1. Anderson and Ray
SECTION 2
Supply and Demand

2. Anderson and Ray

3. What Determines The Prices of Jeans?
Discussion Starter:
What Determines The Prices of Jeans?
How might flooding in Pakistan translate into higher prices for jeans in the United States—or more polyester instead of cotton being used in American T-shirts?
It’s a matter of supply and demand.

5. Introduction and Demand
The supply and demand model is a model of how a competitive market works.
In a competitive market, many buyers and sellers offer the same good or service—such as in the market for blue jeans.

6. Introduction to demand
So what is Demand
Show the amount people are willing to buy at every price (so you want it and you can afford it)
So would this factor into your demand?

7. The Demand Schedule & the Demand Curve
The quantity demanded of a good or service is the amount consumers are willing to buy at any given price.
7.1
7.5
8.1
8.9
10.0
11.5
14.2
Price of cotton
(per pound)
Quantity of cotton demanded (billions of pounds)
1.75
1.50
1.25
1.00
0.75
0.50
$2.00
Demand Schedule for Cotton
A demand schedule displays the quantity demanded at different prices for a good or service—in this case, cotton.

8. Consumer Activity
I will be polling the class on their willingness to pay for a certain good or service
Please raise your hand on if you would buy the following good for the listed price

9. $3.00
$1.00

10. $5.00
$2.58

11. $10.00
$5.00

12. $2.00
$0.99

13. $500
$200

14. $99
$400

15. $300
$1000

16. $7
$20

17. The Demand Schedule & the Demand Curve
The demand curve is the graphical representation of the demand schedule.
It also shows the quantity demanded of a good or service at any given price.

18. The Demand Schedule & the Demand Curve
The demand curve is downward-sloping due to the law of demand.
The law of demand says that all other things being equal, people demand less of a good or service at higher prices.

19. Shifts of the Demand Curve
These two demand schedules show quantity demanded before and after an increase in population from 2012 to 2013.
This increase in population created an increase in demand for cotton at every price.

20. Shifts of the Demand Curve
A shift of the demand curve is a change in the quantity demanded at any given price.
It is represented by the movement of the original demand curve to a new position.

21. Price of cotton (per pound) Quantity of cotton (billions of pounds)
Movement Along the Demand Curve
Price of cotton (per pound)
A movement along the demand curve…
A movement along the demand curve represents a change in quantity demanded and is caused by a change in price.
$2.00
1.75 A
…is not the same as a shift of the demand curve.
1.50
1.25 B
1.00
0.75
As cotton’s price falls from $1.50 to $1.00… D2
0.50 D1 7
8.1 10 13 15 17
Quantity of cotton (billions of pounds)
…quantity demanded rises from 8.1 to 10.

22. Understanding Shifts of the Demand Curve
A decrease in demand means a leftward shift of the demand curve.
An increase in demand means a rightward shift of the demand curve.
Price
Increase in demand
At any given price, consumers demand a larger quantity than before.
At any given price, consumers demand a smaller quantity than before.
Decrease in demand D3 D1 D2
Quantity

23. Understanding Shifts of the Demand Curve
Five factors are responsible for shifts of the demand curve.
Changes in Tastes
Changes in prices of Related goods/services
Changes in Income
Changes in the number of Buyers
Changes in Expectations
TRIBE is a mnemonic device that can help you remember the factors.
Table 5.1 (p. 55) details how each type of change affects demand.

24. Understanding Shifts of the Demand Curve
Changes in tastes are fads, changes in beliefs, or changes in culture that shift the demand curve for a good or service.
Men’s hats became less popular after World War 2, causing the demand curve for hats to shift to the left.
Hip-hop and alternative rock became more popular in the 1990s, causing their demand curves to shift to the right.

25. Understanding Shifts of the Demand Curve
Advertisements are one of the easiest ways to changes tastes.
Here are some prime examples

39. Understanding Shifts of the Demand Curve
Changes in prices of a related good or service shift demand differently depending on whether they are substitutes or complements.
Goods are substitutes if an increase in the price of one causes people to demand more of the other.
When the price of jeans rises, people buy more khakis as a cheaper alternative. Thus, jeans and khakis are substitutes.

40. Understanding Shifts of the Demand Curve
Goods are complements if a decrease in the price of one makes people buy more of the other.
Cookies and milk are often consumed together. When the price of one falls, people buy more of both. Thus, cookies and milk are complements.

41. Understanding Shifts of the Demand Curve
Changes in income can shift demand for a good differently, depending on whether it is is a normal or inferior good.
When an increase in income raises the demand for a good, it is a normal good. Most goods fall under this category.
For example, when people earn more income, they tend to buy more housing. Therefore, housing is a normal good.

42. Understanding Shifts of the Demand Curve
If an increase in income lowers the demand for a good, it is an inferior good. Inferior goods are rarer than normal goods.
When income goes up, people tend to buy fewer bus passes—often opting for a more expensive taxi.
Therefore, bus passes are an inferior good and taxi rides, in this example, are normal goods.

43. Normal or Inferior

44. Normal or Inferior

45. Normal or Inferior

46. Understanding Shifts of the Demand Curve
Changes in the number of buyers or consumers can shift the demand curve.
A decrease in the number of consumers causes demand to shift left.
Price
An increase in the number of consumers causes demand to shift right. D2 D1 D3
Quantity

47. Understanding Shifts of the Demand Curve
Changes in expectations of how prices will change in the future can shift the demand curve.
Expectations of a coming fall in price can cause a decrease in demand today.
Shoppers who hear about a post-holiday sale on jewelry may wait until after the holiday to buy—reducing the demand for it today.

48. Understanding Shifts of the Demand Curve
Expectations of a coming rise in price can cause an increase in demand today.
Consumers who think jeans will be more expensive next year may opt to buy them now—increasing the demand for jeans today.

49. Individual Versus Market Demand Curves
The market demand curve is the horizontal sum of the individual demand curves of all consumers in that market.

50. Summary and Review
1) What does the supply and demand model illustrate?
How a competitive market works.
2) The demand schedule shows what at each price?
Quantity demanded
Option 2 for teasing the jeans narrative: cut the question & answer about jeans on the previous slide, and give it its own slide here. less clutter, but uses 2 slides.
3) What is the graphical representation of the demand schedule?
The demand curve

51. Summary and Review 4) What does the law of demand state?
People demand less of a good or service as its price increases.
5) How does the law of demand shape the demand curve?
Option 2 for teasing the jeans narrative: cut the question & answer about jeans on the previous slide, and give it its own slide here. less clutter, but uses 2 slides.
It gives the demand curve its downward slope.

52. Summary and Review 6) What causes a movement along the demand curve?
A change in quantity demanded.
7) What causes a shift of the demand curve?
Option 2 for teasing the jeans narrative: cut the question & answer about jeans on the previous slide, and give it its own slide here. less clutter, but uses 2 slides.
A change in demand at any given price.

53. Summary and Review Remember TRIBE.
8) What five factors can cause a shift of the demand curve?
A change in Tastes.
A change in the prices of Related goods or services.
A change in Income.
A change in the number of Buyers (consumers).
A change in Expectations about future prices.
Option 2 for teasing the jeans narrative: cut the question & answer about jeans on the previous slide, and give it its own slide here. less clutter, but uses 2 slides.
Remember TRIBE.

54. Summary and Review
9) How are the market demand curve and the individual demand curves of all the consumers in that market related?
The market demand curve is the horizontal sum of the individual demand curves of all consumers in the market.
Option 2 for teasing the jeans narrative: cut the question & answer about jeans on the previous slide, and give it its own slide here. less clutter, but uses 2 slides.

55. Free-Response Question 1: Walkthrough
1. Create a table with two hypothetical prices for a good and two corresponding quantities demanded. Choose the prices and quantities so that they illustrate the law of demand. Using your data, draw a correctly labeled graph showing the demand curve for the good. Using the same graph, illustrate an increase in demand for the good. (6 points)
1 point: Graph shows “Price” on the vertical axis and “Quantity” on the horizontal axis.
1 point: Data table clearly labeled with “Price” and “Quantity”.
1 point: Values in the table show negative relationship between P and Q.
1 point: The data from the table is correctly plotted.
Option 2 for teasing the jeans narrative: cut the question & answer about jeans on the previous slide, and give it its own slide here. less clutter, but uses 2 slides.
1 point: Negatively- sloped curve labeled Demand or D1.
1 point: Second demand curve labeled D2 and is to the right of D1.