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Unit 2: Supply, Demand, and Consumer Choice Demand Practice 1. Which determinant (SHIFTER)? 2. Increase or decrease? 3. Which direction will curve shift? In-and-Out Hamburgers (a normal good) 1. Population boom 2. Incomes fall due to recession 3. Price for Carne Asada burritos (a substitute) falls to $1 4. Price increases to $5 per In-and-Out burger 5. New health craze- “No ground beef” 6. In-and-Out announce that they will significantly increase prices NEXT month 7. Government heavily taxes shake and fries causes their prices to quadruple. 8. In-and-Out lowers price of burgers to $1 Supply Supply Defined 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? There is a DIRECT (or positive) relationship between price and quantity supplied. •As price increases, the quantity producers make increases •As price falls, the quantity producers make falls. Why? Because, at higher prices profit seeking firms have an incentive to produce more. EXAMPLE: Mowing Lawns GRAPHING SUPPLY Price of Corn P Plot the Points $5 CORN P QS 4 $5 4 3 2 1 3 2 1 o 5 10 20 30 40 50 60 70 80 Quantity of Corn Q 60 50 35 20 5 GRAPHING SUPPLY Price of Corn P Plot the Points $5 CORN P QS 4 $5 4 3 2 1 3 2 1 o 10 20 30 40 50 60 70 80 Quantity of Corn Q 60 50 35 20 5 GRAPHING SUPPLY Price of Corn P Plot the Points $5 CORN P QS 4 $5 4 3 2 1 3 2 1 o 10 20 3035 40 50 60 70 80 Quantity of Corn Q 60 50 35 20 5 GRAPHING SUPPLY Price of Corn P Plot the Points $5 CORN P QS 4 $5 4 3 2 1 3 2 1 o 10 20 30 40 50 60 70 80 Quantity of Corn Q 60 50 35 20 5 GRAPHING SUPPLY Price of Corn P Plot the Points $5 CORN P QS 4 $5 4 3 2 1 3 2 1 o 10 20 30 40 50 60 70 80 Quantity of Corn Q 60 50 35 20 5 GRAPHING SUPPLY Price of Corn P $5 S CORN P QS 4 $5 4 3 2 1 3 2 1 o Connect the Points 10 20 30 40 50 60 70 80 Quantity of Corn Q 60 50 35 20 5 GRAPHING SUPPLY Price of Corn P $5 S P QS 4 What if more producers enter the market? 3 2 1 o CORN 10 20 30 40 50 60 70 80 Quantity of Corn $5 4 3 2 1 Q 60 50 35 20 5 GRAPHING SUPPLY Price of Corn P $5 Increase in Supply S CORN P QS 4 $5 4 3 2 1 3 2 1 o S’ 10 20 30 40 50 60 70 80 Quantity of Corn Q 60 80 50 70 35 60 20 45 5 30 GRAPHING SUPPLY Price of Corn P $5 4 3 2 S What if there is a drought? 1 o 10 20 30 40 50 60 70 80 Quantity of Corn CORN P QS $5 4 3 2 1 Q 60 50 35 20 5 GRAPHING SUPPLY Price of Corn P $5 Decrease in Supply S’ S P QS 4 $5 4 3 2 1 3 2 1 o CORN 10 20 30 40 50 60 70 80 Quantity of Corn Q 60 45 50 30 35 20 20 0 5 -- 6 DETERMINANTS OF SUPPLY (SHIFTERS) 1. 2. 3. 4. Prices/Availability of inputs (resources) Number of Sellers Technology Government Action: Taxes & Subsidies Subsidies A subsidy is a government payment that supports a business or market. Subsidies cause the supply of a good to increase. Taxes Regulation 5. The Opportunity Cost of Alternative government can reduce the Regulation occurs when the supply of some goods by placing an government steps into a market to Production excise tax on them. An excise tax affect the price, quantity, or quality of tax on the production orof saleFuture of a good. Regulation usually raises 6.is aExpectations Profit a good. costs. Changes in PRICE don’t shift the curve. It only causes movement along the curve. Supply Practice 1. Which determinant (SHIFTER)? 2. Increase or decrease? 3. Which direction will curve shift? In-and-Out Hamburgers 1. Mad cow kills 20% of cows 2. Price of burgers increase 30% 3. Government taxes burger producers 4. A Demand increase causes the price for shakes to increase to $20 5. New bun baking technology cuts production time in half 6. Minimum wage increases to $10 Putting Supply and Demand Together Supply and Demand are put together to determine equilibrium price and equilibrium quantity . Price of Corn CORN MARKET P $5 4 3 2 1 QD 2 4 7 11 16 Equilibrium Quantity is 7 P S $5 CORN MARKET P Q 4 $5 4 3 2 1 What happens if price is too high? Equilibrium Price is $3 3 2 1 o D 2 4 6 78 10 12 14 16 Quantity of Corn Q S12 10 7 4 1 At a $4 price quantity supplied is greater than quantity demanded which causes a… Price of Corn CORN MARKET P $5 4 3 2 1 QD 2 4 7 11 16 P $5 Surplus S 4 CORN MARKET P Q $5 4 3 2 1 What happens if price is too low? 3 2 1 o D 2 4 6 78 10 12 14 16 Quantity of Corn Q S 12 10 7 4 1 At a $2 price quantity supplied is less than quantity demanded which causes a… Price of Corn CORN MARKET P $5 4 3 2 1 QD 2 4 7 11 16 P S $5 CORN MARKET P Q 4 3 2 Shortage 1 o $5 4 3 2 1 D 2 4 6 78 101112 14 16 Quantity of Corn Q S12 10 7 4 1 The FREE MARKET system automatically pushes the price toward equilibrium. Price of Corn CORN MARKET P $5 4 3 2 1 QD 2 4 7 11 16 P $5 Surplus S 4 3 2 Shortage 1 o CORN MARKET P Q $5 4 3 2 1 D 2 4 6 78 10 12 14 16 Quantity of Corn Q S 12 10 7 4 1 Shifts in Supply or Demand change equilibrium P and Q automatically 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) Ex: Transformers become new Christmas mega hit. S&D Analysis Practice 1. Before Change 2. The Change 3. After Change In-and-Out Hamburgers 1. New bun baking technology cuts production time in half. 2. Price of Burger King Woppers (a substitute good) increases 3. Price of In-and-Out burgers falls from $2 to $1. 4. Minimum wage increases to $10