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Unit 2: Supply, Demand, and Consumer Choice

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1 Unit 2: Supply, Demand, and Consumer Choice

2 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.

3 VERY IMPORTANT COW!

4 This is a change in demand, not a change in quantity demanded
Shifts in Demand CHANGES 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 Changes in price DON’T shift the curve!

5 What if cereal makes you smarter?
Change in Demand Demand Schedule What if cereal makes you smarter? Price of Cereal $5 4 3 2 1 Price Quantity Demanded $5 10 $4 20 $3 30 $2 50 $1 80 Demand o Q Quantity of Cereal 6

6 Change in Demand Demand Schedule Price of Cereal $5 10 $4 20 $3 30 $2
Quantity Demanded $5 10 $4 20 $3 30 $2 50 $1 80 Demand o Q Quantity of Cereal 7

7 Change in Demand Demand Schedule Price of Cereal $5 10 $4 20 $3 30 $2
Quantity Demanded $5 10 $4 20 $3 30 $2 50 $1 80 Demand o Q Quantity of Cereal 8

8 Change in Demand Demand Schedule Price of Cereal $5 30 $4 40 $3 50 $2
1 Price Quantity Demanded $5 30 $4 40 $3 50 $2 70 $1 Demand o Q Quantity of Cereal 9

9 Prices didn’t change but people want MORE cereal
Change in Demand Demand Schedule Price of Cereal Increase in Demand Prices didn’t change but people want MORE cereal $5 4 3 2 1 Price Quantity Demanded $5 30 $4 40 $3 50 $2 70 $1 D1 Demand o Q Quantity of Cereal 10

10 What if cereal causes baldness?
Change in Demand Demand Schedule What if cereal causes baldness? Price of Cereal $5 4 3 2 1 Price Quantity Demanded $5 10 $4 20 $3 30 $2 50 $1 80 Demand o Q Quantity of Cereal 11

11 Change in Demand Demand Schedule Price of Cereal $5 10 $4 20 $3 30 $2
Quantity Demanded $5 10 $4 20 $3 30 $2 50 $1 80 Demand o Q Quantity of Cereal 12

12 Change in Demand Demand Schedule Price of Cereal $5 10 $4 20 $3 30 $2
Quantity Demanded $5 10 $4 20 $3 30 $2 50 $1 80 Demand o Q Quantity of Cereal 13

13 Change in Demand Demand Schedule Price of Cereal $5 $4 5 $3 20 $2 30
1 Price Quantity Demanded $5 $4 5 $3 20 $2 30 $1 80 60 Demand o Q Quantity of Cereal 14

14 Prices didn’t change but people want LESS cereal
Change in Demand Demand Schedule Price of Cereal $5 4 3 2 1 Decrease in Demand Prices didn’t change but people want LESS cereal Price Quantity Demanded $5 $4 5 $3 20 $2 30 $1 80 60 D2 Demand o Q Quantity of Cereal 15

15 What if the price of MILK goes up?
Change in Demand Demand Schedule What if the price of MILK goes up? Price of Cereal $5 4 3 2 1 Price Quantity Demanded $5 10 $4 20 $3 30 $2 50 $1 80 Demand o Q Quantity of Cereal 16

16 What Causes a Shift in Demand?
5 Shifters (Determinates) of Demand: Tastes and Preferences Number of Consumers Price of Related Goods Income Future Expectations Changes in PRICE don’t shift the curve. It only causes movement along the curve.

17 Tastes and Preferences
Think in terms of fads. Things that quickly become popular, or quickly lose popularity. Ex: Fad diets Silly Bands Number of Consumers As the population of an area grows, the demand for goods… As the population of an area dwindles...

18 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. If the price of one increases, the demand for the other will increase (or vice versa) Ex: If price of Gatorade falls, demand for Powerade will… 2. Complements are two goods that are bought and used together. If the price of one increase, the demand for the other will fall. (or vice versa) Ex: If price of skis falls, demand for ski boots will...

19 Substitutes 20 20

20 Substitutes 21 21

21 Substitutes 22 22

22 Substitutes 23 23

23 Substitutes 24 24

24 Substitutes 25 25

25 Substitutes 26 26

26 Complements 27 27

27 Income The incomes of consumer change the demand, but how depends on the type of good. Normal Goods As income increases, demand increases As income falls, demand falls Ex: Luxury cars, Sea Food, jewelry, homes 2. Inferior Goods As income increases, demand falls As income falls, demand increases Ex: Top Ramen, used cars, used clothes, 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)

28 Inferior Goods 29 29

29 Future Expectations Consumers will change their spending habits when provided information about future price changes. Ex. When a mattress store advertises that all of their mattresses will be on sale in February, the demand for mattresses NOW…

30 Change in Qd vs. Change in Demand
There are two ways to increase quantity from 10 to 20 Price of Cereal 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 o Q Cereal Quantity of Cereal

31 Practice First, 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 7 8

32 Hamburgers (a normal good)
Practice First identify the determinant (Shifter). Then decide if demand will increase or decrease Hamburgers (a normal good) Population boom Incomes fall due to recession Price for chicken sandwiches falls to $1 Price increases to $5 for hamburgers New health craze- “No ground beef” Hamburger restaurants announce that they will significantly increase prices NEXT month Government heavily taxes shake and fries causes their prices to quadruple. Restaurants lower price of burgers to $.50 33 33

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