1. Unit 2: Demand, Supply, and Consumer Choice
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ACDC Leadership 2015

2. Supply Defined EXAMPLE: Mowing Lawns What is supply?
Supply is the different quantities of a good that sellers are willing and able to sell (produce) at different prices.
What is the Law of Supply?
There is a DIRECT (or positive) relationship between price and quantity supplied.
As price increases, the quantity producers make increases
As price falls, the quantity producers make falls.
Why? Because, at higher prices profit seeking firms have an incentive to produce more.
EXAMPLE: Mowing Lawns
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ACDC Leadership 2015

3. You own an lawn mower and you are willing to mow lawns.
Example of Supply
You own an lawn mower and you are willing to mow lawns.
How many lawns will you mow at these prices?
Price per lawn mowed
Quantity
Supplied
Supply Schedule $1 $5
$20
$50
$100
$1000 3

4. GRAPHING SUPPLY Draw this large in your notes Supply Schedule
Price of Milk
Draw this large in your notes $5 4 3 2 1
Price
Quantity
Supplied $5 50 $4 40 $3 30 $2 20 $1 10 Q
Quantity of Milk 4

5. GRAPHING SUPPLY Supply Schedule Price of Milk Supply $5 50 $4 40 $3 302 1
Price
Quantity
Supplied $5 50 $4 40 $3 30 $2 20 $1 10 Q
Quantity of Milk 5

6. GRAPHING SUPPLY What if there are new and more productive
Supply Schedule
What if there are new
and more productive
milking machines?
Price of Milk
Supply $5 4 3 2 1
Price
Quantity
Supplied $5 50 $4 40 $3 30 $2 20 $1 10 Q
Quantity of Milk 6

7. Change in Supply Supply Schedule Price of Milk Supply $5 50 $4 40 $32 1
Price
Quantity
Supplied $5 50 $4 40 $3 30 $2 20 $1 10 Q
Quantity of Milk 7

8. Change in Supply Supply Schedule Price of Milk Supply $5 50 $4 40 $32 1
Price
Quantity
Supplied $5 50 $4 40 $3 30 $2 20 $1 10 Q
Quantity of Milk 8

9. Change in Supply Supply Schedule Price of Milk Supply $5 70 $4 60 $32 1
Price
Quantity
Supplied $5 70 $4 60 $3 50 $2 40 $1
10 30 Q
Quantity of Milk 9

10. Prices didn’t change but there is MORE milk produced
Change in Supply
Supply Schedule
Price of Milk
Supply S2 $5 4 3 2 1
Price
Quantity
Supplied $5 70 $4 60 $3 50 $2 40 $1
10 30
Increase in Supply
Prices didn’t change but there is MORE milk produced Q
Quantity of Milk 10

11. Change in Supply What if the price for dairy cows increases
Supply Schedule
What if the price for
dairy cows increases
drastically?
Price of Milk
Supply $5 4 3 2 1
Price
Quantity
Supplied $5 50 $4 40 $3 30 $2 20 $1 10 Q
Quantity of Milk 11

12. Change in Supply Supply Schedule Price of Milk Supply $5 50 $4 40 $32 1
Price
Quantity
Supplied $5 50 $4 40 $3 30 $2 20 $1 10 Q
Quantity of Milk 12

13. Change in Supply Supply Schedule Price of Milk Supply $5 50 $4 40 $32 1
Price
Quantity
Supplied $5 50 $4 40 $3 30 $2 20 $1 10 Q
Quantity of Milk 13

14. Change in Supply Supply Schedule Price of Milk Supply $5 30 $4 20 $31
Price
Quantity
Supplied $5 30 $4 20 $3 10 $2 1 $1
10 0 Q
Quantity of Milk 14

15. Prices didn’t change but there is LESS milk produced
Change in Supply
Supply Schedule
Price of Milk
Supply S2 $5 4 3 2 1
Price
Quantity
Supplied $5 30 $4 20 $3 10 $2 1 $1
10 0
Decrease in Supply
Prices didn’t change but there is LESS milk produced Q
Quantity of Milk 15

16. Change in Supply What if there is a increase in the number
Supply Schedule
What if there is a
increase in the number
of milk producers?
Price of Milk
Supply $5 4 3 2 1
Price
Quantity
Supplied $5 50 $4 40 $3 30 $2 20 $1 10 Q
Quantity of Milk 16

17. 5 Shifters (Determinants) of Supply
resource Prices/Availability of inputs
Other goods (Prices of)
Technology
Government Action: Taxes & Subsidies
R.O.T.T.E.N
5. Expectations of Suppliers/Future Profit
6. Number of Sellers
Changes in PRICE don’t shift the curve. It only causes movement along the curve.
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18. Resource (Inputs) Costs
A change in the cost of inputs can cause a change in supply
If the price of the inputs drops, producers are willing to produce more at each price

19. Other Goods (Prices of)
For example, producer of soccer balls can sometimes use their plant and equipment to produce alternative goods – basketballs and volleyballs

20. Technology New technology tends to shift the supply curve to the right
New Technology can affect supply by lowering the cost of production or by increasing productivity

21. Taxes and Subsidies Firms view taxes as costs
If the producer’s inventory is taxed or if fees are paid the cost of production goes up.
Taxes shift supply left
Subsidies lower the cost of production
Subsidies shift supply right

22. Expectations
Expectations about the future price can affect the supply curve
If producers think the price of their product will go up, they may withhold some of the supply
If producers may expect lower prices they may try to produce and sell as much as possible right away

23. Number of Suppliers/Sellers
Larger the number of suppliers, the greater the market supply.
As more firms enter industry, the supply curve shifts to the right.
EX. Us and Canada imposed restrictions on haddock fishing to replenish dwindling stocks

24. 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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25. Supply Practice
Identify the determinant (shifter) then decide if supply will increase or decrease
Shifter
Increase or Decrease
Left or Right 1 2 3 4 5 6 25 25

26. Supply Practice Analyze Hamburgers
Which determinant (SHIFTER)?
Increase or decrease?
Which direction will curve shift?
Analyze Hamburgers
Strange virus kills 20% of cows
Price of hamburgers increase 30%
Government taxes burger producers
New bun baking technology cuts production time in half
The government subsidizes dairy farmers
Minimum wage increases to $20
Decrease in availability of resources, decrease.
Price doesn’t shift curve, no shift.
Government action, decrease.
Technology, increase.
Government action, increase
Price of resources, decrease.
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27. Putting Supply and Demand Together!!!
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28. Please Don’t Ever Quit School$5 4 3 2 1 E D Q

29. Equilibrium
When supply and demand are equal (i.e. when the supply function and demand function intersect) the economy is said to be at equilibrium. EP = EQ
At this point, the allocation of goods is at its most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded. Thus, everyone (individuals, firms, or countries) is satisfied with the current economic condition. At the given price, suppliers are selling all the goods that they have produced and consumers are getting all the goods that they are demanding. As you can see on the chart, equilibrium occurs at the intersection of the demand and supply curve, which indicates no allocative inefficiency. At this point, the price of the goods will be P* and the quantity will be Q*. These figures are referred to as equilibrium price and quantity.
In the real market place equilibrium can only ever be reached in theory, so the prices of goods and services are constantly changing in relation to fluctuations in demand and supply.

30. Disequilibrium
Disequilibrium occurs whenever the price or quantity is not equal to P or Q*.
Excess Supply
Excess Demand

31. Disequilibrium #1
Excess Supply - If the price is set too high, excess supply will be created within the economy and there will be allocative inefficiency. (SURPLUS)
Surplus - A market condition existing at any price where the quantity supplied is greater than the quantity demanded
Surplus - A market condition existing at any price where the quantity supplied is greater than the quantity demanded
At price P1 the quantity of goods that the producers wish to supply is indicated by Q2. At P1, however, the quantity that the consumers want to consume is at Q1, a quantity much less than Q2. Because Q2 is greater than Q1, too much is being produced and too little is being consumed. The suppliers are trying to produce more goods, which they hope to sell to increase profits, but those consuming the goods will find the product less attractive and purchase less because the price is too high.

32. Disequilibrium #2
Excess Demand - Excess demand is created when price is set below the equilibrium price. Because the price is so low, too many consumers want the good while producers are not making enough of it. (SHORTAGE)
Shortage - A market condition existing at any price where the quantity supplied is less than the quantity demanded
In this situation, at price P1, the quantity of goods demanded by consumers at this price is Q2. Conversely, the quantity of goods that producers are willing to produce at this price is Q1. Thus, there are too few goods being produced to satisfy the wants (demand) of the consumers. However, as consumers have to compete with one other to buy the good at this price, the demand will push the price up, making suppliers want to supply more and bringing the price closer to its equilibrium.

34. Putting Supply and Demand Together!!! THE Examples
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35. Supply and Demand are put together to determine equilibrium price and equilibrium quantity
Supply Schedule
Demand Schedule S $5 4 3 2 1 P Qd $5 10 $4 20 $3 30 $2 50 $1 80 P Qs $5 50 $4 40 $3 30 $2 20 $1 10 D Q 35

36. Equilibrium Price = $3 (Qd=Qs) Equilibrium Quantity is 30
Supply and Demand are put together to determine equilibrium price and equilibrium quantity P
Supply Schedule
Demand Schedule S $5 4 3 2 1 P Qd $5 10 $4 20 $3 30 $2 50 $1 80 P Qs $5 50 $4 40 $3 30 $2 20 $1 10
Equilibrium Price = $3 (Qd=Qs) D Q
Equilibrium Quantity is 30 36

37. What if the price increases to $4?
Supply and Demand are put together to determine equilibrium price and equilibrium quantity
What if the price
increases to $4? P
Supply Schedule
Demand Schedule S $5 4 3 2 1 P Qd $5 10 $4 20 $3 30 $2 50 $1 80 P Qs $5 50 $4 40 $3 30 $2 20 $1 10 D Q 37

38. How much is the surplus at $4?
At $4, there is disequilibrium. The quantity demanded is less than quantity supplied. P
Supply Schedule
Demand Schedule S $5 4 3 2 1
Surplus
(Qd<Qs) P Qd $5 10 $4 20 $3 30 $2 50 $1 80 P Qs $5 50 $4 40 $3 30 $2 20 $1 10
How much is the surplus at $4?
Answer: 20 D Q 38

39. How much is the surplus if the price is $5?
What if the price
decreases to $2? P
Supply Schedule
Demand Schedule S $5 4 3 2 1 P Qd $5 10 $4 20 $3 30 $2 50 $1 80 P Qs $5 50 $4 40 $3 30 $2 20 $1 10
Answer: 40 D Q 39

40. How much is the shortage at $2?
At $2, there is disequilibrium. The quantity demanded is greater than quantity supplied. P
Supply Schedule
Demand Schedule S $5 4 3 2 1 P Qd $5 10 $4 20 $3 30 $2 50 $1 80 P Qs $5 50 $4 40 $3 30 $2 20 $1 10
How much is the shortage at $2?
Answer: 30
Shortage
(Qd>Qs) D Q 40

41. How much is the shortage if the price is $1?
Supply Schedule
Demand Schedule S $5 4 3 2 1 P Qd $5 10 $4 20 $3 30 $2 50 $1 80 P Qs $5 50 $4 40 $3 30 $2 20 $1 10
Answer: 70 D Q 41

42. The FREE MARKET system automatically pushes the price toward equilibrium.
Supply Schedule
Demand Schedule S $5 4 3 2 1
When there is a surplus, producers lower prices P Qd $5 10 $4 20 $3 30 $2 50 $1 80 P Qs $5 50 $4 40 $3 30 $2 20 $1 10
When there is a shortage, producers raise prices D Q 42

43. Review Explain the Law of Demand Explain the Law of Supply
Identify the 5 shifters of demand
Identify the 6 shifters of supply
Define Subsidy
Explain why price DOESN’T shift the curve
Define Equilibrium
Define Shortage
Define Surplus
Identify 10 stores in the mall
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44. 32. A

45. Supply