1. 1) What is Supply? Supply- the amount of goods available
Supply refers to producers- people who make goods or offer services
Suppliers enter markets when high prices or high profits are available from providing that good or service

2. 4.2 SUPPLY

3. Law of Supply
Law of Supply- states that the quantity supplied, or offered for sale, varies directly with its price
Essentially - the higher the price, the greater the quantity supplied; the lower the price, the lower the quantity supplied
P , S (vice versa)

4. 4.2 SUPPLY Figure 4.7 shows changes in supply.
1. When supply decreases, the supply curve shifts leftward from S0 to S1.
2. When supply increases, the supply curve shifts rightward from S0 to S2.
When you draw a shift of the supply curve, again be careful to draw the arrows in the horizontal direction. Follow the text by always describing shifts of supply curves as “rightward” or “leftward.” Do not say that the curves shift “up” or “down.” This description of a shift is especially confusing for the supply curve. A rightward shift of the supply curve makes it look as if the curve is moving lower. Students who do not think in terms of “rightward” and “leftward” believe this shift reflects a decrease in supply, which is wrong. Get the student to always go left and right and draw the shift arrows too.

5. Determinants of Supply
Change in supply- occurs when our supply curve shifts right or left. There are 9 determinants:
Productivity
Expectations
Taxes
Technology
Price of other goods
Inputs (cost of)
Gov’t Regulations
Subsidies
Sellers (number of)
Determinants of Supply P E T R X A O C D H U S N L I V G Y B OF
Other Goods
Cost of
that can be
Number of
Produced

6. Determinants…PETT PIGSS
Productivity- is the efficiency of workers or the work process, when workers are happy or better trained they are more productive and supply increases, when they are unhappy or poorly trained productivity decreases so supply decreases

7. Determinants…PETT PIGSS
Expectations- if producers expect that the future price of their product will increase, they will limit supplies being sold now.
If they expect future prices to decrease they will increase supply for now.

8. Determinants…PETT PIGSS
Taxes taxes have the same impact as an increase in the cost of inputs (decreasing supply)

9. Determinants…PETT PIGSS
Technology- new technology almost always increases supply unless something goes very wrong with it

10. Determinants…PETT PIGSS
Prices of Related Goods
A change in the price of one good can bring a change in the supply of another good.
A substitute in production is a good that can be produced in place of another good.
For example, a truck and an SUV are substitutes in production in an auto factory.
The supply of a good increases if the price of one of its substitutes in production falls.
The supply a good decreases if the price of one of its substitutes in production rises.

11. Determinants…PETT PIGSS
A complement in production is a good that is purchased along with another good, which in turn can impact supply.
For example, chips are a complement to dip.
The supply of a good increases if the price of one of its complements in production rises.
The supply a good decreases if the price of one of its complements in production falls.

12. Determinants…PETT PIGSS
Cost of Inputs- if the price of the items used to make the goods increases, supply would decrease (shift left).
If the cost of an input or resource decreases, supply will increase

13. Determinants…PETT PIGSS
Government Regulations- tighter government regulations decrease supply, looser government regulations increase supply (ex: air bags in cars are now required, this is an increased cost causing a decrease in supply)

14. Determinants…PETT PIGSS
Subsidies- government payments used to protect an industry, they have the opposite effect of taxes (increasing supply).
Government offers subsidy to auto industry if they make more fuel efficient vehicles.

15. Determinants…PETT PIGSS
Number of Sellers- when more suppliers enter a market supply increases, when sellers leave the market, supply decreases.

16. Quantity Supplied v. Supply
Change in Quantity Supplied Versus Change in Supply
A change in quantity supplied is a change in the quantity of a good that suppliers plan to sell that results from a change in the price of the good.
A change in supply is a change in the quantity that suppliers plan to sell when any influence on selling plans other than the price of the good changes.

17. Practice Questions
1. Which of the following will cause the quantity supplied for milk to decrease?
Decrease in the price of a key resource
A decrease in the number of milk producers
A decrease in the price of milk
An increase in the price of milk
A subsidy for milk producers
Answer C. A change in price is rice is the only thing that changes quantity supplied
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18. 4.2 SUPPLY
Figure 4.8 illustrates and summarizes the distinction

19. Demand

20. What is the Law of Demand?
DEMAND DEFINED
What is Demand?
Demand is the different quantities of goods that consumers are willing and able to buy at different prices.
(Ex: You are able to purchase instagram, but if you aren’t willing to buy then there is NO demand)
What is the Law of Demand?
There is an INVERSE relationship between price and quantity demanded
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22. Why does the Law of Demand occur?
1. The Substitution Effect
If the price goes up for a product, consumer buy less of that product and more of another substitute product (and vice versa)
2. The Income Effect
If the price goes down for a product, the purchasing power increases for consumers -allowing them to purchase more.

23. Why does the Law of Demand occur?
3. Law of Diminishing Marginal Utility
Utility = Satisfaction
We buy goods because we get utility from them
The law of diminishing marginal utility states that as you consume anything, the additional satisfaction that you will receive will eventually start to decrease
In other words, the more you buy of ANY GOOD the less satisfaction you get from each new unit consumed.
Discussion Questions:
What does this have to do with the Law of Demand?
How does this effect the pricing of businesses?
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24. Can you see the Law of Diminishing Marginal Utility in Disneyland’s pricing strategy?

25. Graphing Demand
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26. Let’s draw a new demand curve for milk…
The Demand Curve
A demand curve is a graphical representation of a demand schedule.
The demand curve is downward sloping showing the inverse relationship between price (on the y-axis) and quantity demanded (on the x-axis)
When reading a demand curve CETERIS PARABUS
Let’s draw a new demand curve for milk…
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27. GRAPHING DEMAND Draw this large in your notes Demand Schedule
Price of Milk
Draw this large in your notes $5 4 3 2 1
Price
Quantity
Demanded $5 10 $4 20 $3 30 $2 50 $1 80 Q
Quantity of Milk
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28. GRAPHING DEMAND Demand Schedule Price of Milk $5 10 $4 20 $3 30 $2 50
Quantity
Demanded $5 10 $4 20 $3 30 $2 50 $1 80
Demand Q
Quantity of Milk 28

29. Where do you get the Market Demand?
Billy
Jean
Other Individuals
Market
Price
Q Demd $5 1 $4 2 $3 3 $2 5 $1 7
Price
Q Demd $5 $4 1 $3 2 $2 3 $1 5
Price
Q Demd $5 9 $4 17 $3 25 $2 42 $1 68
Price
Q Demd $5 10 $4 20 $3 30 $2 50 $1 80 P P P P $3 $3 $3 $3 D D D D Q Q Q Q 3 2 25 30

30. This is a change in demand, not a change in quantity demanded
Shifts in Demand
Ceteris paribus-“all other things held constant.”
When the ceteris paribus assumption is dropped, movement no longer occurs along the demand curve. Rather, the entire demand curve shifts.
A shift means that at the same prices, more people are willing and able to purchase that good.
This is a change in demand, not a change in quantity demanded
PRICE DOESN’T SHIFT THE CURVE
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31. Change in Quantity Demanded
Change in Quantity Demanded- a change in the quantity of the product purchased in response to a change in price
In other words… a movement along the demand curve

32. Change in Demand
Change in Demand- when there is a change in demand the entire demand curve shifts
A shift to the right is an increase in demand
A shift to the left is a decrease in demand

33. Change in Demand What if milk makes you smarter? Demand Schedule
Price of Milk
What if milk
makes you smarter? $5 4 3 2 1
Price
Quantity
Demanded $5 10 $4 20 $3 30 $2 50 $1 80
Demand Q
Quantity of Milk 33

34. Change in Demand What if milk makes you smarter? Demand Schedule
Price of Milk
What if milk
makes you smarter? $5 4 3 2 1
Price
Quantity
Demanded $5 10 $4 20 $3 30 $2 50 $1 80
Demand Q
Quantity of Milk 34

35. Change in Demand Demand Schedule Price of Milk $5 30 $4 40 $3 50 $2 701
Price
Quantity
Demanded $5 30 $4 40 $3 50 $2 70 $1
Demand Q
Quantity of Milk 35

36. Prices didn’t change but people want MORE Milk
Change in Demand
Demand Schedule
Price of Milk
Increase in Demand
Prices didn’t change but people want MORE Milk $5 4 3 2 1
Price
Quantity
Demanded $5 30 $4 40 $3 50 $2 70 $1 D1
Demand Q
Quantity of Milk 36

37. Change in Demand What if milk makes causes baldness? Demand Schedule
Price of Milk
What if milk
makes causes baldness? $5 4 3 2 1
Price
Quantity
Demanded $5 10 $4 20 $3 30 $2 50 $1 80
Demand Q
Quantity of Milk 37

38. Change in Demand What if milk makes causes baldness? Demand Schedule
Price of Milk
What if milk
makes causes baldness? $5 4 3 2 1
Price
Quantity
Demanded $5 10 $4 20 $3 30 $2 50 $1 80
Demand Q
Quantity of Milk 38

39. Change in Demand Demand Schedule Price of Milk $5 $4 5 $3 20 $2 30 $1
Quantity
Demanded $5 $4 5 $3 20 $2 30 $1
80 60
Demand Q
Quantity of Milk 39

40. Prices didn’t change but people want LESS Milk
Change in Demand
Demand Schedule
Price of Milk $5 4 3 2 1
Decrease in Demand
Prices didn’t change but people want LESS Milk
Price
Quantity
Demanded $5 $4 5 $3 20 $2 30 $1
80 60 D2
Demand Q
Quantity of Milk 40

41. The demand stays the same
Change in Demand
Demand Schedule
Price of Milk
What happens to
the demand for milk if
the price of milk
goes up? $5 4 3 2 1
Price
Quantity
Demanded $5 10 $4 20 $3 30 $2 50 $1 80
NOTHING!
The demand stays the same
Demand Q
Quantity of Milk 41

42. Change in Qd vs. Change in Demand
There are two ways to increase quantity from 10 to 20
Price of Milk P
A to B is a change in quantity demand (due to a change in price)
A to C is a change in demand (shift in the curve) A C $3 $2 B D2 D1
Q Milk
Quantity of Milk

43. What Causes a Shift in Demand?
6 Shifters (Determinates) of Demand:
Number of Consumers
Income
Compliments (price of them)
Expectations (of future events)
Substitutes (price of them)
Tastes and Preferences
Changes in PRICE don’t shift the curve. It only causes movement along the curve.
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44. Income
The incomes of consumer change the demand, but how depends on the type of good.
Normal Goods
Ex: Luxury cars, Sea Food, jewelry, homes
As income increases, demand increases
As income falls, demand falls
2. Inferior Goods
Ex: Top Ramen, used cars, used clothes
As income increases, demand falls
As income falls, demand increases
Spam-Inferior
Yachts- Normal
Off Brand Cereal-Inferior
McDonald’s-Inferior
Toilet Paper- Probably no connection to income (The point-some products are very reliant on income and others are not)
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45. Prices of Related Goods
The demand curve for one good can be affected by a change in the price of ANOTHER related good.
1. Complements are two goods that are bought and used together.
Ex: If price of hot dogs falls, demand for hot dog buns will...
If the price of one increase, the demand for the other will fall. (or vice versa)
2. Substitutes are goods used in place of one another.
Ex: If price of Pepsi falls, demand for coke will…
If the price of one increases, the demand for the other will increase (or vice versa)

46. Expectations (NICEST)
Expectations about the future can change demand.
Expected change in prices
Expected change in income
Example: A hurricane is heading towards Florida and will arrive in 3 days. What will happen to the demand for bottled water?

47. Tastes and Preferences (NICEST)
Tastes and Preferences- these change over time and with the season, effected by ads, trends, fads, etc., when something is “in” people’s demand increases, when it is “out” demand decreases

48. Practice Questions
1. Which of the following will cause the demand for milk to decrease?
Increase in the price of a substitute
A decrease in income assuming that milk is a normal good
A decrease in the price of milk
An increase in the price of milk
A decrease in the price of a complementary good
Answer B
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49. Practice Questions
2. Which of the following will cause the quantity demanded of milk to decrease?
Increase in the price of a substitute
A decrease in income assuming that milk is a normal good
A decrease in the price of milk
An increase in the price of milk
A decrease in the price of a complementary good
Answer D
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