# Unit 2: Demand, Supply, and Consumer Choice

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1 Unit 2: Demand, Supply, and Consumer Choice 1

2 DEMAND DEFINED What is Demand? Demand is the different quantities of goods that consumers are willing and able to buy at different prices. (Ex: You are able to purchase diapers, but if you aren t willing to buy then there is NO demand) What is the Law of Demand? There is an INVERSE relationship between price and quantity demanded 2

3 Example of Demand I am willing to sell several A s in AP Economics. How much will you pay? Price Quantity Demanded Demand Schedule 3

4 4

5 Why does the Law of Demand occur? The law of demand is the result of three separate behavior patterns that overlap: 1.The Substitution effect 2.The Income effect 3.The Law of Diminishing Marginal Utility We will define and explain each 5

6 Why does the Law of Demand occur? 1. The Substitution Effect If the price goes up for a product, consumer buy less of that product and more of another substitute product (and vice versa) 2. The Income Effect If the price goes down for a product, the purchasing power increases for consumers - allowing them to purchase more. 6

7 Why does the Law of Demand occur? 3. Law of Diminishing Marginal Utility Utility = Satisfaction We buy goods because we get utility from them The law of diminishing marginal utility states that as you consume anything, the additional satisfaction that you will receive will eventually start to decrease In other words, the more you buy of ANY GOOD the less satisfaction you get from each new unit consumed. Discussion Questions: 1. What does this have to do with the Law of Demand? 2. How does this effect the pricing of businesses? 7

8 Can you see the Law of Diminishing Marginal Utility in Disneyland s pricing strategy?

9 2010 Question 36 9

10 Graphing Demand 10

11 The Demand Curve A demand curve is a graphical representation of a demand schedule. The demand curve is downward sloping showing the inverse relationship between price (on the y-axis) and quantity demanded (on the x-axis) When reading a demand curve, assume all outside factors, such as income, are held constant. (This is called ceteris paribus) Let s draw a new demand curve for milk 11

12 GRAPHING DEMAND Demand Schedule Price Quantity Demanded \$5 10 \$4 20 \$3 30 \$2 50 Price of Milk \$ Draw this large in your notes \$ Quantity of Milk Q 12

13 GRAPHING DEMAND Demand Schedule Price of Milk \$5 Price Quantity Demanded 4 \$ \$4 20 \$ \$ Demand \$ Quantity of Milk Q 13

14 Where do you get the Market Demand? Billy Jean Other Individuals Market Price Q Demd Price Q Demd Price Q Demd Price Q Demd \$5 1 \$5 0 \$5 9 \$5 10 \$4 2 \$4 1 \$4 17 \$4 20 \$3 3 \$3 2 \$3 25 \$3 30 \$2 5 \$2 3 \$2 42 \$2 50 \$1 7 \$1 5 \$1 68 \$1 80 P P P P \$3 \$3 \$3 \$3 3 D Q 2 D Q 25 D Q 30 D Q

15 Demand Review 1. What are the two key aspects of the definition of demand? 2. What is the Law of Demand? 3. Give an example of the substitution effect 4. Give an example of the income effect 5. Give an example of the law of diminishing marginal utility 6. Explain how the law of diminishing marginal utility causes the law of demand 7. How do you determine the MARKET demand for a particular good? (from reading) 8. Name 10 fast food places 15

16 Shifts 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 PRICE DOESN T SHIFT THE CURVE 16

17 Change in Demand Demand Schedule Price \$5 10 \$4 20 \$3 30 Quantity Demanded Price of Milk \$ What if milk makes you smarter? \$ Demand \$ Quantity of Milk Q 17

18 Change in Demand Demand Schedule Price \$5 10 \$4 20 \$3 30 Quantity Demanded Price of Milk \$ What if milk makes you smarter? \$ Demand \$ Quantity of Milk Q 18

19 Change in Demand Demand Schedule Price of Milk \$5 Price Quantity Demanded 4 \$ \$ \$ \$ Demand \$ Quantity of Milk Q 19

20 Change in Demand Demand Schedule Price Quantity Demanded \$ \$ \$ Price of Milk \$ Increase in Demand Prices didn t change but people want MORE Milk D 1 \$ Demand \$ Quantity of Milk Q 20

21 Change in Demand Demand Schedule Price \$5 10 \$4 20 \$3 30 \$2 50 Quantity Demanded Price of Milk \$ What if milk makes causes baldness? Demand \$ Quantity of Milk Q 21

22 Change in Demand Demand Schedule Price \$5 10 \$4 20 \$3 30 \$2 50 Quantity Demanded Price of Milk \$ What if milk makes causes baldness? Demand \$ Quantity of Milk Q 22

23 Change in Demand Demand Schedule Price of Milk \$5 Price Quantity Demanded 4 \$ \$ \$ \$ Demand \$ Quantity of Milk Q 23

24 Change in Demand Demand Schedule Price Quantity Demanded \$ \$ \$ Price of Milk \$ Decrease in Demand Prices didn t change but people want LESS Milk \$ D 2 Demand \$ Quantity of Milk Q 24

25 Change in Qd vs. Change in Demand Price of Milk P \$3 \$2 There are two ways to increase quantity from 10 to 20 A C B 1. A to B is a change in quantity demand (due to a change in price) 2. A to C is a change in demand (shift in the curve) D 1 D Quantity of Milk Q Milk

26 What Causes a Shift in Demand? 5 Shifters (Determinates) of Demand: 1.Number of Buyers 2.Income and Wealth 3.Tastes and Preferences 4.Future Expectations 5.Price of Related Goods Changes in PRICE don t shift the curve. It only causes movement along the curve. 26

27 Number of buyers in the market When a population increases or decreases demand curves will shift accordingly

28 Income and Wealth Income is the amount of money received each year from working, interest on savings, and other sources such as gifts. A normal good is a good whose demand increases if income rises. An inferior good is a good whose demand decreases if income rises.

29 Normal Good examples

30 Inferior Good examples

31 Inferior Goods 31

32 Income and Wealth Wealth is the value of accumulated past savings, including human wealth.

33 Tastes (or preferences) are people s underlying likes and dislikes. Tastes

34 Usefulness A good s usefulness is its benefit in creating the products people ultimately want.

35 Expectations of Buyers When buyers sense prices will rise or fall quickly they will choose to act or not act

36 Prices of Related Goods The demand curve for one good can be affected by a change in the price of ANOTHER related good. 1. Substitutes are goods used in place of one another. Ex: If price of Pepsi falls, demand for coke will If the price of one increases, the demand for the other will increase (or vice versa) 2. Complements are two goods that are bought and used together. Ex: If price of hot dogs falls, demand for hot dog buns will... If the price of one increase, the demand for the other will fall. (or vice versa) 36

37 Substitutes v. Post Office Margarine v. Butter Pepsi v. Coke Skis v. Snowboards

38 Substitutes 38

39 Substitutes 39

40 Substitutes 40

41 Substitutes 41

42 Substitutes 42

43 Substitutes 43

44 Substitutes 44

45 Substitutes 45

46 Complements Skis and ski boots Tennis rackets and tennis balls Peanut butter and jelly

47 Complements 47

48 Substitutes or Complements? 48

49 Practice Questions 1. Which of the following will cause the demand for milk to decrease? A. Increase in the price of a substitute B. A decrease in income assuming that milk is a normal good C. A decrease in the price of milk D. An increase in the price of milk E. A decrease in the price of a complementary good 49

50 Practice Questions 2. Which of the following will cause the quantity demanded of milk to decrease? A. Increase in the price of a substitute B. A decrease in income assuming that milk is a normal good C. A decrease in the price of milk D. An increase in the price of milk E. A decrease in the price of a complementary good 50

51 1. The income of the Pago-Pagans declines after a typhoon hits the island. Price D 1 D Quantity

52 2. Pago-Pagan is named on of the most beautiful islands in the world and tourism to the island doubles. Price D D 1 Quantity

53 3. The price of Frisbees decreases. (Frisbees are a substitute good for boomerangs) Price D 1 D Quantity

54 4. The price of boomerang t-shirts decreases, which I assume all of you know are a complementary good. Price D D 1 Quantity

55 5. The Boomerang Manufactures decide to add a money back guarantee on their product, which increases the popularity for them. Price D D 1 Quantity

56 6. Many Pago-pagans begin to believe that they may lose their jobs in the near future. (Think expectations!) Price D 1 D Quantity

57 Shifter Practice Identify the determinant (shifter) then decide if demand will increase or decrease Increase or Decrease Left or Right 57

58 Practice Identify the determinant (shifter) then decide if demand will increase or decrease Hamburgers (a normal good) 1. Population boom 2. Incomes fall due to recession 3. Price of tacos, a substitute, decreases 4. Price increases to \$5 for hamburgers 5. New health craze- No ground beef 6. Hamburger restaurants announce that they will significantly increase prices NEXT month 7. Price of fries, a complement, increases 8. Restaurants lower price of burgers to \$.50 58

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