1. Chapter 2 Review

2. What is Demand
Demand is a relationship between a product’s price and quantity demanded.
Demand is shown using a schedule or curve.
The law of demand states that price and quantity demanded are inversely related.
Market demand is the sum of quantities demanded by all consumers in a market.

3. Your Demand Curve for Strawberries
The Demand Curve
Your Demand Schedule
for Strawberries
Your Demand Curve for Strawberries
2.50 a
Quantity Demanded
(kg per month)
Point
on graph
Price
($ per kg) b
2.00 c
$2.50 7 a
1.50
Price ($ per kg) D
2.00 9 b
1.00
1.50 11 c
0.50 1 3 5 7 9 11 13
Quantity Demanded
(kg per month) 3

4. Individual and Market Demand Schedules for Strawberries
Let’s assume that we want to buy our strawberries at $2, what is our Revenue?
Individual and Market Demand
Schedules for Strawberries
Price
($ per
kg)
You
(D0)
Friend
(D1)
Market
(Dm)
(kg per month)
$2.50
2.00
1.50 1 2 3 2 3 4 3 5 7

5. Deriving Market Demand
Your Demand Curve for Strawberries
Friend’s Demand Curve for Strawberries
Let’s assume that we want to buy our strawberries at $2, what is the revenue of D0, D1 and Dm?
2.50
2.50
2.00
2.00
Price ($ per kg)
1.50
Price ($ per kg)
1.50
1.00
1.00 D0 D1
0.50
0.50 1 2 3 4 5 6 7 1 2 3 4 5 6 7
Quantity Demanded (kg per month)
Quantity Demanded (kg per month)
Do = 2.50 x 2 = 5
D1 = 2 x 3 = 6
Dm= 2 x 5 = 10
Market Demand Curve for Strawberries
Individual and Market Demand
Schedules for Strawberries
2.50
Price
($ per
kg)
You
(D0)
Friend
(D1)
Market
(Dm)
2.00
Price ($ per kg)
1.50
1.00
(kg per month) Dm
0.50
$2.50
2.00
1.50 1 2 3 2 3 4 3 5 7 1 2 3 4 5 6 7
Quantity Demanded (kg per month) 3

6. Changes in Demand (Shifting R and L)
Market Demand Curve for Strawberries
Market Demand Schedule
for Strawberries
0.50
1.00
1.50
2.00
2.50
Price
($ per kg)
Quantity Demanded
(millions of kg)
(D2)
(D0)
(D1)
Price ($ per kg) D2 D0 D1
What happens to your Demand and Profit if you SHIFT the curve to the RIGHT? LEFT?
$2.50 5 7 9
2.00 7 9 11
1.50 9 11 13 1 3 5 7 9 11 13
Quantity Demanded
(millions of kg per year) 3

7. Demand Factors Demand factors include the following:
The number of buyers (an increase causes a rightward demand shift)
Income
For normal products, an increase causes a rightward demand shift.
For inferior products, an increase causes a leftward demand shift.
Prices of other products
For substitute products, a rise in the other product’s price causes a rightward demand shift.
For complementary products, a rise in the other product’s price causes a leftward demand shift.
Consumer preferences
Consumer expectations

8. Changes in Quantity Demanded
are shown by movements along demand curve
are caused by price changes
5000
6000
Quantity Demanded (pairs of skis)
Change in Quantity Demanded
Price ($ per pair of skis)
0.50
1.00
1.50
2.00
5000
Quantity Demanded (pairs of skis)
Change in Demand
Price ($ per pair of skis)
0.50
1.00
1.50
2.00 a b D0 D0 D1

9. What Is Supply?
Supply:
is a relationship between a product’s price and quantity supplied
is shown using a schedule or curve
The law of supply states there is a direct relationship between price and quantity supplied. 6

10. The Supply Curve Market Supply Curve for Strawberries
Market Supply Schedule
for Strawberries f S
0.50
1.00
1.50
2.00
2.50 e
Price
($ per kg)
Quantity Supplied
(millions of kg)
Points
on graph d
$1.50 5 d
Price ($ per kg)
Compare the Demand Curve…
2.00 9 e
2.50 13 f 1 3 5 7 9 11 13
Quantity Supplied
(millions of kg per year)

11. Changes in Supply Changes in supply:
are shown by shifts in the supply curve
are caused by changes in supply factors

12. Market Supply Curve for Strawberries
Market Supply Schedule
for Strawberries
0.50
1.00
1.50
2.00
2.50
Price
($ per kg)
Quantity Supplied
(millions of kg)
(S2)
(S0)
(S1)
If you were the Distributor (the one SELLING the strawberries..) which Curve would you prefer? S1 because for the same price (use $2 at a pricepoint)… you are getting MORE for the same price
When does a supply curve shift RIGHT? .. When there are MORE producers and they are COMPETING with you
When does a supply curve shift LEFT?
Price ($ per kg)
$2.50 11 13 15
2.00 7 9 11
1.50 3 5 7 1 3 5 7 9 11 13 15
Quantity Supplied
(millions of kg per year)

13. Supply Factors Supply factors include the following factors:
Number of producers (an increase causes a rightward supply shift)
Resource prices (an increase causes a leftward supply shift)
State of technology (an improvement causes a rightward supply shift)
Prices of related products (an increase causes a leftward supply shift)
Changes in nature (an improvement causes a rightward shift for some products)
Producer expectations (an expectation of lower prices in the future causes an immediate rightward supply shift)

14. Changes in Quantity Supplied
are shown by movements along the supply curve
are caused by price changes

15. Changes in Quantity Supplied1 2
Quantity Supplied
(millions of kg per year)
Change in Quantity Supplied
Price ($ per kg) 20 40 60 80
100
120
Change in Supply 1 2
Quantity Supplied
(millions of kg per year)
Price ($ per kg) 20 40 60 80
100
120 S0 S0 S1 b a 3

16. Market Equilibrium When a product is in surplus:
there is excess supply
price is pushed down
When a product is in shortage:
there is excess demand
price is pushed up 10

17. Market Equilibrium Market Demand and Supply Schedules for Strawberries
Market Demand and Supply Curves
for Strawberries S
3.00
Surplus (+)
or Shortage (-)
(millions of kg)
Surplus
Quantities
Price
($ per kg)
2.50
(millions of kg)
D S a a
2.00 e
In eq, the quantity of a good producers will supply exactly matches the quantity consumers want to buy
-this results without external influence
When price is at $2.50, The Demand is LESS than the supply.. Is ~6 and Supply is ~11…. So there is a surplus…
The output of the good would exceed what consumers want and producers would be left with unsold goods on their hands. To dispose of them, producers would cut the price, as happens during sales when retailers wish to sell unsold goods
=> As prices fall, consumers would demand more of the good and producers produce less pushing it back to the EQ point $
Price ($ per kg)
1.50 b b
Shortage
1.00 D 15 1 3 5 7 9 11 13
Quantity
(millions of kg per year)

18. Changes in Equilibrium
A rightward demand shift pushes up both equilibrium price and quantity.
A leftward demand shift pushes down both equilibrium price and quantity.
A rightward supply shift pushes equilibrium price down and equilibrium quantity up.
A leftward supply shift pushes equilibrium price up and equilibrium quantity down. 12

19. Demand Changes and Equilibrium
Market Demand and Supply Curves
for Strawberries
Market Demand and Supply
Schedules for Strawberries
Price Quantities
(D0) (D1) (S)
($ per kg.) (millions of kg) S
1.00
1.50
2.00
2.50
3.00 b a
shortage D1
Price ($ per kg)
If Do is our ANTICIPATED / Last year’s supply and D1 is our NEW supply.. Is there a shortage or surplus?
$3.00 5 9 13
2.50 7 11 11 D0
2.00 9 13 9
1.50 11 15 7
1.00 13 17 5 1 3 5 7 9 11 13 15 17
Quantity
(millions of kg per year)

20. Supply Changes and Equilibrium
Market Demand and Supply Curves
for Strawberries
Market Demand and Supply
Schedules for Strawberries
Price Quantities
($ per kg) (millions of kg) S0 S1
1.00
1.50
2.00
2.50
3.00
Surplus
(D0)
(S0)
(S1) a b
Price ($ per kg)
“So” is our budgeted original supply curve.. And S1 is what we have right now.. If we keep our price constasnt at $2 and look at the quantity… we can see that before we had around 9 million kg and now we have 11kg…. What does this tell us?
Look at Equilb point “a and “b”… it went down.. The equilb shifted down….. What does this tell us? Because we have more Supply now.. And our DEMAND stayed the same… it means that there is more supply than the market can handle and that producers are competing with each other.. Thus pushing the price down
$3.00 5 13 17
2.50 7 11 15 D0
2.00 9 9 13
1.50 11 7 11
1.00 13 5 9 1 3 5 7 9 11 13 15 17
Quantity
(millions of kg per year)

21. A local grocery store orders 200 cases of Pepsi each week and sells them at a price of $6.00 per case. At the end of the first week, they have only sold 160 cases. What economic situation is the grocery store facing and what will have to happen to price in order for equilibrium to be attained? a. surplus; price will rise. b. surplus; price will fall. c. shortage; price will rise. d. shortage; price will fall. e. nothing since the market is in equilibrium.
b. surplus; price will fall.

22. For Next Class Homework
Describe how prices or gross substitutes or gross complements shift demand
Describe how input costs or production costs shift supply.
Point form

23. Shifting Demand Curve Left
Decrease in Demand
Fall in income
A fall in price of a substitute
Rise in the price of a complement

24. Shifting Demand Curve to the Right
Rise in income
Rise in the price of substitute
Fall in the price of a complement