Unit Supply and Demand 1 Connection to Circular

Unit: Supply and Demand 1

Connection to Circular Flow Model 1. 2. 3. 4. Do individuals supply or demand? Do business supply or demand? Who demands in the product market? Who supplies in the product market? 2

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I am willing to sell several in AP Economics. How much will you pay? Demand Schedule Price $1, 000 $500 $200 $5 $1 Quantity Demanded 4

DEMAND What is DEMAND? DEMAND Demand is the quantities that a person or market is ready, willing and able to buy. (Ex. Bill Gates is able to purchase a Ferrari, but if he is NOT willing to buy one， Then he has NO demand for one) What is the Law of Demand? Demand All else being equal, quantity demanded of a good rises, as the price decreases. 5

LAW OF DEMAND There is an INVERSE relationship between PRICE and QUANTITY DEMANDED As Price Falls… …Quantity Demanded Rises As Price Rises… …Quantity Demanded Falls Price Quantity Demanded 6

Demand worksheet Demand Schedule for CDs at School Quantity Demanded (monthly) Price (dollars) 300 250 200 150 100 50 5 10 15 20 25 30 • If the price of CDs is $10, how 250 many will people buy? _______ • If the price of CDs is $20, how 150 many will people buy? _______ • If the quantity of CDs sold is $15 200, what is the price? _____ • If the quantity of CDs sold is $25 100, what is the price? ______ 7

Demand worksheet Demand Schedule for Apples at School Quantity Price Demanded (cents) (weekly) 400 350 250 100 50 10 20 30 50 80 100 • How many apples will students buy at 30 cents? 250 • How many apples will students buy at 80 cents? 100 • What effect does the price seem to have on the quantity of CDs and apples sold? • Calculate total revenue (P X Q): ü If the price of apples is 30 cents, $75 ü If 100 apples are sold, $80 8

Quiz Time Demand Schedule for Boba at School Quantity Demanded (monthly) Price (dollars) 400 200 150 50 25 10 1 2 3 4 5 6 What is the change in the quantity demanded if price increases from $2 to $3? What is the quantity demanded if the price is $6? What is the price if the quantity demanded is 150? If the price $7 then the quantity demanded is? 9

Example of Supply You own a scrub brush and you are willing to clean toilets. How many toilets will you clean at these prices? Supply Schedule Price per toilet clean $1 $5 $20 $50 $1000 Quantity Supplied 10

Supply What is SUPPLY? SUPPLY Supply is the quantities of a good that sellers or firms are willing and able to produce and sell (now). What is the Law of Supply? Supply All else being equal, quantity supplied of a good rises, as the price increases. Why? Because, at higher prices profit seeking firms have an incentive to produce more. 11

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5 Shifters of Supply 1. Input Prices 2. Technology 3. Expectations 4. Taxes & Subsidies 5. Number of Sellers Subsidies It is government payment to support business or market. Subsidies cause the supply of a good to increase. Changes in PRICE Stay on the Line 13

Why does the Law of Demand occur? The law of demand is the result of three separate behavior patterns that overlap: 1. The Substitution effect 2. The Income effect 3. The Law of Diminishing Marginal Utility We will define and explain each… 14

Why does the Law of Demand occur? 1. The Substitution Effect • If the price goes up for a product, consumer buy less of that product and more of another substitute product, and vice versa. 16

Why does the Law of Demand occur? 2. The Income Effect • If the price goes down for a product, the purchasing power increases for consumers allowing them to purchase more. 17

Why does the Law of Demand occur? § We buy goods because we get utility from them § The law of diminishing marginal utility states that as you consume more units of any same good, the additional satisfaction from each additional unit will eventually start to decrease § In other words, the more you buy of any good the less satisfaction you get from each new unit. Discussion Questions: 1. How does it relate to the Law of Demand? 2. How does this affect the pricing of businesses? 18

Can you see the Law of Diminishing Marginal Utility in Disneyland’s pricing strategy? Change N/A $54 $33 $15 $10 $5