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Unit 2:
Demand, Supply, and
Consumer Choice
Copyright
ACDC Leadership 2015
1
Review
1. Explain the Law of Demand
2. Explain the Law of Supply
3. Identify the 5 shifters of demand
4. Identify the 6 shifters of supply
5. Define Subsidy
6. Explain why price DOESN’T shift the
curve
7. Define Equilibrium
8. Define Shortage
9. Define Surplus
10.Identify 10 stores in the mall
2
Supply and Demand Analysis
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)
Let’s Practice!
3
S&D Analysis Practice
1. Before Change (Draw equilibrium)
2. The Change (S or D, Identify Shifter)
3. After Change (Price and Quantity After)
Analyze Hamburgers
1. New grilling technology cuts production
time in half
2. Price of chicken sandwiches (a
substitute) increases
3. Price of hamburgers falls from $3 to $1.
4. Price for ground beef triples
5. Human fingers found in multiple burger
restaurants
4
1. New grilling technology cuts production
time in half
Price
S
S1
Pe
P decrease
Q increase
P1
D
Qe Q1
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ACDC Leadership 2015
Quantity
5
2. Price of chicken sandwiches (a
substitute) increases
Price
S
P increase
Q increase
P1
Pe
D
Qe Q1
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ACDC Leadership 2015
D1
Quantity
6
3. Price of hamburgers falls from $3 to $1.
Price
S
Shortage
Pe
Qd increase
Qs decrease
P1
D
Qs
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ACDC Leadership 2015
Qe
Qd
Quantity
7
4. Price for ground beef triples
Price
S1
P1
Pe
S
P increase
Q decrease
D
Q1 Qe
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ACDC Leadership 2015
Quantity
8
5. Human fingers found in multiple burger
restaurants
Price
S
P decrease
Q decrease
Pe
P1
D1
Q1 Qe
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ACDC Leadership 2015
D
Quantity
9
Econmovies
Episode 3: Indiana Jones
10
Double Shifts
• Suppose the demand for milk increased at
the same time as production technology
improved.
• Use S&D Analysis to show what will
happen to PRICE and QUANTITY.
Double Shift Rule:
If TWO curves shift at the same time,
EITHER price or quantity will be
indeterminate (ambiguous).
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ACDC Leadership 2015
11
Demand increases AND supply increases
Price
S
S1
P1 Pe
D
P indeterminate
Q increase
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ACDC Leadership 2015
Qe
D1
Q1 Quantity
12
Trick: Draw it out
separately and
combine the results
P indeterminate
Q increase
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ACDC Leadership 2015
13
What if supply
increases and
demand falls?
P decrease
Q indeterminate
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ACDC Leadership 2015
14
What if supply
decreases and
demand falls?
P indeterminate
Q decrease
15
Voluntary Exchange Activity
In the free-market, buyers and sellers voluntarily come
together to seek mutual benefits.
16
Example of Voluntary Exchange
Ex: You want to buy a truck so you go to the local
dealership. You are willing to spend up to $20,000 for a
new 4x4. The seller is willing to sell this truck for no less
than $15,000. After some negotiation you buy the truck
for $18,000.
Analysis:
Buyer’ Maximum- $20,000
Sellers Minimum- $15,000
Price- $18,000
Consumer’s Surplus-$2,000
Producer’s Surplus- $3,000
17
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
18
Consumer and Producer’s Surplus
P
$10
Calculate the area of:
1. Consumer Surplus
2. Producer Surplus
3. Total Surplus
8
6
$5
4
CS
PS
S
Area of a
triangle is
1/2bh:
1. CS= $25
2. PS= $20
3. Total= $45
2
1
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ACDC Leadership 2015
D
2 4 6 8 10
Q
19
Review
P
$16
Calculate the area of:
1. Consumer Surplus
2. Producer Surplus
3. Total Surplus
S
14
CS
12
PS
11
10
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ACDC Leadership 2015
1. CS= $20
2. PS= $5
3. Total= $25
D
2 4 6 8 10
Q
20
Supply and Demand Review
1. Define the Law of Demand
2. Define the Law of Supply
3. What is the difference between a change
in demand and a change in quantity
demanded?
4. What happens if price is above
equilibrium?
5. What happens if price is below
equilibrium?
6. Identify the rule for double shifts in S&D
7. Define consumer surplus
8. Name 10 musical instruments
2008 Audit Exam