Unit 2 Demand Supply and Consumer Choice Copyright

Unit 2: Demand, Supply, and Consumer Choice Copyright ACDC Leadership 2015 1

Supply Copyright ACDC Leadership 2015

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. Copyright ACDC Leadership 2015 EXAMPLE: Mowing Lawns 3

Example of Supply You own an lawn mower and you are willing to mow lawns. How many lawns will you mow at these prices? Supply Schedule Copyright ACDC Leadership 2015 Price per lawn mowed $1 $5 $20 $50 $1000 Quantity Supplied 4

GRAPHING SUPPLY Supply Schedule Price Quantity Supplied $5 50 $4 40 $3 30 $2 20 $1 10 Copyright ACDC Leadership 2015 Price of Milk Draw this large in your notes $5 4 3 2 1 10 20 30 40 50 60 Quantity of Milk 70 80 Q 5

GRAPHING SUPPLY Supply Schedule Price Quantity Supplied $5 50 $4 40 $3 30 $2 20 $1 10 Copyright ACDC Leadership 2015 Price of Milk Supply $5 4 3 2 1 10 20 30 40 50 60 Quantity of Milk 70 80 Q 6

GRAPHING SUPPLY Supply Schedule Price Quantity Supplied Price of Milk Supply $5 $4 What if there are new 50 3 and more productive 40 $3 30 milking $5 2 $2 20 $1 10 Copyright ACDC Leadership 2015 4 machines? 1 10 20 30 40 50 60 Quantity of Milk 70 80 Q 7

Change in Supply Schedule Price Quantity Supplied $5 50 $4 40 $3 30 $2 20 $1 10 Copyright ACDC Leadership 2015 Price of Milk Supply $5 4 3 2 1 10 20 30 40 50 60 Quantity of Milk 70 80 Q 8

Change in Supply Schedule Price Quantity Supplied $5 50 $4 40 $3 30 $2 20 $1 10 Copyright ACDC Leadership 2015 Price of Milk Supply $5 4 3 2 1 10 20 30 40 50 60 Quantity of Milk 70 80 Q 9

Change in Supply Schedule Price Quantity Supplied $5 50 70 $4 40 60 $3 30 50 $2 20 40 $1 10 30 Copyright ACDC Leadership 2015 Price of Milk Supply $5 4 3 2 1 10 20 30 40 50 60 Quantity of Milk 70 80 Q 10

Change in Supply Schedule Price Quantity Supplied $5 50 70 $4 40 60 $3 30 50 $2 20 40 $1 10 30 Copyright ACDC Leadership 2015 Price of Milk Supply S 2 $5 4 3 2 Increase in Supply Prices didn’t change but there is MORE milk produced 1 10 20 30 40 50 60 Quantity of Milk 70 80 Q 11

Change in Supply Schedule Price $5 $4 $3 Quantity Supplied Supply $5 What if the price for 50 dairy cows increases 40 drastically? 30 4 3 2 $2 20 $1 10 Copyright ACDC Leadership 2015 Price of Milk 1 10 20 30 40 50 60 Quantity of Milk 70 80 Q 12

Change in Supply Schedule Price Quantity Supplied $5 50 $4 40 $3 30 $2 20 $1 10 Copyright ACDC Leadership 2015 Price of Milk Supply $5 4 3 2 1 10 20 30 40 50 60 Quantity of Milk 70 80 Q 13

Change in Supply Schedule Price Quantity Supplied $5 50 $4 40 $3 30 $2 20 $1 10 Copyright ACDC Leadership 2015 Price of Milk Supply $5 4 3 2 1 10 20 30 40 50 60 Quantity of Milk 70 80 Q 14

Change in Supply Schedule Price Quantity Supplied $5 50 30 $4 40 20 $3 30 10 $2 20 1 $1 10 0 Copyright ACDC Leadership 2015 Price of Milk Supply $5 4 3 2 1 10 20 30 40 50 60 Quantity of Milk 70 80 Q 15

Change in Supply Schedule Price Quantity Supplied $5 50 30 $4 40 20 $3 30 10 $2 20 1 $1 10 0 Copyright ACDC Leadership 2015 Price of Milk Supply S 2 $5 4 3 Decrease in Supply Prices didn’t change but there is LESS milk produced 2 1 10 20 30 40 50 60 Quantity of Milk 70 80 Q 16

Change in Supply Schedule Price $5 $4 $3 Quantity Supplied Supply $5 4 What if there is a 50 3 increase in the number 40 2 of milk producers? 30 $2 20 $1 10 Copyright ACDC Leadership 2015 Price of Milk 1 10 20 30 40 50 60 Quantity of Milk 70 80 Q 17

5 Shifters (Determinants) of Supply 1. 2. 3. 4. Prices/Availability of inputs (resources) Number of Sellers Technology Government Action: Taxes & Subsidies 5. Expectations of Future Profit Changes in PRICE don’t shift the curve. It only causes movement along the curve. Copyright ACDC Leadership 2015 18

Practice Questions 1. Which of the following will cause the quantity supplied for milk to decrease? A. Decrease in the price of a key resource B. A decrease in the number of milk producers C. A decrease in the price of milk D. An increase in the price of milk E. A subsidy for milk producers Copyright ACDC Leadership 2015 19

Supply Practice Identify the determinant (shifter) then decide if supply will increase or decrease Shifter Increase or Decrease Left or Right 1 2 3 4 5 6 Copyright ACDC Leadership 2015 20

Supply Practice 1. Which determinant (SHIFTER)? 2. Increase or decrease? 3. Which direction will curve shift? Analyze Hamburgers 1. Strange virus kills 20% of cows 2. Price of hamburgers increase 30% 3. Government taxes burger producers 4. New bun baking technology cuts production time in half 5. The government subsidizes dairy farmers 6. Minimum wage increases to $20 Copyright ACDC Leadership 2015 21

Putting Supply and Demand Together!!! Copyright ACDC Leadership 2015 22

Supply and Demand are put together to determine equilibrium price and equilibrium quantity 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 Copyright ACDC Leadership 2015 $4 40 2 $3 30 1 D 10 20 30 40 50 60 70 80 Q $2 20 $1 10 23

Supply and Demand are put together to determine equilibrium price and equilibrium quantity 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 Copyright ACDC Leadership 2015 Supply Schedule 2 $3 30 1 D 10 20 30 40 50 60 70 Equilibrium Quantity is 30 80 Q $2 20 $1 10 24

Supply and Demand are put together to determine equilibrium price and equilibrium quantity Demand P Schedule $5 P Qd 3 $4 20 $2 50 $1 80 Copyright ACDC Leadership 2015 S P Qs 4 $5 10 $3 30 Supply Schedule 2 What if the price increases to $4? 1 $5 50 $4 40 $3 30 D 10 20 30 40 50 60 70 80 Q $2 20 $1 10 25

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 Copyright ACDC Leadership 2015 P Qs 4 3 $2 50 S Surplus (Qd<Qs) $5 10 $3 30 Supply Schedule 2 $5 50 $4 40 $3 30 1 D 10 20 30 40 50 60 70 80 Q $2 20 $1 10 26

How much is the surplus if the price is $5? Demand P Schedule $5 P Qd 3 $4 20 $2 50 $1 80 Copyright ACDC Leadership 2015 S P Qs 4 $5 10 $3 30 Supply Schedule 2 What if the Answer: price 40 decreases to $2? 1 D 10 20 30 40 50 60 70 80 Q $5 50 $4 40 $3 30 $2 20 $1 10 27

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 Copyright ACDC Leadership 2015 Supply Schedule 2 10 20 30 40 $4 40 $3 30 Shortage (Qd>Qs) 1 $5 50 D 50 60 70 80 Q $2 20 $1 10 28

How much is the shortage if the price is $1? Demand P Schedule $5 P Qd Supply Schedule S P Qs 4 $5 10 Answer: 70 3 $4 20 $3 30 $2 50 $1 80 Copyright ACDC Leadership 2015 $5 50 $4 40 2 $3 30 1 D 10 20 30 40 50 60 70 80 Q $2 20 $1 10 29

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 Copyright ACDC Leadership 2015 2 1 D 10 20 30 40 50 60 70 80 Q $2 20 $1 10 30

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 Copyright ACDC Leadership 2015 31

2008 Audit Exam