1. Unit 2: Supply, Demand, and Prices
Length: 3 Weeks
Chapters: 4, 5, and 6
Activity: Pearl Exchange
Assignment: PS #2

2. This is the most important cow all year!

3. Circular Flow Model Review
Do individuals supply or demand?
Do business supply or demand?
Who demands in the product market?
Who supplies in the product market?
Both, they demand products and supply resources
Both, the supply products and demand resources
Individuals and the government
Businesses
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4. Resource Market DEMAND SUPPLY Individuals Businesses Government SUPPLY
$$$ Income $$$
(Factor payments)
$$$ Costs $$$
Resources
Resources
(Factors of
Production)
$$$
Taxes
Taxes
Subsidies
Transfer Payments
Public Goods
Public Goods
Individuals
Businesses
Government
$$$
Goods and
Services
Goods and
Services
$$$ Revenue $$$
SUPPLY
$$$ Spending $$$
DEMAND
Product Market 4
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5. Graphing Review

6. Graphing the Classroom Activity

8. The Hudsucker Proxy – An Introduction to Demand

9. Demand

10. DEMAND DEFINED What is Demand? What is the Law of Demand?
Demand is the different quantities of goods that consumers are willing and able to buy at different prices.
(Ex: Bill Gates is able to purchase a Ferrari, but if he isn’t willing he has NO demand for one)
What is the Law of Demand?
The law of demand states There is an INVERSE relationship between price and quantity demanded

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12. Example of Demand
I am willing to sell several A’s in AP Economics. How much will you pay?
Price
Quantity
Demanded
Demand Schedule

13. LAW OF DEMAND As Price Falls… …Quantity Demanded Rises As Price Rises…
…Quantity Demanded Falls
Quantity Demanded
Price

14. Inverse Relationship

15. Inverse Relationship

16. Why does the Law of Demand occur?
The law of demand is the result of three separate behavior patterns that overlap:
The Substitution effect
The Income effect
The Law of Diminishing Marginal Utility
We will define and explain each…

17. 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.

18. The “feeling richer effect”

19. Why does the Law of Demand occur?
3. Law of Diminishing Marginal Utility U-
TIL-
IT- Y
Utility = Satisfaction
We buy goods because we get utility from them
The law of diminishing marginal utility states that as you consume more units of any good, the additional satisfaction from each additional unit will eventually start to decrease
In other words, the more you buy of ANY GOOD the less satisfaction you get from each new unit.
Discussion Questions:
What does this have to do with the Law of Demand?
How does this affect the pricing of businesses?

20. The Law of Diminishing Marginal Utility

21. Can you see the Law of Diminishing Marginal Utility in Disneyland’s pricing strategy?
Change
N/A
$54
$33
$15
$10 $5

22. Graphing Demand

23. Label Carefully!!

24. 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, assume all outside factors, such as income, are held constant. (This is called ceteris paribus)
Let’s draw a new demand curve for milk…
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25. 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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26. 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 26

27. 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

28. Demand Review
What are the two key aspects of the definition of demand?
What is the Law of Demand?
Give an example of the substitution effect
Give an example of the income effect
Give an example of the law of diminishing marginal utility
Explain how the law of diminishing marginal utility causes the law of demand
How do you determine the MARKET demand for a particular good?
Name 10 fast food places
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29. 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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30. 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 30

31. 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 31

32. 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 32

33. 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 33

34. 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 34

35. 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 35

36. 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 36

37. 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 37

38. 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 38

39. 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

40. What Causes a Shift in Demand?
6 Shifters (Determinants) of Demand:
1.Tastes and Preferences
2. Number of Consumers
Price of Related Goods
3. Substitutes
4. Complements
5. Income
6. Future expectations
Changes in PRICE don’t shift the curve. It only causes movement along the curve.

41. Prices of Related Goods
The demand curve for one good can be affected by a change in the price of ANOTHER related good.
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)
2. 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)

42. Substitutes or Complements?

43. Substitutes 43 43

44. Substitutes 44 44

45. Substitutes 45 45

46. Substitutes 46 46

47. Substitutes 47 47

48. Substitutes 48 48

49. Substitutes 49 49

50. Substitutes 50 50

51. Substitutes 51 51

52. Complements 52 52

53. 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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54. Inferior Goods 54 54

55. 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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56. 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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57. Practice
Identify the determinant (shifter) then decide if demand will increase or decrease
Shifter
Increase or Decrease
Left or Right 1 2 3 4 5 6

58. Hamburgers (a normal good)
Practice – Part 1
Identify the determinant (shifter) then decide if demand will increase or decrease
Hamburgers (a normal good)
Population boom
Incomes fall due to recession
Price of tacos, a substitute, decreases
New health craze- “No ground beef”
Hamburger restaurants announce that they will significantly increase prices NEXT month
Price of fries, a complement, increases
Number of consumers, increase.
Income, decrease.
Price of Related Goods (Substitute), decrease.
Price doesn’t shift curve, no change.
Tastes and preferences, decrease.
Expectations, increase.
Price of Related Goods (Complements), decrease. 58 58

59. Part 2: For each of the shifts in part 1, create a clear and complete graph showing the demand shift and the effects on price and quantity.