Download APECON-Section_2

AP ECONOMICS
MS. COLÓ
HELLO!
DO NOW
LESSON
EXIT
TICKET
• Describe the law of Demand.
• List five goods you would no longer buy if
you won the lottery.
TIP
In several common economics graphs including the
graph of supply and demand, the dependent variable is
on the horizontal axis (Q). and the independent variable
is on the vertical axis (P) You learn the opposite
convention in math and science classes, so graphing in
economics may be a little difficult.
What are we going to cover?
Supply and Demand: Demand
DO NOW
LESSON
EXIT
TICKET
• Explain what a competitive market is and
what and how it is described by the supply
and demand model.
• Draw a demand curve and interpret its
meaning
• Discuss the difference between movements
along the demand curve and changes in
demand.
• List the factors that shift the demand curve.
DEMAND
Module 5
5 KEY ELEMENTS TO SUPPLY & DEMAND
 THE DEMAND CURVE
 THE SUPPLY CURVE
 FACTORS THAT CAUSE CURVES TO SHIFT
 MARKET EQUILIBRIUM
 HOW MARKET EQUILIBRIUM CHANGES WHEN SUPPLY
OR DEMAND CURVE “SHIFTS”
DEMAND CURVE
 Demand is the different quantities of goods that
consumers are willing and able to buy at different
prices.
 (Ex: Bill Gates is able to buy a Ferrari, but if he isn’t
willing to then he has NO demand for one)
 The law of demand states there is an INVERSE
relationship between price and quantity demanded :
 AS PRICE GOES UP THE QUANTITY DEMANDED WILL DROP &
AS PRICE DROPS QUANTITY DEMAND RISES
DEMAND CURVE
The demand curve has a negative slope,
consistent with the law of demand.
© OnlineTexts.com p. 8
DEMAND CURVE
As Price Falls…
…Quantity Demanded Rises
As Price Rises…
…Quantity Demanded Falls
The law of demand is the result of three (3) separate behavior
patterns that overlap:
1. The Substitution effect
2. The Income effect
3. The Law of Diminishing Marginal Utility
1. THE SUBSTITUTION EFFECT
 Price or Availability of substitutes (Substitution effect)
 Substitute is a good that can be used in place of another.
 If the price goes up for a product, consumers buy less of that
product and more of another substitute product (and vice versa)
SUBSTITUTION EFFECT
2. THE INCOME EFFECT
 In economics, the income effect is the change in
consumption of goods caused by a change in income,
whether income goes up or down. The income effect
can be direct or indirect.
 If the price goes down for
a product, the purchasing
power increases for
consumers -allowing them
to purchase more.
INCOME EFFECT
3. LAW OF DIMINISHING MARGINAL
UTILIT Y
•
Utility = Satisfaction
•
The law of diminishing marginal utility states that as you
consume more units of any good, the additional satisfaction
from each additional unit will eventually start to decrease.
•
In other words, the more you buy of ANY GOOD the less
satisfaction you get from each new unit of that good.
 Disneyland’s pricing strategy is another example of marginal
utility (law of diminishing demand)
Change
N/A
$54
$33
$15
$10
$5
GRAPHING DEMAND FOR CALVIN’S CEREAL
Demand
Schedule
Price
Quantity
Demanded
$5
10
$4
20
Price of Cereal
$5
4
3
2
$3
30
$2
50
1
$1
80
o
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
16
KEYS TO GRAPHING SUPPLY &
DEMAND
• 1. The slope of the curve is always down and to the
right
• 2. A change in demand at the same price requires a
SHIFT but a change in demand due to a change in
price is show as MOVEMENT along the curve
DEMAND CURVE RECAP
• A demand curve is a graphical representation of a
demand schedule or table.
• The demand curve is downward sloping showing the
inverse relationship between price (always on the y axis) & quantity demanded (always on the x-axis)
• When reading a demand curve, assume all outside
factors, such as income, weather, etc. are held
constant or equal (ceteris paribus)
CHANGE IN DEMAND VS. QUANTITY
DEMANDED
 A change in the quantity demanded is a movement
from one point to another on the demand curve. (DUE
TO PRICE)
https://www.youtube.com/watch v=Ng3XHPdexNM&feature= youtube
 A change in demand itself is a shift of the entire curve
(DUE TO A M.E.R.I.T. FACTOR)
DEMAND WILL SHIFT IF THERE IS
M.E.R.I.T
• 1.
• 2.
• 3.
• 4.
• 5.
Market Size
Expectations
Related Prices ( compliments/substitutes )
Income ( normal & inferior )
Tastes
Market Size
THE INDIVIDUAL DEMAND CURVE OF (a) and (b) and then note
that (c) Is the sum of all the individual demand curves of all
consumers. In this case Darla and Dino.
HOW TO GET THE MARKET DEMAND / ADD THE DEMAND OF EACH CONSUMER A T THE
MARKET EQUILIBRIUM POINT OF EACH CONSUMER
Billy
Jean
Other Individuals
Market
Price Q Demd
Price Q Demd
Price Q Demd
Price Q Demd
$5
$4
$3
$2
$1
$5
$4
$3
$2
$1
$5
$4
$3
$2
$1
$5
$4
$3
$2
$1
1
2
3
5
7
P
0
1
2
3
5
P
$3
P
$3
3
D
Q
9
17
25
42
68
P
$3
2
D
Q
10
20
30
50
80
$3
25
D
Q
30
D
Q
A M.E.R.I.T. FACTOR HAS CAUSED A SHIFT IN THE DEMAND CURVE (NOTE IT IS
TO THE RIGHT REFLECTING THE INCREASED DEMAND. A DECREASE IN
DEMAND WOULD MEAN A SHIFT TO THE LEFT)
REVIEW
True or False:
 An increase in the price of apples decreases the
demand for Apples?
FALSE
An increase in the price of apples decreases the quantity of
apples demanded.
REVIEW – MOVEMENT OR SHIFT?
Explain whether each of the following events represents (i) Change in Demand
(a shift of the demand curve) or (ii) Movement along the demand curve
(change in the quantity demanded)
• A store owner finds that customers are willing to pay
more for umbrellas on rainy days.
•
Quantity of umbrellas demanded is higher at any given price on a rainy day
than on a dry day. This is a rightward shift of the demand curve.
• When XYZ Telecom, a long distance telephone service
provider, offered reduced rates on the weekends, its
volume of weekend calling increases sharply.
•
The quantity of weekend calls demanded rises in response to a price reduction.
This is a movement along the demand curve for weekend calls.
REVIEW CONT.
• People buy more long-stem roses the weekend of
Valentines Day, even though the prices are higher
than at other times during the year.
• The demand of roses increases the week of Valentines
day. This is a rightward shift of the demand curve.
• A sharp rise in the price of gasoline leads many
commuters to join carpools in order to reduce the
gasoline purchases.
• The quantity of gasoline demanded falls in response to a
rise in price. This is a movement along the demand
curve.
KEY TERMS
 Substitute good is one whose demand goes up when
the price of another good goes up (coffee and tea are
examples of this)
 Compliment goods are ones usually used together and
thus if demand for one falls then demand for the
other will also fall (cars and gasoline are examples of
this)
 Most goods are “normal” (demand increases as income
rises) but some are “inferior” (demand drops as
income rises…for example buses…as income rises
people tend to then take taxis)
SUPPLY
Module 6
What are we going to cover?
Supply and Demand: Supply
DO NOW
LESSON
EXIT
TICKET
• Draw a supply curve and interpret its
meaning.
• Discuss the difference between movements
along the supply curve and and changes in
supply.
• List the factors that shift the supply curve.
SUPPLY
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?
 As price increases, the quantity producers make increases
 As price falls, the quantity producers make falls.
THIS IS THE OPPOSITE OF DEMAND
Why? Because, at higher prices profit seeking firms
have an incentive to produce more.
34
GRAPHING SUPPLY
Supply
Schedule
Price
Quantity
Supplied
$5
50
$4
40
Price of Cereal
$5
4
3
2
$3
30
$2
20
1
$1
10
o
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
35
GRAPHING SUPPLY
Supply
Schedule
Price
Quantity
Supplied
$5
50
$4
40
Price of Cereal
Supply
$5
4
3
2
$3
30
$2
20
1
$1
10
o
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
36
SUPPLY
 It is important to distinguish between a change in
supply (meaning a SHIFT) of the supply curve and
MOVEMENT along the supply curve.
 MOVEMENT is caused merely by the change in price .
 SHIFT is caused by one of five factors or
determinants other than price. T.I.R.E.S
THERE ARE 5 DETERMINANTS (SHIFTERS)
OF SUPPLY
1.
Change in Technology
1.
Prices/Availability of Inputs (resources)
1.
Change in price of Related Goods or Services
1.
(Substitutes and Complements)
2.
Change in Expectations of Future Profits
3.
Change in number of Sellers (Producers)
REFER TO THESE AS T.I.R.E.S.
38
T.T.I.R.E.S?
 Although not made part of T.I.R.E.S. there is one
additional factor that can SHIFT the Supply Curve and
that is:
When the government increases/decreases taxes or
decides to subsidize a good or service.
THIS IS EXAMPLE OF JUST ONE SUPPLIER IN THE MARKET PLACE,
BUT WHAT IF ANOTHER SUPPLIER ENTERS THE MARKET PLACE
BECAUSE PROFITS LOOK GOOD?
 As with demand, market supply is arrived at by
horizontally adding up the individual supplies of all of
the firms in the market.
GRAPHING SUPPLY
Supply
Schedule
Price
Quantity
Supplied
$5
50
$4
$3
Price of Cereal
Supply
$5
4
For Example: What if new
3
companies
start making
40
Cereal Because they see the Profit Potential?
2
(new producer)
30
$2
20
1
$1
10
o
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
42
CHANGE IN SUPPLY
Supply
Schedule
Price
Quantity
Supplied
$5
50 70
$4
40 60
Price of Cereal
Supply
4
3
2
$3
S2
$5
Increase in Supply
Prices didn’t change but there is
MORE cereal produced
30 50
$2
20 40
1
$1
10 30
o
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
43
CHANGE IN SUPPLY
Supply
Schedule
Price
$5
$4
Quantity
Supplied
Price of Cereal
Supply
$5
Or, What if a Drought
4
50 and Destroys the Corn and Wheat
Comes
3
40 Crops used to make cereal?
2
$3
30 (increased cost of inputs)
$2
20
1
$1
10
o
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
44
CHANGE IN SUPPLY
Supply
Schedule
Price
Quantity
Supplied
$5
50 30
$4
40 20
Price of Cereal
S2
$5
4
3
Decrease in Supply
Prices didn’t change but there is
LESS cereal produced
2
$3
Supply
30 10
$2
20 1
1
$1
10 0
o
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
45
SUPPLY PRACTICE
First, identify the determinant (shifter) then
decide if supply will increase or decrease
Shifter
1
2
3
4
5
6
Increase or
Decrease
Left or Right
LETS TRY SOME EXAMPLES
1. Which determinant (SHIFTER)?
2. Increase or decrease of Supply?
3. Which direction will curve shift?
Sale of Hamburger Meat by Producer Company
1. Mad cow disease kills 20% of cows
2. Price of burgers increase 30%
3. Restaurants sell both burgers and tacos.
Demand increases for tacos 500%
4. New technology cuts production time in
half
5. Minimum wage increases to $10
6. Government increases tax on hamburgers
47
SUPPLY PRACTICE
First, identify the determinant (shifter) then
decide if supply will increase or decrease
Shifter
1
2
3
4
5
6
Input
Increase or
Decrease
Left or Right
Decrease
Left
Related Good
Decrease
Left
Technology
Increase
Right
Subsidy
Increase
Right
Tax
Decrease
Left
None
48
PUTTING SUPPLY AND
DEMAND TOGETHER
Module 7
What are we going to cover?
Supply and Demand: Equilibrium
DO NOW
LESSON
EXIT
TICKET
• Explain how supply and demand curves
determine a markets equilibrium price and
equilibrium quantity.
• Describe how price moves the market back to
equilibrium in the case of a shortage or
surplus.
• Explain how equilibrium price and quantity
are affected when there is a change in either
supply or demand.
• Explain how equilibrium price and quantity
are affected when there is a simultaneous
change in both supply and demand.
SUPPLY AND DEMAND. WHAT’S NEXT?
The next step is to put these elements
together to show how they can be used to
predict the actual price at which the good is
bought and sold, as well as the actual quantity
transacted.
MARKET EQUILIBRIUM
 A market will determine the price at which the quantity
of a product demanded is equal to the quantity
supplied.
 At this price, the market will be in equilibrium,
meaning that the amount consumers wish to purchase
at this price is matched exactly by the amount
producers wish to sell.
 The price at which this takes place is the equilibrium
price, also referred to as the market-clearing price.
An economic situation is in equilibrium when no individual would be better off doing something different.
TO DETERMINE EQUILIBRIUM NEED TO
GRAPH SUPPLY AND DEMAND TOGETHER
 Equilibrium occurs when quantity supplied equals exactly the
quantity demanded ( where the demand and supply curve meet).
Price
S
D
Quantity
S&D together = E. So what is E point on graph below?
Demand P
Schedule $5
P Qd
Supply
Schedule
S
P Qs
4
$5 10
$5 50
3
$4 20
$3 30
$2 50
$1 80
$4 40
2
$3 30
1
o
D
10
20
30
40
50
60
70
80
Q
$2 20
$1 10
Demand P
Schedule $5
P Qd
S
P Qs
4
$5 10
$5 50
Equilibrium Price = $3
(Qd=Qs)
$4 40
3
$4 20
$3 30
$2 50
$1 80
Supply
Schedule
2
$3 30
1
o
D
10
20
30
40
50
60
70
Equilibrium Quantity is 30
80
Q
$2 20
$1 10
EQUILIBRIUM PRICE
 But how can we be sure that the market will arrive at
the equilibrium price? We begin by answering three
simple questions:
1.Why do all sales and purchases in a market take
place at the same price?
2.Why does the market price fall if it is above the
equilibrium price?
3.Why does the market price rise if it is below the
equilibrium price?
WHY DO ALL SALES AND PURCHASES IN A
MARKET TAKE PLACE AT THE SAME PRICE?
• Suppose a seller offered a potential buyer a price
noticeably above what the buyer knew other people to
be paying.
• The buyer would clearly be better off shopping
elsewhere—unless the seller was prepared to offer a
better deal.
• In any market where the buyers and sellers have both
been around for some time, sales and purchases tend
to converge at a generally uniform price,
• In any well-established, ongoing market, all sellers
receive and all buyers pay approximately the same
price. This is what we call the market price.
WHY DOES THE MARKET PRICE FALL IF IT IS
ABOVE THE EQUILIBRIUM PRICE?
•
Price Above Its Equilibrium Level Creates a Surplus
• Surplus - also known as the excess supply.
•
There is a surplus of a good when the quantity supplied
exceeds the quantity demanded. Surpluses occur when the
price is above its equilibrium level.
Burgers
Demand P
Schedule $5
P Qd
3
$4 20
$2 50
$1 80
S
P Qs
4
$5 10
$3 30
Supply
Schedule
2
What if the price
increases to $4?
$4 40
$3 30
1
o
$5 50
D
10
20
30
40
50
60
70
80
Q
$2 20
$1 10
59
At $4, there is disequilibrium. The quantity
demanded is less than quantity supplied.
Demand P
Schedule $5
P Qd
How much is the
surplus at $4?
Answer: 20
$4 20
$1 80
P Qs
4
3
$2 50
S
Surplus
(Qd<Qs)
$5 10
$3 30
Supply
Schedule
2
$4 40
$3 30
1
o
$5 50
D
10
20
30
40
50
60
70
80
Q
$2 20
$1 10
60
WHY DOES THE MARKET PRICE RISE IF IT IS
BELOW THE EQUILIBRIUM PRICE?
• This bidding up of prices happens whenever there are
shortages—and there will be shortages whenever the price is
below its equilibrium level.
• A shortage —also known as an excess demand.
• The market price will always rise if it is below the equilibrium
level
Demand P
Schedule $5
P Qd
3
$4 20
$2 50
$1 80
S
P Qs
4
$5 10
$3 30
Supply
Schedule
2
What if the Answer:
price 40
decreases to $2?
$4 40
$3 30
1
o
$5 50
D
10
20
30
40
50
60
70
80
Q
$2 20
$1 10
62
At $2, there is disequilibrium. The quantity
demanded is greater than quantity supplied.
Demand P
Schedule $5
P Qd
S
P Qs
4
How much is the
shortage at $2?
Answer: 30
$5 10
3
$4 20
$3 30
$2 50
$1 80
Supply
Schedule
2
o
10
20
30
40
$4 40
$3 30
Shortage
(Qd>Qs)
1
$5 50
D
50
60
70
80
Q
$2 20
$1 10
63
The FREE MARKET system automatically pushes
the price toward equilibrium.
Demand P
Schedule $5
P Qd
Supply
Schedule
S
When there is a
surplus, producers P Qs
lower prices
$5 50
When there is a
shortage, producers $4 40
raise prices
$3 30
4
$5 10
3
$4 20
$3 30
$2 50
$1 80
2
1
o
D
10
20
30
40
50
60
70
80
Q
$2 20
$1 10
64
ALWAYS ASSUME SHIFTS IN SUPPLY OR DEMAND
CHANGE EQUILIBRIUM P AND Q
INSTANTANEOUSLY
65
Learning to Diagram the Change is 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)
ANALYZE SALE OF HAMBURGERS
WHAT IS THE RESULT FROM CHANGES BELOW
1. Price of sushi (a substitute) increases
1. New technology cuts production time ½
1. Price of burgers falls from $3 to $1.
1. Fingers found in multiple burger restaurants.
1. Before Change (Draw equilibrium)
2. The Change (S or D, Identify Shifter)
3. After Change (Price and Quantity After)
Price of sushi (a substitute) increases
D increases
New technology cuts production time
½
S increases
Price of burgers falls from $3 to $1.
no shift
Fingers found in multiple burger
restaurants.
D decreases
ANOTHER EXAMPLE USING COFFEE TO GO WITH YOUR BURGER
A price above equilibrium creates a surplus
A price below equilibrium creates a shortage
THE EQUILIBRIUM PRICE AKA THE
MARKET-CLEARING PRICE.
 When supply and demand change, equilibrium
price and output change.
 When only one curve shifts, the resulting
changes in equilibrium price and quantity can
be predicted.
 But when both curves shift, we can only predict
the change in equilibrium price in some cases,
and the change in equilibrium quantity in
others, but never both.
Increase in demand =‘s higher equilibrium
price and a higher equilibrium quantity.
Decrease in demand =‘s lower equilibrium
price and a lower equilibrium quantity.
Increase in supply =‘s lower equilibrium
price and a higher equilibrium quantity.
Decrease in supply =‘s higher equilibrium
price and a lower equilibrium quantity.
FOR EXAMPLE
 An increase in the supply of grapes and a decrease in the
demand for wine led to lower wine prices in 2001.
 An increase in the price of
jumbo tires used on
mining equipment
led to higher prices for
copper, coal, and zinc in 2006.
WHAT HAPPENS WHEN THE DEMAND
CURVE SHIFT:
Cotton and Polyester are Substitutes: If the price of
polyester rises, the demand for cotton will increase,
and if the price of polyester falls, the demand for
cotton will decrease.
How does the price of polyester affect the market
equilibrium for cotton?
WHAT HAPPENS WHEN THE DEMAND
CURVE SHIFT:
SUMMARY
 An increase in demand leads to a rise in both the
equilibrium price and the equilibrium quantity.
 A decrease in demand leads to a fall in both the
equilibrium price and equilibrium quantity.
WHAT HAPPENS WHEN THE SUPPLY
CURVE SHIFT:
There was a flooding in Pakistan in 2010.
What happened to the supply in Cotton?
WHAT HAPPENS WHEN THE SUPPLY
CURVE SHIFT:
SUMMARY
• When supply of a good or service decreases,
the equilibrium price of the good or service
rises and equilibrium quantity of the good or
service falls.
• When supply of a good or service increases,
the equilibrium price of the good and service
falls and the equilibrium quantity of the good
and service rise.
ANSWER THE FOLLOWING QUESTION
 The price of cameras decreases and people buy more
cameras, this can be explained by:
A) an increase in demand for cameras.
B) an increase in the supply of cameras.
C) a decrease in demand for cameras.
D) A decrease in the supply of cameras.
ANSWER
 The price of cameras decreases and people buy more
cameras, this can be explained by:
A) an increase in demand for cameras.
B) an increase in the supply of cameras. Correct!
C) a decrease in demand for cameras.
D) A decrease in the supply of cameras.
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
85