Download Section 2 Supply and Demand

AP Macroeconomics
Instructor Nancy K. Ware
Gainesville High School
What you will learn in this module:
 What a competitive market
is and how it is described
by the supply and demand
model
 What the demand curve is
 The difference between
movements along the
demand curve and
changes in demand
 The factors that shift the
demand curve
Information Brain Upload:
What is a Competitive Market?
A ___________ is where consumers and
producers engage in v_______________
e______________.
2. What is voluntary exchange? Consumer
purchasing goods and services of own
________ ___________.
3. What is a competitive market:
1.
4. Competitive markets are governed by
D____________ and S___________.
Video clip:
Different
types of
markets
Information Brain Upload:
What is a Competitive Market?
A market is where consumers and
producers engage in voluntary exchange.
2. What is voluntary exchange? Consumer
purchasing goods and services of own free
will.
3. What is a competitive market: a market
where there are many buyers and sellers
of the same good and service.
4. Competitive markets are governed by
demand and supply.
1.
Video clip:
Different
types of
markets
All Competitive Markets Large & Small
Markets can be l______,
n__________ and
i________________.
2. Some markets are personal,
face to face exchanges ~
example: ___________ or
impersonal & distant ~
example: ______________
3. Each of these buyers and
sellers are small, and cannot
affect the price of the
product.
1.
All Competitive Markets Large & Small
Markets can be local,
national and international
2. Some markets are
personal, face to face
exchanges ~ example: yard
sale or impersonal &
distant ~ example: internet
3. Each of these buyers and
sellers are small, and
cannot affect the price of
the product.
1.
Terms to Know:
The Demand Schedule & Curve
Video Clip: Demand
 Demand schedule: table showing
how much of a good or service
consumers will want to buy at
different prices
 Law of demand: As price rises, the
quantity demanded (the actual
amount consumers are willing to
buy), will fall or decrease all other
things being equal (ceteris paribus)
 Demand Curve: the graphical
illustration of the points that show
this relationship between quantity
demanded and price
Notes
Law of Demand:
Fundamental Characteristic of Human Behavior
1.
Other things being equal, as the
_________ increases,
corresponding ____________
_____________ decreases
2.
In other words, the relationship is
____________ between price and
quantity demanded
Drawings here
Law of Demand:
Fundamental Characteristic of Human Behavior
1. Other things being equal, as
the price increases,
corresponding quantity
demanded decreases
2. In other words, the
relationship is inverse
between price and
quantity demanded
Drawings here
Demand Schedule & Curve
Price of
Coffee Beans
per pound
2.00
1.75
1,50
1.25
1.00
.75
.50
D
7
As price increases, quantity demanded decreases.
As price decreases, quantity demanded increases.
9
11
13
15
17
Quantity of Coffee Beans
(billions of pounds)
Soda Pop Demand Drawing
1. Draw the corresponding demand curve from the demand schedule below.
2. What happens when price falls from $3 a can to $2 per can?
3. What is movement is along the curve?
Price Per
Soda
Quantity
demanded per
Week
$5
50
4
100
3
150
2
200
1
250
Soda Pop Demand Drawing
1. Draw the corresponding demand curve from the demand schedule below.
2. What happens when price falls from $3 a can to $2 per can?
3. What is movement is along the curve?
Price
6
Price Per
Soda
Quantity
demanded per
Week
$5
50
4
4
100
3
3
150
2
200
1
250
5
2
1
D
0
50
100
150
200
250
Quantity
Understanding Shifts of the Demand Curve
• Increase = right, Decrease = left
• M.E.R.I.T. shifts demand
• market size (number of consumers)
• expectations
• related prices (complements,
substitutes)
• income (normal, inferior)
• tastes
What Else Affects Demand??
Market Size : Number of
Buyers (Population) ~ More
buyers lead to an increase in
demand; fewer buyers lead to a
decrease in demand.
Example: the baby Boomer
generation has grown older. Demand
for what types of products have
increased?
 Prescription drugs
 Medical equipment
 Assisted living products (bath
tubs, etc)
What Else Affects Demand??
Expectations ~ Consumers have
expectations about future prices,
product availability, and income, and
these expectations can shift demand.
 WWYD? Future price of gas is
going up $10.00 per gallon
tomorrow. What happens to
demand?
 WWYD? An item you want is
going on sale next week.
What happens to your current
demand? What happens to
your future demand?
What Else Affects Demand??
Related Prices
 Substitution Effect ~ Those goods that can be
used in place of each other. Price of
substitutes and demand for the other good are
directly related.

If the price of Charmin goes up, the demand for
Wal-Mart brand toilet paper may shift to the right.
 Complementary Goods ~ Goods that are used
together like tennis balls and rackets.
Complementary goods have an inverse
relationship between price of one and the
demand for the other.

If the price of golf clubs go up, the demand for golf
balls will shift to the left.
What Else Affects Demand??
Income ~ Changes in Incomes affect demand
Income increases: more n________g_____ are
demanded
2. Income decreases: less n________g______ are
demanded
3. What are normal goods?____________________
_________________________________________
_____________________ Examples?
 _______________________
 _______________________
 ________________________
1. Income Increases (for some goods)lead to a
decrease in demand for inferior goods. What is
an inferior good?
 __________________________
 __________________________
 __________________________
 _______________________________
1. More inferior goods may be consumed when
income ______________
1.
What Else Affects Demand??
Income ~ Changes in Incomes affect demand
Income increases: more normal goods are
demanded
2. Income decreases: less normal goods are
demanded
3. What are normal goods? Goods that are in
demand when income rises. Like?
 New Cars
 New Clothes
 National brand names
1. Income Increases (for some goods)lead to a
decrease in demand for inferior goods. What is
an inferior good?
 Bus tickets
 Second hand clothing
 Used cars
 Store brand instead of national brand
1. More inferior goods may be consumed when
income decreases
1.
What Else Affects Demand??
Tastes and Advertising ~
Advertising plays an important role in
many trends and fads & influences
demand.
 Demand for a sports team’s apparel may
increase when the team is winning, and
decrease when it is losing.
 Demand for a good may increase after
consumers see a funny Superbowl
commercial
 Demand may increase for certain colors
and designs after seeing these fashions
on TV shows
Demand Movement vs. a Shift
• A movement occurs along
the demand curve and is
only caused by price
increases or decreases.
• A shift of the entire
demand curve occurs
when quantity
demanded increases (or
decreases) at every price
level.
• If a curve jumps right, it
is increasing.
• If a jumps left, it is
decreasing.
Shift of the
entire curve to
the right
2.00
1.75
1,50
1.25
1.00
.75
Movement
along the
curve
.50
7
9
11
13
15
17
Shifts of the Demand Curve
An increase in population leads
to an increase in the quantity of
coffee demanded. Graph the
new demand curve.
Shifts of the Demand Curve
An increase in population leads
to an increase in the quantity of
coffee demanded. Graph the
new demand curve.
Price of
Coffee Beans
per pound
2.00
1.75
1,50
1.25
1.00
.75
.50
D1
7
9
11
13
15
D2
17
Quantity of Coffee Beans
(billions of pounds)
Individual Demand Curves &
Market Demand Curves
 Individual Demand Curve:
Illustrates the relationship
between quantity demanded
and price for an individual
consumer
 Market Demand Curve:
illustrates the quantity
demanded by all consumers at
given prices
What is YOUR Demand GHS? Activity
 In groups, select a product from the list, or




come up with your own. Survey & find out
amongst your group what the demand
would be at 5 possible price points that
you create for your product. (demand
schedule)
Interview 2 more students outside your
group for their demand and record your
points on a graph and draw your demand
curve.
At what price on the demand curve was
quantity demanded the highest?
Why?
Pick an outside factor that would shift
your entire curve either right or left.
Redraw your demand curve. Explain why
this shifted your curve.
Products To Sell at GHS?
1. Private Parking Spots
2. Breakfast Burritos
3. GHS Sunglasses
4. GHS Rain jackets
5. GHS Flip flops
6. GHS IPhone cases
7. Your own idea!!
Class Project: GHS Demand for…..?
What?
 How was the Back to School Dance?
 What do Red Elephants have the desire to do?
 Come up with 5 different options for back to school
functions besides a dance. Find out how much GHS
students would be willing to pay to attend at your
predetermined prices.
 Draw a demand schedule and curve based on your
information.
• Module 5 Review p. 57-58 all
questions
• Read Module 6 Changes in
Equilibrium
• Strive for a 5
Module 6
Supply & Equilibrium
What you will learn in this Module:
 What the supply curve is
 The difference between
movements along the supply
curve and changes in supply
 The factors that shift the
supply curve
 How supply and demand
curves determine a market's
equilibrium price and
equilibrium quantity
 In the case of a shortage or
surplus, how price moves
the market back to
equilibrium
Terms to Know: Supply & Equilibrium
1. Quantity Supplied:
 the actual amount of a good or
service producers are willing to
sell at some specific price
2. Supply schedule:
 shows how much of a good or
service producers will supply at
different prices
3. Supply curve:
 shows the relationship between
quantity supplied and price
Law of Supply:
Fundamental Characteristic of Producer Behavior
All things being equal, the p_____
and the q__________ s__________
are p____________ related. In
other words, the higher the price
being offered the more of any good
or service producers are willing to
sell.
2. Why?
1.
Law of Supply:
Fundamental Characteristic of Producer Behavior
All things being equal, the price
and the quantity supplied are
positively related. In other words,
the higher the price being offered
the more of any good or service
producers are willing to sell.
2. Why?
1.
Supply Schedule & Curve
Price of
Coffee Beans
per pound
Supply
Curve S
2.00
1.75
1,50
1.25
1.00
.75
Supply curve slope upward
.50
7
As price increases, quantity supplied increases.
As price decreases, quantity supplied decreases.
WHY?
9
11
13
15
17
Quantity of Coffee Beans
(billions of pounds)
Soda Pop Supply Drawing
1. Draw the corresponding Supply curve from the supply schedule below.
2. What happens when price falls from $3 a can to $2 per can?
3. What is movement down the supply curve?
Price Per
Soda
Quantity supplied
per Week
$5
250
4
200
3
150
2
100
1
50
Quantity
Soda Pop Supply Drawing
1. Draw the corresponding Supply curve from the supply schedule below.
2. What happens when price falls from $3 a can to $2 per can?
3. What is movement down the supply curve?
Price
Price Per
Soda
Quantity supplied
per Week
6
$5
250
5
4
200
3
150
2
100
1
50
S
4
3
2
1
0
50
100
150
200
250
Quantity
Understanding Shifts of the Supply Curve
• Increase = right, decrease = left
• T.R.I.C.E. shifts supply
• Technology
• Related prices (complements in production,
substitutes in production)
• Input prices
• Competition (number of producers)
• Expectations
What Else Shifts Supply?
Technology ~ Technological improvements mean more
e______________ production and l________ c_______ to produce,
so an increase in supply or a rightward shift of the curve is the
result.
 Examples? Genetically altered c___________ will increase
the supply of __________________.
Prices of related goods or services ~ If the price of a
substitute production good rises, producers might shift
production toward the higher priced good causing a
decrease in supply of the original good.

Examples? Increase in the price of
c______________has lead farmers to decrease the
supply of w_______________, and plant more
c_______________. WHY?
What Else Shifts Supply?
Technology ~ Technological improvements mean more
efficient production and lower costs to produce, so an
increase in supply or a rightward shift of the curve is the
result.
 Examples? Genetically altered corn will increase the
supply of corn and related products.
Prices of related goods or services ~ If the price of a
substitute production good rises, producers might shift
production toward the higher priced good causing a
decrease in supply of the original good.

Examples? Increase in the price of corn has lead
farmers to decrease the supply of wheat, and plant
more corn. WHY? ~~~ Profit~~~~
What Else Shifts Supply?
Input (resource prices) ~ A rise in input
price (cost to produce) will cause a
________________in supply or a
____________shift in the supply curve.
 A decrease in input prices will cause an
_____________ in supply or a
___________________ shift in the supply
curve.
 Examples? Increase in the input price of
_____________leads to a decrease in quantity
supplied of _________________.
What Else Shifts Supply?
Input (resource prices) ~ A rise in input price
(cost to produce) will cause a decrease in
supply or a leftward shift in the supply
curve.
 A decrease in input prices will cause an
increase in supply or a rightward shift in
the supply curve.
 Examples? Increase in the input price of
corn leads to a decrease in quantity
supplied of you name it – corn chips,
chicken, beef, cereal, etc.
What Else Shifts Supply?
Expectations ~ expectations about the
_________________ of a product can
cause producers to increase or decrease
current supply.
 Examples?
Competition or Number of sellers in a
market ~ generally, the __________ the
number of sellers, the ______________
the supply
What Else Shifts Supply?
Expectations ~ expectations about the
future price of a product can cause
producers to increase or decrease current
supply.
 Examples? Expectations of higher oil
prices next month may cause refiners
to decrease supply to the market
today.
Competition or Number of sellers in a
market ~ generally, the larger the
number of sellers, the greater the supply
Shifts of the Supply Curve
New producers enter the
market for coffee beans.
Graph the new supply curve.
Price of
Coffee Beans
per pound
S1
S2
2.00
1.75
Supply Curve
before entry of
new producers
1,50
1.25
1.00
Supply Curve
after entry of
new producers
.75
.50
7
9
11
13
15
17
Quantity of Coffee Beans
(billions of pounds)
Supply, Demand, & Equilibrium
 What is equilibrium?
 Economic situation when no individual would







be better off doing something different
Think balance, stability, even
What is Equilibrium Price?
The price that matches the quantity supplied
and the quantity demanded
What is Equilibrium Quantity?
Quantity bought and sold at the equilibrium
price
Think the price that consumers will buy that
producers will also be willing to supply for
Also known as Market Clearing Price
Finding Equilibrium Price & Quantity
Where is equilibrium
price and quantity?
Price
Price
Per
Soda
Quantity
demanded
per Week
Quantity
supplied
per
Week
Shortage
or
Surplus?
$5
50
250
5
4
100
200
4
3
150
150
2
200
100
1
250
50
6
3
2
1
Where is the equilibrium price?
0
50
100
150
200
250
Quantity
Finding Equilibrium Price & Quantity
Where is equilibrium
price and quantity?
Price
Price
Per
Soda
Quantity
demanded
per Week
Quantity
supplied
per
Week
Shortage
or
Surplus?
$5
50
250
5
4
100
200
4
3
150
150
2
200
100
1
250
50
6
S
Equilibrium or market
clearing price
3
2
1
D
Where is the equilibrium price?
0
50
100
150
200
250
Quantity
Equilibrium, Surplus & Shortage
 Market Clearing Price is where Qd = Qs
 At this price there is no tendency
for the price to rise or fall ~ the
market is in a state of balance
 Why do producers lower prices?
 Because of a surplus of a product
they need to sell
 Surplus = Qs – Qd
 Why do producers raise their prices
above equilibrium?
 To eliminate the shortage
 Shortage = Qd – Qs
Price Above Equilibrium
Creates a Surplus
 Surplus = Qs –
Qd
 200 – 100 = 100
surplus
 What should
the producer do
to the price?
 Lower it!
Price
Surplus
6
S
5
4
3
E
2
1
D
0
50
100
Quantity
Demanded
150
200
Quantity
Supplied
250
Price Below Equilibrium
Creates a Shortage
 Shortage = Qd
– Qs
 100 – 200 = -100
shortage
 What should
producers do to
get rid of the
shortage?
 Raise the price!
Price
6
S
5
4
3
E
2
1
D
Shortage
0
50
100
Quantity
Supplied
150
200
250
Quantity
Demanded
Are You A Supplier? You Betcha!
 How many hours are you willing to work raking leaves this fall? Or work as
a cashier at a local store? Create a supply curve with the amount of hours
you are willing to supply labor at the following wages for both jobs. After
you have your supply schedule, draw supply curves for each type of labor.
Wages
Hours willing
to rake leaves
$16
12
10
8
6
Wages
$16
12
10
8
6
Hours willing
to cashier
• Module 6 Review p. 69 -70 all
questions
• Read Module 7 Changes in
Equilibrium
• Strive for a 5 & Supply Activity
Packet Reasons for Changes in
Supply p.25-29 (stop at part B)