Download SS.912.E.1.4

Standard 1
Understand the fundamental concepts
relevant to the development of a
market economy
SS.912.E.1.4
Define supply, demand, quantity supplied, and quantity
demanded; graphically illustrate situations that would cause
changes in each, and demonstrate how the equilibrium price of
a product is determined by the interaction of supply and
demand in the market place
The Law of Demand:
The inverse relationship between price
and quantity demanded; when price rises,
quantity demanded falls
Quantity demanded is a number; it’s how
many units of a good you bought
Picture of this relationship:
Why is the demand curve downward
sloping?
Story from Economics is Everywhere
Today is a great day in economic research. A study of
mine, written jointly with a former colleague, has been
accepted for publication in a leading scholarly journal.
Both he and I are very happy about it. For a professor,
getting recognition for your ideas is always very gratifying
and, in my profession, publication outlets form a clear
hierarchy, with this one near the top. This outlet had
previously published thirteen papers by my ex-colleague,
but none of mine. The marginal utility of the fourteenth
paper published in that journal must be less than the
marginal utility of the first. If we are both rational and
have the same preferences, then I should be much
happier about having this study accepted for publication
than he is.
Q: I have had many scholarly papers published over my
thirty-eight-year career in economics, many of them in
others of the very top scholarly journals in the field.
What’s special about this one?
Why is the demand curve downward
sloping?
Diminishing Marginal Utility
– The marginal benefit you receive from an item falls as
you gain more of the item
– The only way to get you to buy more is to lower the
price
Demonstration: eating marshmallows or
bananas
Video: Cool Hand Luke
Demand is the relationship
between two variables: price
and quantity demanded
Changes:
(1) When price changes, quantity demanded
changes but demand does NOT change
– This is movement along a demand curve
(2) When something else changes, demand
changes (i.e., the relationship changes)
– This is movement of the entire curve
Typical demand shifters:
1)
2)
3)
4)
5)
6)
Consumer income
Number of consumers
Prices of substitutes and complements
Expectations
Demographic changes
Consumer preferences
Graphs:
Video: Hudsucker Proxy
The price and demand for one
good can be intimately tied to
demand for another good
(1) Substitute goods-used in place of each
other
An increase (decrease) in price for the first
good will increase (decrease) demand for
the second good
(1) Substitute goods
Example:
If the price of _______ increases people
will buy less _______ and more ________
Graphs:
(2) Complement goods-usually consumed
at the same time
An increase (decrease) in price for the first
good will decrease (increase) demand for
the second good
(2) Complement goods
Example:
If the price of ________ increases people
will buy less _______ and less ______
Graphs:
The Law of Supply:
The positive relationship between price
and quantity supplied; when price rises,
quantity supplied rises
Quantity supplied is a number; it’s how
many units of a good you made
Graph:
Why is the supply curve upward
sloping?
At a higher price, a product is usually more
profitable so a firm has a stronger
incentive to make more.
Price is not the only factor that
determines how much a firm
makes
Changes:
(1) When price changes, quantity supplied
changes but supply does NOT change
– This is movement along a supply curve
(2) When something else changes, supply
changes (i.e., the relationship changes)
– This is movement of the entire curve
Typical Supply Shifters:
1)
2)
3)
4)
5)
6)
Resource prices
Technology
Weather
Political conditions
Taxes
Subsidies
Graphs:
Story from Economics is Everywhere
Even gangsters’ supply curves slope upward. In his
book But He Was Good to His Mother (Jerusalem:
Gefen, 2000), Robert Rockaway reports that an
associate of Big Jack, a New York gangster in the early
twentieth century, stated to police that Big Jack had the
following price list for his services: slash on the cheek
with knife, $1 to $5; shot in leg, $1 to $25; shot in arm,
$5 to $25; throwing a bomb, $5 to $50, murder, $10 to
$100. Clearly, the prices are higher for the more difficult
tasks; and the range of prices for a particular criminal act
probably reflects the ease of access to the target.
Perhaps a shot in the leg costs less than one in the arm
because hitting a person in the leg without causing
further damage is easier than hitting someone in the
arm.
Q: Draw a supply curve for criminal activities. Then
show how it would shift if unemployment were low and
there were many good legitimate jobs. Then show how
the curve would shift if jobs were scarce.
S&D Graph:
Key points:
– (1) Excess supply and excess demand are
NOT unique points
– (2) Equilibrium IS a unique point
Story from Economics is Everywhere
If free to do so, markets tend toward an equilibrium
where supply equals demand. That’s even true for the
market for dating, as shown in the 1960s No. 1 hit song,
“Surf City,” by Jan and Dean. They sing, “We’re going to
Surf City; gonna have some fun…Two girls for every
boy.” Two girls for every boy is not an equilibrium- it is a
disequilibrium situation. There is a shortage of boys and
a surplus of girls. Jan and Dean are going to Surf City,
having been attracted by the surplus of girls. Their
arrival there will reduce the size of the surplus of girls
and also reduce the shortage of boys. If enough other
boys follow their lead, the market for dates in Surf City
will be in equilibrium- the shortage and surplus will have
been removed by the action of the market as people
respond to the shortage of boys by “going to Surf City.”
Q: If you have ever been to a mixer or a singles bar
where there is an excess of members of one sex, why
did the excess arise? What prevented the equilibrium,
roughly equal numbers of men and women, from being
reached?
Supply and Demand analysis
You don’t have to use graphs but it’s
helpful
Use this 3 step procedure:
– (1) Identify the change
– (2) Determine if Supply or Demand is
affected and how
– (3) Draw and read graph (or reason through
the change)
Only allow one variable to change at
a time.
Example: Part of Doak Campbell Stadium
is destroyed by locusts
– (1) Fewer seats will be available
– (2) Supply is affected, will decrease
– (3) Shift supply left and find new equilibrium
Graph: