Unit 2 Demand Supply and Consumer Choice Copyright

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 Copyright ACDC Leadership 2015 2

Shifting Supply and Demand Copyright ACDC Leadership 2015 3

Yoo-hoo! Big summer blowout! What would happen to the price and quantity of sunblock if summer suddenly became winter? 4

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) Copyright ACDC Leadership 2015 Let’s Practice! 5

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 Copyright ACDC Leadership 2015 6

1. New grilling technology cuts production time in half Price S S 1 Pe P decrease Q increase P 1 D Qe Q 1 Copyright ACDC Leadership 2015 Quantity 7

2. Price of chicken sandwiches (a substitute) increases Price S P increase Q increase P 1 Pe D Qe Q 1 Copyright ACDC Leadership 2015 D 1 Quantity 8

3. Price of hamburgers falls from $3 to $1. Price S Shortage Pe Qd increase Qs decrease P 1 D Qs Copyright ACDC Leadership 2015 Qe Qd Quantity 9

4. Price for ground beef triples Price S 1 Pe S P increase Q decrease D Q 1 Qe Copyright ACDC Leadership 2015 Quantity 10

5. Human fingers found in multiple burger restaurants Price S P decrease Q decrease Pe P 1 D 1 Qe Copyright ACDC Leadership 2015 D Quantity 11

Econmovies Episode 3: Indiana Jones 12

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). Copyright ACDC Leadership 2015 13

Demand increases AND supply increases Price S S 1 Pe D P indeterminate Q increase Copyright ACDC Leadership 2015 Qe D 1 Quantity 14

Trick: Draw it out separately and combine the results P indeterminate Q increase Copyright ACDC Leadership 2015 15

What if supply increases and demand falls? P decrease Q indeterminate Copyright ACDC Leadership 2015 16

What if supply decreases and demand falls? P indeterminate Q decrease 17

Supply and Demand Practice Worksheet Copyright ACDC Leadership 2015 18

Voluntary Exchange Activity In the free-market, buyers and sellers voluntarily come together to seek mutual benefits. 19

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 4 x 4. 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 20

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 21

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 1/2 bh: 1. CS= $25 2. PS= $20 3. Total= $45 2 1 Copyright ACDC Leadership 2015 D 2 4 6 8 10 Q 22

Review P $16 Calculate the area of: 1. Consumer Surplus 2. Producer Surplus 3. Total Surplus S 14 CS 12 PS 11 10 Copyright ACDC Leadership 2015 1. CS= $20 2. PS= $5 3. Total= $25 D 2 4 6 8 10 Q 23

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 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