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

2. 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

3. Supply and Demand Analysis
Easy as 1, 2, 3
Before the change:
Draw supply and demand
Label original equilibrium price and quantity
The change:
Did it affect supply or demand first?
Which determinant caused the shift?
Draw increase or decrease
After change:
Label new equilibrium?
What happens to Price? (increase or decrease)
What happens to Quantity? (increase or decrease)
Let’s Practice!

4. S&D Analysis Practice Analyze Hamburgers
Before Change (Draw equilibrium)
The Change (S or D, Identify Shifter)
After Change (Price and Quantity After)
Analyze Hamburgers
New grilling technology cuts production time in half
Price of chicken sandwiches (a substitute) increases
Price of hamburgers falls from $3 to $1.
Price for ground beef triples
Human fingers found in multiple burger restaurants
1. Supply Increases
2. Demand Increases
3. No Shift. Shortage
4. Supply Decreases
5. Demand Decreases

5. Qe Q1 New grilling technology cuts production time in half Price S S1Pe
P decrease
Q increase P1 D Qe Q1
Quantity 5
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6. Qe Q1 2. Price of chicken sandwiches (a substitute) increases Price S
P increase
Q increase P1 Pe D1 D Qe Q1
Quantity
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7. Qs Qe Qd 3. Price of hamburgers falls from $3 to $1. Price S Shortage
Qd increase
Qs decrease Pe P1 D Qs Qe Qd
Quantity
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8. Q1 Qe 4. Price for ground beef triples Price S1 S P1 Pe D Quantity
P increase
Q decrease D Q1 Qe
Quantity
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9. Q1 Qe 5. Human fingers found in multiple burger restaurants Price S Pe
P decrease
Q decrease Pe P1 D1 D Q1 Qe
Quantity
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ACDC Leadership 2015

10. Episode 3: Indiana Jones
Econmovies
Episode 3: Indiana Jones

11. Double Shifts Double Shift Rule:
Suppose the demand for milk increased at the same time as production technology improved.
Use S&D Analysis to show what will happen to PRICE and QUANTITY.
Double Shift Rule:
If TWO curves shift at the same time, EITHER price or quantity will be indeterminate (ambiguous).
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12. Qe Q1 Demand increases AND supply increases Price S S1 P1 Pe D1 D
P indeterminate
Q increase Qe Q1
Quantity
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13. Trick: Draw it out separately and combine the results
P indeterminate
Q increase
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14. What if supply increases and demand falls?
P decrease
Q indeterminate
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15. What if supply decreases and demand falls?
P indeterminate
Q decrease

16. Voluntary Exchange Activity
In the free-market, buyers and sellers voluntarily come together to seek mutual benefits. 16

17. Example of Voluntary Exchange
Ex: You want to buy a truck so you go to the local dealership. You are willing to spend up to $20,000 for a new 4x4. The seller is willing to sell this truck for no less than $15,000. After some negotiation you buy the truck for $18,000.
Analysis:
Buyer’ Maximum-
Sellers Minimum-
Price-
Consumer’s Surplus-
Producer’s Surplus-
$20,000
$15,000
$18,000
$2,000
$3,000

18. Voluntary Exchange Terms
Consumer Surplus is the difference between what you are willing to pay and what you actually pay.
CS = Buyer’s Maximum – Price
Producer’s Surplus is the difference between the price the seller received and how much they were willing to sell it for.
PS = Price – Seller’s Minimum

19. Consumer and Producer’s Surplus Area of a triangle is 1/2bh:
Calculate the area of:
Consumer Surplus
Producer Surplus
Total Surplus P
$10 8 6 $5 4 2 1 S
Area of a triangle is 1/2bh:
CS= $25
PS= $20
Total= $45 CS PS D 10 Q
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20. Review $16 14 12 11 10 P Calculate the area of: Consumer Surplus
Producer Surplus
Total Surplus
$16 14 12 11 10 S CS
CS= $20
PS= $5
Total= $25 PS D 10 Q
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ACDC Leadership 2015

21. Supply and Demand Review
Define the Law of Demand
Define the Law of Supply
What is the difference between a change in demand and a change in quantity demanded?
What happens if price is above equilibrium?
What happens if price is below equilibrium?
Identify the rule for double shifts in S&D
Define consumer surplus
Name 10 musical instruments

22. 2008 Audit Exam
21. C
Producers will produce more corn and supply will increase

23. 4.D