1. Warm-up
Use the graph for Q1 - Q3.
If you move from point B production to point E, what is the opportunity cost in units of guns?
How could point H be described in terms of production?
What is a feasible but inefficient number of guns and butter to produce (units of each)?
Use the table. What is the opportunity cost of one small jet if production changes from point F to point A?
What is comparative advantage?
Point
Quantity of Small Jets
Quantity of Dreamliners E 40 B 28 9 A 20 15 F 30

2. Overview of Next Two Weeks
Tuesday, Sept 4
Wednesday, Sept 5
Thursday, Sept 6
Practice PPF
Chapter 3
Begin Chapter 3
Practice Supply, Demand
Quiz
Assignment Due
Tuesday, Sept 11
Wednesday, Sept 12
Thursday, Sept 13
Chapter 4 Price Controls
Chapter 4
Major Exam
Practice
Overview of Writing Assignment

3. Partner Work: Practice Set 1

4. Supply and Demand
Chapter 3

5. Markets Competitive Markets
Any place where goods and/or services are bought and sold
Can be a two person market or a global market (and everything in between)
Competitive
Markets

6. Competitive Markets Many buyers and many sellers!
What are some examples of products that sell in competitive markets?
What are some examples of products that sell in markets that are NOT competitive?

7. Demand Schedule
A schedule that shows the various amounts of a product that consumers are willing and able to buy at various prices at a particular time.
What are the two variables in the demand schedule?
The schedule shows the relationship between
PRICE and QUANTITY DEMANDED.

8. Demand Schedule and Demand Curve
Is the relationship between the two variables negative or positive?
The demand curve is the plot of the two variables on a plane.

9. Ceteris Paribus Assumption
All other factors remain constant.

10. Law of Demand
The fact that, as prices rise, quantity demanded falls, ceteris paribus.
As prices fall, quantity demanded rises, ceteris paribus.
There is an INVERSE relationship between Price and Quantity Demanded.

11. Sketching the Demand Curve
QUANTITY DEMANDED on the X axis. Label axis.
PRICE on the Y axis. Label axis.
Plot the points from the demand schedule.

12. Individual Demand Individual Demand P Qd $5 4 3 2 1 10 20 35 55 80 P6 5 4 3 2 1
Quantity Demanded (bushels per week)
Price (per bushel)
Individual
Demand P Qd $5 4 3 2 1 10 20 35 55 80 D Q

13. Changes in Demand
A change in demand is reflected graphically by a new demand curve.
An increase in demand is shown by a new demand curve to the right of the original curve.
A decrease in demand is reflected by a shift to the left of the original demand curve.

14. Demand Increase or DecreaseP
An Increase in demand means a RIGHT movement of the line 6 5 4 3 2 1
Individual
Demand
A Movement between
two points on a
demand curve is called
a change in quantity
demanded P Qd $5 4 3 2 1 10 20 35 55 80
Price (per bushel) D2
A Decrease in demand means
a LEFT movement of the line D1 D3 Q
Quantity Demanded (bushels per week)

15. Shifts or Changes in Demand
R – E – T – I - N
Other things are NOT equal.
Changes in:
Related goods or services (price)
Expectations
Tastes of preferences
Incomes of consumers
Number of consumers

16. Shifts in Demand Related Goods and Services (Prices of)
Substitute Goods – a related good that can be used in place of another good
Coke or Pepsi
Butter or Margarine
Nikes or Reebok
Jeans or Khakis
Complementary Goods – goods usually consumed together
Peanut Butter and Jelly
Movies and Popcorn
Hot dogs and hot dog buns

17. Shifts in Demand: Related Goods
Substitute Goods
If the price of Coke goes up , the demand for Pepsi will go up .
Complementary Goods
If the price of Jelly declines , the demand for peanut butter will increase .

18. Shifts in Demand: Expectations
If consumers worry that they may lose their job, they will spend less now.
If consumers feel prices will rise in the near future, they will spend more now. D D

19. Shifts in Demand: Tastes/Preferences
Until World War II, men wore hats.
Greater knowledge about health has increased demand for vegetables and/or organic food.

20. Shifts in Demand: Incomes of Consumers
When incomes rise, the demand of normal goods increases.
When incomes rise, the demand for inferior goods decreases.

21. Shifts in Demand: Incomes of Consumers
Time-lag
In general, as consumer incomes rise there is an increase in demand for most consumer goods and services.
As incomes decline, there is a decline in demand for most goods and services.

22. Individual Demand Curves and the Market Demand Curve

23. Shifts in Demand: Number of Consumers
Increase in the number of consumers increases demand.
Decrease in the number of consumers decreases demand.

24. Demand Shift: Practice Example
When the price of a substitute
good rises,
show on the graph what happens
to the demand of the original good. P Q D1 D2

25. Demand: Practice Example
When income falls,
show on the graph what happens
to the demand of a normal good. P Q D1 D2

26. Let’s Practice

27. Supply Schedule and Supply Curve
A schedule that shows the various amounts of product that producers are willing and able to produce and make available at various prices at a particular time.
What are the two variables?
The schedule shows the relationship between PRICE and QUANTITY SUPPLIED.

28. Supply Schedule and Supply Curve
Is the relationship between the two variables negative or positive?

29. Ceteris Paribus Assumption
All other factors remain constant.

30. Law of Supply
As prices rise, the quantity supplied rises, ceteris paribus.
As prices fall, the quantity supplied falls, ceteris paribus.
There is a DIRECT relationship between Price and Quantity Supplied.

31. Sketching the Supply Curve
QUANTITY SUPPLIED on the X axis. Label the axis.
PRICE on the Y axis. Label the axis.
Plot the points of a supply schedule.

32. Individual Supply Individual Supply P Qs $5 4 3 2 1 60 50 35 20 5 P S1
Individual
Supply S1 P Qs $5 4 3 2 1 60 50 35 20 5
Price (per bushel) Q
Quantity Supplied (bushels per week)

33. Changes in Supply
A change in supply is reflected graphically by a new supply curve.
An increase in supply is shown by a new supply curve to the right of the original curve.
A decrease in supply is reflected by a shift to the left of the original supply curve.

34. Individual Supply Supply Can Increase or Decrease Individual Supply P
An Decrease in Supply Means a Shift of Line to the Left 6 5 4 3 2 1
Individual
Supply S3 S1 S2 P Qs $5 4 3 2 1 60 50 35 20 5
Price (per bushel)
An Increase in Supply Means a Shift of Line to The Right
A Movement Between Two Points on Supply Curve is Called a Change in Quantity Supplied Q
Quantity Supplied (bushels per week)

35. Shifts or Changes in Supply
T-O-N-E-R
Other things NOT equal.
Changes in:
Technology
Other goods firm produces (price of)
Number of sellers
Expectations of firms
Resource (input) prices

36. Shifts in Supply: Technology
Technological improvements lead to lower costs and increased supply.
Technology is not always “high” technology—methods people use to turn inputs into useful goods and services.
Spend less on inputs

37. Shifts in Supply: Other Goods
Other goods and services the firm produce (prices of)
A rise in the price of soccer balls may lead to an athletic company producing less baseballs.

38. Shifts in Supply: Number of Sellers
As more firms enter a market, the supply curve shifts to the right.

39. Shifts in Supply: Expectations
In general, if businesses are expecting future profits, they will increase supply.
The opposite is true if businesses are pessimistic about future profits.
Summer demand for gasoline increases

40. Shifts in Supply: Resource Price
A decrease in resource (input) prices leads to an increase in supply.
An increase in resource (input) prices leads to a decrease in supply.
Airline Fuel Cost

41. Supply: Practice Example
When the price of a substitute
input falls,
show on the graph what happens
to the supply of the original good. P Q S1 S2

42. Supply: Practice Example
When the price of an input rises,
show on the graph what happens
to the supply of the good. P Q S2 S1

43. Supply Curve Shift or Movement on Supply Curve
More homeowners put their houses up for sale during a real estate boom that causes house prices to rise.
Many strawberry farmers open temporary roadside stands during harvest season, even though prices are usually low at that time.
Immediately after the school year begins, fast-food chains must raise wages, which represent the price of labor, to attract workers.
Many construction workers temporarily move to areas that have suffered hurricane damage, lured by higher wages.
Since new technologies have made it possible to build larger cruise ships (which are cheaper to run per passenger), Caribbean cruise lines offer more cabins, at lower prices, than before.
1-Movement
2-SC Shift
3-Shift SC
4-Movement Shift
5-SC Shift

44. Competitive Market Equilibrium
Markets move toward equilibrium.
Market equilibrium is when the price has moved to a level at which the quantity of goods demanded equals the quantity of goods supplied.
The market clearing price and quantity where quantity supplied equals quantity demanded.

45. Sketching Market Equilibrium
QUANTITY on the X axis. Label the axis.
PRICE on the Y axis. Label the axis.
Plot the points of a demand schedule.
Plot the points of a supply schedule.

46. Market Equilibrium 200 Buyers & 200 Sellers P Qd P Qs Market Market
Demand
200 Buyers
Market
Supply
200 Sellers 6 5 4 3 2 1 S P Qd P Qs $5 4 3 2 1
2,000
4,000
7,000
11,000
16,000 $5 4 3 2 1
12,000
10,000
7,000
4,000
1,000
Price (per bushel)
Market Equilibrium
Equilibrium price 3 D
Equilibrium quantity 7
Bushels of Corn (thousands per week)

47. Market Disequilibrium
Sometimes markets are temporarily in disequilibrium but move toward equilibrium.
Record crops
Weather events: hurricanes, snow, flooding
Government intervention
A surplus of a good/service is when the quantity supplied exceed the quantity demanded.
A shortage (excess demand) of a good/service is when the quantity supplied is less than the quantity demanded.

48. Market Equilibrium Surplus Shortage 200 Buyers & 200 Sellers P Qd P Qs
Bushels of Corn (thousands per week) 6 5 4 3 2 1
Price (per bushel) D S P Qd $5 4 3 2 1
2,000
4,000
7,000
11,000
16,000
Market
Demand
200 Buyers P Qs $5 4 3 2 1
12,000
10,000
7,000
4,000
1,000
Market
Supply
200 Sellers
6,000 Bushel
Surplus 3
7,000 Bushel
Shortage 7
Surplus
Shortage

49. Shift in Demand Curve
Shift in demand curve happens when changes occur in:
Related goods or service (price)
Expectations
Tastes or preferences
Incomes of Consumers
Number of Customers
What happens when the demand curve shifts?
Price?
Quantity?

50. Shifts in Demand Related goods or services (price) Expectations
Other things are NOT equal.
Changes in:
Related goods or services (price)
Expectations
Tastes of preferences
Incomes of consumers
Number of consumers

51. Demand Curve Shift (Increase) and New Market Equilibrium
Bushels of Corn (thousands per week) 6 5 4 3 2 1
Price (per bushel) D S E2 E1 3 D2 D1 7

52. Demand Curve Shift (Decrease) and New Market Equilibrium
Bushels of Corn (thousands per week) 6 5 4 3 2 1
Price (per bushel) D S E1 3 E2 D1 D2 7

53. Summary of Demand Curve Shift
New Equilibrium Price Rises, Quantity Demanded Increases
Price of substitute or complement good rises
Number of consumers rise
New Equilibrium Price Falls, Quantity Demanded Decreases
Price of substitute or complement good falls
Number of consumers falls

54. Shifts or Changes in Supply
T-O-N-E-R
Other things NOT equal.
Changes in:
Technology
Other goods firm produces (price of)
Number of sellers
Expectations of firms
Resource (input) prices

55. Supply Shift (Increase) and New Market Equilibrium
Bushels of Corn (thousands per week) 6 5 4 3 2 1
Price (per bushel) D S S1 S2 E1 3 E2 7

56. Supply Shift (Decrease) and New Market Equilibrium
Bushels of Corn (thousands per week) 6 5 4 3 2 1
Price (per bushel) D S S2 S1 E2 E1 3 7

57. Summary of Shift in Supply
New equilibrium price rises and new quantity supplied decreases
Price of a substitute in production increases
New equilibrium price falls and quantity supplied increases
Price of an input falls, the supply of the good increases.

58. Simultaneous Shift of Demand and Supply Curves and New Market Equilibrium
Bushels of Corn (thousands per week) 6 5 4 3 2 1
Price (per bushel) D S S2 S1 E2 3 E1 D2
Increase in price but small increase in quantity. D1 7
When demand increases and supplies decreases, what happens to price and quantity?

59. Simultaneous Shift of Demand and Supply Curves and New Market Equilibrium
Bushels of Corn (thousands per week) 6 5 4 3 2 1
Price (per bushel) D S S2 S1 E2
Larger decrease
In supply 3 E1
Increase in price but small decrease in quantity. D2 D1 7
When demand increases and supplies decreases, what happens to price and quantity?

60. Simultaneous Shift of Demand and Supply Curves and New Market Equilibrium
Bushels of Corn (thousands per week) 6 5 4 3 2 1
Price (per bushel) D S S1 S2 E1 3 E2
What about a small
increase in supply?
Increase in price but small decrease in quantity. D1 D2 7
When demand decreases and supplies increases, what happens to price and quantity?

61. Simultaneous Shifts of Demand and Supply Curves
When demand increases and supply decreases, the equilibrium price rises but the change in the equilibrium quantity is ambiguous.
When demand decreases and supply increases, the equilibrium price falls but the change in the equilibrium quantity is ambiguous.