1. SUPPLY & DEMAND AP Economics

3. MARKETS  Institution that brings together buyers (DEMAND)  and sellers (SUPPLY) of resources, goods and services

4. DEMAND IS  Amount of a good or service consumers are willing and able to buy  Major determinant of quantity demanded is PRICE  Amount of demand at each price is quantity demanded  Quantity of demand at each price is shown in a “Demand Schedule”

5. DEMAND SCHEDULE PRICEQTY DEMANDED $ 1.753 $ 1.505 $ 1.257 $ 1.0010 $ 0.7515 $ 0.5020 $ 0.2525

6. DEMAND CURVE PRICE QUANTITY DEMAND

7. DEMAND CURVE  Price is the vertical axis  Qty of demand is the horizontal axis  Demand Curve is downward sloping because: Common sense (lower price = buy more) Diminishing marginal utility (the more consumers buy, the less satisfaction they receive)

8. INCOME & SUBSTITUTION  Income Effect – the lower price increases the purchasing power of consumer’s  Substitution Effect – lower price gives incentive to “substitute” this item for those that are relatively more expensive

9. NON-PRICE DETERMINANTS  PREFERENCES – based on popularity or trends by consumers  INCOME EFFECT – how much money consumers have available to spend  POPULATION CHANGES – how many consumers are in this market  EXPECTATIONS OF CONSUMERS – what consumers think will happen in the future that affects their actions NOW!!

10. NON-PRICE DETERMINANTS CON ’ T.  Elasticity of demand – how much demand changes to respond to changes in price More elastic when goods are luxuries Ex: steak, diamonds, SUV More inelastic when good is needed Ex: medicine (insulin), soap, milk

11. NON-PRICE DETERMINANTS CON ’ T. n RELATED GOODS n SUBSTITUTION EFFECT As price increases for a good, demand for its substitute (chicken for beef; generic) goes up n COMPLEMENTARY GOODS As price goes down for one good, demand for that good & its complement both go up DVD player on sale but DVD bought for regular price

12. NON-PRICE DETERMINANTS  REMINDER: “P I P E E R” Preference of consumers (popularity) Income of consumers ($$ to spend) Population (# of consumers) Expectations for future (what to do NOW?) Elasticity (effect of price) Related Goods substitute available? price of complementary good changes- demand for both changes?

13. SUPPLY IS  Amount of a good or service producers are willing and able to sell  Major determinant of supply is PRICE  Amount of supply at each price is quantity  Amount of supply at each price is shown in a “Supply Schedule”

14. SUPPLY SCHEDULE PRICEQTY SUPPLIED $ 1.7525 $ 1.5020 $ 1.2517 $ 1.0015 $ 0.7510 $ 0.507 $ 0.255

15. SUPPLY CURVE PRICE QUANTITY SUPPLY

16. SUPPLY CURVE  Price is the vertical axis  Qty of supply is the horizontal axis  Supply Curve is upward sloping because: Price and quantity supplied have a direct relation Price is an incentive to the producer as they receive more revenue when more is sold

17. LAW OF SUPPLY  Supply varies directly with price  If Price goes up – Qty. Supply goes up  If Price goes down – Qty. Supply goes down

18. NON-PRICE DETERMINANTS n Cost of Production Cost of producing goods & services Ex: minimum wage for labor goes up Ex: Natural disasters make costs go up n Expectations of producers Predictions on how consumers will act n Resources that can be used to produce different goods Ex: corn syrup or sugar? Ex: corn or soybeans?

19. NON-PRICE DETERMINANTS  Technology Improvements increase production  Taxes/Subsidies Pay more tax which increases cost of production Gov pays firm to produce  Suppliers (# of firms) New automotive firm (Tesla) enters the car market and increases the supply of autos Blackberry exits the cell phone market causing the supply of cell phones to decrease REMINDER: “C E R T T/S S”

20. SHIFTS IN SUPPLY & DEMAND CURVES  Increase - shifts to the right  Decrease - shifts to the left PRICE QUANTITY PRICE QUANTITY D 1 D 2 D 1 D 2

21. SHIFTS IN SUPPLY & DEMAND CURVES n Increase - shifts to the right n Decrease - shifts to the left

22. EQUILIBRIUM PRICE  Point where buyers and sellers are equally satisfied  Point where D & S curves intersect  Adam Smith’s Invisible Hand Theory Forces of S & D, competition & price make societies use resources efficiently

23. EQUILIBRIUM PRICE PRICE QUANTITY SUPPLY DEMAND E P EQ

24. SURPLUS  Supply is greater than demand at this price  Must adjust by lowering price to reach equilibrium supply demand SURPLUS D QtyS Qty P Q

25. PRICE FLOORS  Government sets minimum price Price can’t go lower Causes surplus Market can’t adjust Ex: Minimum wage causes surplus of workers at set price

26. SHORTAGE  Demand is greater than supply at this price  Must adjust by increasing the price P Q S D SHORTAGE S QtyD Qty

27. PRICE CEILINGS  Government sets maximum price Price can’t go higher Causes shortage Market can’t adjust Ex: Rent controls, Price controls, Utility rates set by gov’t.

28. SUPPLY AND DEMAND CURVES Economic Analysis  In the supply/demand curves for new cars, where would the equilibrium price and quantities supplied/demanded be (P1 Q1)?  Now what if companies start to replace human workers, who take breaks, get sick, and get bored, with robots that work 24 hours per day? A change has taken place? Would it affect supply or demand first? Would supply increase or decrease due to this change? If the price were not changed, would there be a shortage or a surplus? What will happen to the Price and Quantity in order to reach the new equilibrium? Congratulations! You have just done “economic analysis: 1.Before change: a.Find original equilibrium. 2.Change: a.Did it affect supply or demand first? b.Which determinant caused the shift? c.Did it increase or decrease? 3.After change: a.Where is the new equilibrium? b.What happens to Price? c.What happens to Quantities demanded and supplied?

29. Two Curves Move - We learned the S and D shift determinants separately, but in the prompts, two curves can move at once, causing S and D to shift at once. When this happens, one of the variables, price or quantity, will change, but one will not change much or at all. We say that the variable is “indeterminate”. This means we can’t tell because we do not know the magnitude of the shifts.