Unit 2: Supply, Demand, and Consumer Choice

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Review with your neighbor…

1. Define scarcity2. Define Economics3. Identify the relationship between scarcity

and choices4. Explain how Macroeconomics is different

than Micro5. Explain the difference between positive and

normative economics 6. Give an example of marginal analysis

Economic Terminology

3

Scarcity vs. ShortagesPrice vs. CostInvestmentConsumer GoodsCapital Goods

Demand Review Part 11. Give an example of the law of diminishing marginal

utility2. Explain how the law of diminishing marginal utility

causes the law of demand3. How do you determine the MARKET demand for a

particular good? (from reading)

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REVIEW 1. Explain relationship between scarcity and choices

2. What is different between positive & normative3. What is different between price and cost 4. What is different between consumer and capital

goods5. Give examples of each of the 4 Factors of

Production6. Define trade-offs 7. Define opportunity cost8. What is different between accounting costs and

economic costs

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The Factors of Production

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Trade-offs and Opportunity CostALL decisions involve trade-offs.

The most desirable alternative given up as a result of a decision is known as opportunity cost.

Trade-offs are all the alternatives that we give up whenever we choose one course of action over others.

(Examples: going to the movies)

What are trade-offs of deciding to go to college? What is the opportunity cost of going to college?

Every society must answer three questions:

The Three Economic Questions1. What goods and services should be

produced? 2. How should these goods and services be

produced? 3. Who consumes these goods and services?

The way these questions are answered determines the economic system

An economic system is the method used by a society to produce and distribute goods and

services. 8

What Causes a Shift in Demand?

5 Shifters (changers) of Demand:

1.Tastes and Preferences2.Related Goods price3.Income4.Consumer population5.Expectations of the future

TRICE

Changes in PRICE don’t shift the curve. It only causes movement along the curve. 9

DEMAND DEFINEDWhat is Demand?

What is the Law of Demand?

The law of demand states There is an INVERSE relationship between price and quantity demanded

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Scarcity vs. Shortages

•Shortages occur when producers will not or cannot offer goods or services at current prices. Shortages are temporary.

•Scarcity occurs at all times for all goods.

Price vs. CostWhat’s the price? vs. How much does that cost?

Price= Amount buyer (or consumer) pays

Cost= Amount seller pays to produce a good

InvestmentInvestment= the money spent by BUSINESSES to improve their production

Ex: $1,000 new computer, $1 Million new factory 11

Supply

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Supply DefinedWhat 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 Lawns13

Example of SupplyYou own an lawn mower and you are

willing to mow lawns. How many lawns will you mow at these prices?

Price per lawn mowed

Quantity

SuppliedSupply Schedule

14

$1$5

$20$50

$100$1000

GRAPHING SUPPLY

Qo

$5

4

3

2

1

Price of Cereal

Quantity of Cereal

Supply Schedule

10 20 30 40 50 60 70 80

Draw this large in your notes

15

PriceQuantity

Supplied

$5 50

$4 40

$3 30

$2 20

$1 10

GRAPHING SUPPLY

Qo

$5

4

3

2

1

Price of Cereal

Quantity of Cereal

Supply Schedule

10 20 30 40 50 60 70 80

16

PriceQuantity

Supplied

$5 50

$4 40

$3 30

$2 20

$1 10

Supply

GRAPHING SUPPLY

Qo

$5

4

3

2

1

Price of Cereal

Quantity of Cereal

Supply Schedule

10 20 30 40 50 60 70 80

17

PriceQuantity

Supplied

$5 50

$4 40

$3 30

$2 20

$1 10

Supply

What if new

companies start making

cereal?

Change in Supply

Qo

$5

4

3

2

1

Price of Cereal

Quantity of Cereal

Supply Schedule

10 20 30 40 50 60 70 80

18

PriceQuantity

Supplied

$5 50

$4 40

$3 30

$2 20

$1 10

Supply

Change in Supply

Qo

$5

4

3

2

1

Price of Cereal

Quantity of Cereal

Supply Schedule

10 20 30 40 50 60 70 80

19

PriceQuantity

Supplied

$5 50

$4 40

$3 30

$2 20

$1 10

Supply

Change in Supply

Qo

$5

4

3

2

1

Price of Cereal

Quantity of Cereal

Supply Schedule

10 20 30 40 50 60 70 80

20

PriceQuantity

Supplied

$5 50 70

$4 40 60

$3 30 50

$2 20 40

$1 10 30

Supply

Change in Supply

Qo

$5

4

3

2

1

Price of Cereal

Quantity of Cereal

Supply Schedule

10 20 30 40 50 60 70 80

21

SupplyS2

PriceQuantity

Supplied

$5 50 70

$4 40 60

$3 30 50

$2 20 40

$1 10 30

Increase in SupplyPrices didn’t change but

there is MORE cereal produced

Change in Supply

Qo

$5

4

3

2

1

Price of Cereal

Quantity of Cereal

Supply Schedule

10 20 30 40 50 60 70 80

22

PriceQuantity

Supplied

$5 50

$4 40

$3 30

$2 20

$1 10

Supply

What if a drought

destroys corn and wheat

crops?

Change in Supply

Qo

$5

4

3

2

1

Price of Cereal

Quantity of Cereal

Supply Schedule

10 20 30 40 50 60 70 80

23

PriceQuantity

Supplied

$5 50

$4 40

$3 30

$2 20

$1 10

Supply

Change in Supply

Qo

$5

4

3

2

1

Price of Cereal

Quantity of Cereal

Supply Schedule

10 20 30 40 50 60 70 80

24

PriceQuantity

Supplied

$5 50

$4 40

$3 30

$2 20

$1 10

Supply

Change in Supply

Qo

$5

4

3

2

1

Price of Cereal

Quantity of Cereal

Supply Schedule

10 20 30 40 50 60 70 80

25

PriceQuantity

Supplied

$5 50 30

$4 40 20

$3 30 10

$2 20 1

$1 10 0

Supply

Change in Supply

Qo

$5

4

3

2

1

Price of Cereal

Quantity of Cereal

Supply Schedule

10 20 30 40 50 60 70 80

26

SupplyS2

PriceQuantity

Supplied

$5 50 30

$4 40 20

$3 30 10

$2 20 1

$1 10 0

Decrease in SupplyPrices didn’t change but

there is LESS cereal produced

Change in Supply

Qo

$5

4

3

2

1

Price of Cereal

Quantity of Cereal

Supply Schedule

10 20 30 40 50 60 70 80

27

PriceQuantity

Supplied

$5 50

$4 40

$3 30

$2 20

$1 10

Supply

What if cereal companies

find a quicker way to make

cereal ?

6 Determinants (SHIFTERS) of Supply1. Prices/Availability of inputs (resources)2. Number of Sellers3. Technology4. Government Action: Taxes & Subsidies

5. Opportunity Cost of Alternative Production

6. Expectations of Future ProfitChanges in PRICE don’t shift the curve. It only

causes movement along the curve. 28

Supply PracticeFirst, identify the determinant (shifter) then

decide if supply will increase or decrease

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ShifterIncrease or Decrease

Left or Right

1

2

3

4

5

6

Supply Practice

Hamburgers1. Mad cow disease kills 20% of cows 2. Price of burgers increase 30%3. Government taxes burger producers4. Restaurants can produce burgers and/or tacos. A demand

increase causes the price for tacos to increase 500%5. New bun baking technology cuts production time in half6. Minimum wage increases to $10

1. Which determinant (SHIFTER)?2. Increase or decrease?3. Which direction will curve shift?

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