unit 2: supply, demand, and consumer choice can they see me?

Unit 2: Supply, Demand, and Consumer Choice

Can they see me?

Demand

DEMANDWhat is Demand?

Demand is the different quantities of goods that consumers are willing and able to buy at different prices.

What is the Law of Demand? INVERSE relationship between price and

quantity demanded

Why does the Law of Demand occur?1. The Substitution effect 2. The Income effect3. The Law of Diminishing Marginal Utility

What Causes a Shift in Demand?

5 Determinates of Demand (SHIFTERS) :

1.Tastes and Preferences2.Number of Consumers3.Price of Related Goods4. Income5.Future Expectations

Changes in PRICE don’t shift the curve.

Prices of Related Goods

Substitutes

P _____Demand for Other _____P _____Demand for Other _____

Compliments

P _____Demand for Other _____P _____Demand for Other _____

Income

Normal

Income _____Demand _____Income _____Demand _____

Inferior

Income _____Demand _____Income _____Demand _____

If Z is an inferior good, a decrease in income will shift the:

A) supply curve for Z to the left.

B) supply curve for Z to the right.

C) demand curve for Z to the left.

D) demand curve for Z to the right

E) there is no shift since this only changes price

Other things equal, if the price of a key resource used to produce product X falls, the:

A) supply curve of X will shift to the right.

B) demand curve of X will shift to the right.

C) supply curve of X will shift to the left.

D) demand curve of X will shift to the right.

E)both the supply and demand of X will increase

Supply

SupplyWhat 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.

Shifters• Prices/Availability of inputs (resources)• Number of Sellers• Technology• Government Action: Taxes & Subsidies• Opportunity Cost of Alternative Production• Expectations of Future Profit

Price Controls

7

SP

Qo

$5

4

3

2

1

2 4 6 8 10 12 14 16

D

Price of Corn

Quantity of Corn

Draw an effective Price Floor and Price CeilingWhat are the results?

7

SP

Qo

$5

4

3

2

1

2 4 6 8 10 12 14 16

D

Price of Corn

Quantity of Corn

Shortage

SurplusFloor

Ceiling

At price $20, there would be a surplus of… A) 100 B) 150 C) 200 D) 50 E) 0

What would be the effect of a price floor at $60A) It would be ineffective E) A shortage of 100 B) A shortage of 50 D) A surplus of 100C) Quantity demanded would increase

Excise TaxesTaxes on producers

PracticeFRQ #1

Double Shifts• Demand for sports cars fell at the same time as

production technology improved. • What happens to P and Q?

If TWO curves shift at the same time, EITHER price or quantity

will be indeterminate.

Which of the following statements is correct? A) If demand increases and supply decreases, equilibrium price will fall. B) If the demand and the supply both fall at the same time, quantity will be indeterminate C) If demand decreases and supply increases, equilibrium price will rise. D) If supply increases and demand decreases, equilibrium price will fall. E) If supply falls and demand remains constant, equilibrium price will fall.

S

P

Q

D

How does the S&D graph show consumer and producer’s surplus?

$10

8765432

10 11 12 136 7 8 9

Consumer’s Surplus = Buyers Maximum - Price

Producer’s Surplus = Price- Sellers Minimum

Practice FRQ #2

Elasticity

Inelastic Demand

•If price increases, quantity demanded will fall a little•If price decreases, quantity demanded increases a little.

In other words, people will continue to buy it.

General Characteristics of INelastic Goods:• Few Substitutes• Necessities• Small portion of income• Required now, rather than later

20%

5%

INelastic = Insensitive to a change in price.

Elastic Demand

•If price increases, quantity demanded will fall a lot•If price decreases, quantity demanded increases a lot.

In other words, the amount people buy is sensitive to price.

General Characteristics of Elastic Goods:• Many Substitutes• Luxuries• Large portion of income• Plenty of time to decide

Elastic = Sensitive to a change in price.

Perfectly and Unit Elastic

Perfectly INELASTIC Unit Elastic (45 degrees)

Total Revenue TestUse elasticity to show how changes in price

will affect total revenue (TR). Elastic Demand-

• Price _____ causes TR to _____• Price _____ causes TR to _____

Inelastic Demand • Price _____ causes TR to _____• Price _____ causes TR to _____

Unit Elastic-• Price _____causes TR to ______

Practice FRQ #3

Consumer Choice

First 10 -- 24 --

$ 10 income

UTILITY MAXIMIZING COMBINATION

To maximize utility, how should the $10 income be allocated?

Unit ofproduct

Product A:Price = $1

Product B:Price = $2

Marginalutility,utils

Marginalutility per

dollar(MU/price)

Marginalutility,utils

Marginalutility per

dollar(MU/price)

First 10 10 24 12

$ 10 income

UTILITY MAXIMIZING COMBINATION

Unit ofproduct

Product A:Price = $1

Product B:Price = $2

Marginalutility,utils

Marginalutility per

dollar(MU/price)

Marginalutility,utils

Marginalutility per

dollar(MU/price)

Examine themarginal utilities per dollar

$ 10 income

UTILITY MAXIMIZING COMBINATION

Unit ofproduct

Product A:Price = $1

Product B:Price = $2

Marginalutility,utils

Marginalutility per

dollar(MU/price)

Marginalutility,utils

Marginalutility per

dollar(MU/price)

First 10 10 24 12Second 8 8 20 10Third 7 7 18 9Fourth 6 6 16 8Fifth 5 5 12 6Sixth 4 4 6 3Seventh 3 3 4 2

First 10 10 24 12Second 8 8 20 10Third 7 7 18 9Fourth 6 6 16 8Fifth 5 5 12 6Sixth 4 4 6 3Seventh 3 3 4 2

$ 10 income

UTILITY MAXIMIZING COMBINATION

Unit ofproduct

Product A:Price = $1

Product B:Price = $2

Marginalutility,utils

Marginalutility per

dollar(MU/price)

Marginalutility,utils

Marginalutility per

dollar(MU/price)

First 10 10 24 12Second 8 8 20 10Third 7 7 18 9Fourth 6 6 16 8Fifth 5 5 12 6Sixth 4 4 6 3Seventh 3 3 4 2

$ 10 income

UTILITY MAXIMIZING COMBINATION

Unit ofproduct

Product A:Price = $1

Product B:Price = $2

Marginalutility,utils

Marginalutility per

dollar(MU/price)

Marginalutility,utils

Marginalutility per

dollar(MU/price)

First 10 10 24 12Second 8 8 20 10Third 7 7 18 9Fourth 6 6 16 8Fifth 5 5 12 6Sixth 4 4 6 3Seventh 3 3 4 2

$ 10 income

UTILITY MAXIMIZING COMBINATION

Unit ofproduct

Product A:Price = $1

Product B:Price = $2

Marginalutility,utils

Marginalutility per

dollar(MU/price)

Marginalutility,utils

Marginalutility per

dollar(MU/price)

First 10 10 24 12Second 8 8 20 10Third 7 7 18 9Fourth 6 6 16 8Fifth 5 5 12 6Sixth 4 4 6 3Seventh 3 3 4 2

$ 10 income

UTILITY MAXIMIZING COMBINATION

Unit ofproduct

Product A:Price = $1

Product B:Price = $2

Marginalutility,utils

Marginalutility per

dollar(MU/price)

Marginalutility,utils

Marginalutility per

dollar(MU/price)

First 10 10 24 12Second 8 8 20 10Third 7 7 18 9Fourth 6 6 16 8Fifth 5 5 12 6Sixth 4 4 6 3Seventh 3 3 4 2

$ 10 income

UTILITY MAXIMIZING COMBINATION

Unit ofproduct

Product A:Price = $1

Product B:Price = $2

Marginalutility,utils

Marginalutility per

dollar(MU/price)

Marginalutility,utils

Marginalutility per

dollar(MU/price)

First 10 10 24 12Second 8 8 20 10Third 7 7 18 9Fourth 6 6 16 8Fifth 5 5 12 6Sixth 4 4 6 3Seventh 3 3 4 2

$ 10 income

UTILITY MAXIMIZING COMBINATION

Unit ofproduct

Product A:Price = $1

Product B:Price = $2

Marginalutility,utils

Marginalutility per

dollar(MU/price)

Marginalutility,utils

Marginalutility per

dollar(MU/price)

First 10 10 24 12Second 8 8 20 10Third 7 7 18 9Fourth 6 6 16 8Fifth 5 5 12 6Sixth 4 4 6 3Seventh 3 3 4 2

$ 10 income

UTILITY MAXIMIZING COMBINATION

Utility maximizing combination is 2 of Product A

and 4 of product B

Unit ofproduct

Product A:Price = $1

Product B:Price = $2

Marginalutility,utils

Marginalutility per

dollar(MU/price)

Marginalutility,utils

Marginalutility per

dollar(MU/price)

First 10 10 24 12

$ 10 income

UTILITY MAXIMIZING COMBINATION

Unit ofproduct

Product A:Price = $1

Product B:Price = $2

Marginalutility,utils

Marginalutility per

dollar(MU/price)

Marginalutility,utils

Marginalutility per

dollar(MU/price)

Utility Maximizing RuleThe consumer’s money should be spent so that the marginal utility per dollar of each goods equal each other.

MUx = MUyPx Py

Practice FRQ #4

UNIT 1 KEY CONCEPT

Absolute and Comparative Advantage

Output Questions:OOO=

Output: Other goes Over

Input Questions:IOU=

Input: Other goes Under