2. Unit 2: Supply, Demand, and Consumer Choice

3. Demand Practice In-and-Out Hamburgers (a normal good) 1.Population boom 2.Incomes fall due to recession 3.Price for Carne Asada burritos (a substitute) falls to $1 4.Price increases to $5 per In-and-Out burger 5.New health craze- “No ground beef” 6.In-and-Out announce that they will significantly increase prices NEXT month 7.Government heavily taxes shake and fries causes their prices to quadruple. 8.In-and-Out lowers price of burgers to $1 1.Which determinant (SHIFTER)? 2.Increase or decrease? 3.Which direction will curve shift?

4. Supply

5. Supply Defined 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

6. 5 P Q o $5 4 3 2 1 10 20 30 40 50 60 70 80 $5 4 3 2 1 60 50 35 20 5 PQSQS Price of Corn Quantity of Corn CORN Plot the Points GRAPHING SUPPLY

7. P Q o $5 4 3 2 1 10 20 30 40 50 60 70 80 $5 4 3 2 1 60 50 35 20 5 PQSQS Price of Corn Quantity of Corn CORN Plot the Points GRAPHING SUPPLY

8. 35 P Q o $5 4 3 2 1 10 20 30 40 50 60 70 80 $5 4 3 2 1 60 50 35 20 5 PQSQS Price of Corn Quantity of Corn CORN Plot the Points GRAPHING SUPPLY

9. P Q o $5 4 3 2 1 10 20 30 40 50 60 70 80 $5 4 3 2 1 60 50 35 20 5 PQSQS Price of Corn Quantity of Corn CORN Plot the Points GRAPHING SUPPLY

10. P Q o $5 4 3 2 1 10 20 30 40 50 60 70 80 $5 4 3 2 1 60 50 35 20 5 PQSQS Price of Corn Quantity of Corn CORN Plot the Points GRAPHING SUPPLY

11. S P Q o $5 4 3 2 1 10 20 30 40 50 60 70 80 $5 4 3 2 1 60 50 35 20 5 PQSQS Price of Corn Quantity of Corn CORN Connect the Points GRAPHING SUPPLY

12. S P Q o $5 4 3 2 1 10 20 30 40 50 60 70 80 $5 4 3 2 1 60 50 35 20 5 PQSQS Price of Corn Quantity of Corn CORN What if more producers enter the market? GRAPHING SUPPLY

13. S P Q o $5 4 3 2 1 10 20 30 40 50 60 70 80 Price of Corn Quantity of Corn $5 4 3 2 1 60 50 35 20 5 PQSQS CORN 80 70 60 45 30 S’ Increase in Supply GRAPHING SUPPLY

14. S P Q o $5 4 3 2 1 10 20 30 40 50 60 70 80 $5 4 3 2 1 60 50 35 20 5 PQSQS Price of Corn Quantity of Corn CORN What if there is a drought? GRAPHING SUPPLY

15. S P Q o $5 4 3 2 1 10 20 30 40 50 60 70 80 $5 4 3 2 1 60 50 35 20 5 PQSQS Price of Corn Quantity of Corn CORN S’ 45 30 20 0 -- Decrease in Supply GRAPHING SUPPLY

16. 6 DETERMINANTS OF SUPPLY (SHIFTERS) 1.Prices/Availability of inputs (resources) 2.Number of Sellers 3.Technology 4.Government Action: Taxes & Subsidies 5. Opportunity Cost of Alternative Production 6. Expectations of Future Profit Changes in PRICE don’t shift the curve. It only causes movement along the curve.

17. Supply Practice In-and-Out Hamburgers 1.Mad cow kills 20% of cows 2.Price of burgers increase 30% 3.Government taxes burger producers 4.A Demand increase causes the price for shakes to increase to $20 5.New bun baking technology cuts production time in half 6.Minimum wage increases to $10 1.Which determinant (SHIFTER)? 2.Increase or decrease? 3.Which direction will curve shift?

18. Putting Supply and Demand Together

19. 7 S P Q o $5 4 3 2 1 2 4 6 8 10 12 14 16 PQDQD $5 4 3 2 1 2 4 7 11 16 $5 4 3 2 1 12 10 7 4 1 D PQSQS Price of Corn Quantity of Corn CORN MARKET CORN MARKET Equilibrium Price is $3 Supply and Demand are put together to determine equilibrium price and equilibrium quantity. Equilibrium Quantity is 7 What happens if price is too high?

20. 7 S P Q o $5 4 3 2 1 2 4 6 8 10 12 14 16 PQDQD $5 4 3 2 1 2 4 7 11 16 $5 4 3 2 1 12 10 7 4 1 D PQSQS Price of Corn Quantity of Corn CORN MARKET CORN MARKET Surplus At a $4 price quantity supplied is greater than quantity demanded which causes a… What happens if price is too low?

21. 11 7 S P Q o $5 4 3 2 1 2 4 6 8 10 12 14 16 PQDQD $5 4 3 2 1 2 4 7 11 16 $5 4 3 2 1 12 10 7 4 1 D PQSQS Price of Corn Quantity of Corn CORN MARKET CORN MARKET Shortage At a $2 price quantity supplied is less than quantity demanded which causes a…

22. 7 S P Q o $5 4 3 2 1 2 4 6 8 10 12 14 16 PQDQD $5 4 3 2 1 2 4 7 11 16 $5 4 3 2 1 12 10 7 4 1 D PQSQS Price of Corn Quantity of Corn CORN MARKET CORN MARKET Shortage Surplus The FREE MARKET system automatically pushes the price toward equilibrium.

23. Shifts in Supply or Demand change equilibrium P and Q automatically

24. Supply and Demand Analysis Easy as 1, 2, 3 1.Before the change: Draw supply and demand Label original equilibrium price and quantity 2.The change: Did it affect supply or demand first? Which determinant caused the shift? Draw increase or decrease 3.After change: Label new equilibrium? What happens to Price? (increase or decrease) What happens to Quantity? (increase or decrease) Ex: Transformers become new Christmas mega hit.

25. S&D Analysis Practice In-and-Out Hamburgers 1.New bun baking technology cuts production time in half. 2.Price of Burger King Woppers (a substitute good) increases 3.Price of In-and-Out burgers falls from $2 to $1. 4.Minimum wage increases to $10 1.Before Change 2.The Change 3.After Change