Demand Schedule The demand schedule

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Figure 1 Catherine’s Demand Schedule and Demand Curve Price of Ice-Cream Cone $3. 00 2. 50 1. A decrease in price. . . 2. 00 1. 50 The demand curve is a graph of the relationship between the price of a good and the quantity demanded. 1. 00 0. 50 0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of Ice-Cream Cones 2. . increases quantity of cones demanded. © 2007 Thomson South-Western

Demand • Demand (D) – the various amounts consumers are willing and able to purchase at a series of possible prices at a given point in time • Quantity Demanded (QD) – the amount consumers are willing and able to purchase at a specific price at a given point in time. © 2007 Thomson South-Western

Distinguishing Demand Quantity Demanded Demand P $5 4 3 2 1 QD 10 20 35 55 80 Quantity Demanded Entire relationship P $5 4 3 2 1 QD 10 20 35 55 80 Only a part of the relationship. © 2007 Thomson South-Western

Changes in Quantity Demanded Price of Ice. Cream Cones B $2. 00 A tax on sellers of icecream cones raises the price of ice-cream cones and results in a movement along the demand curve. A 1. 00 D 0 4 8 Quantity of Ice-Cream Cones © 2007 Thomson South-Western

Shifts in the curve are caused by any change that alters the quantity demanded at every price. This product more people want to buy but not because the price went down. Look at the price and Quantities Notice the price stayed the same D Price 5 d 2 d 1 6 10 Quantity © 2007 Thomson South-Western

Shifts in the Demand Curve • Consumer Income • As income increases the demand for a normal good will increase. • As income increases the demand for an inferior good will decrease. © 2007 Thomson South-Western

can increase/decrease from economic decisions, advertising, and government political decisions (China). China Ex: The large “baby boom” of 1946 -64 “baby boom” increased the demand for baby supplies. An increase in life expectancy increased demand for medical care, retirement medical care communities, and nursing homes. communities nursing homes Increase in # of consumers © 2007 Thomson South-Western

Shifts in the Demand Curve • Prices of Related Goods • When a fall in the price of one good reduces the demand for another good, the two goods are called substitutes. • When a fall in the price of one good increases the demand for another good, the two goods are called complements. © 2007 Thomson South-Western

[Decrease in price of one; increase in the “D” for the other] Decrease increase P 1 P 2 QD 1 QD 2 Boat Prices D 1 D 2 P QD QD Gasoline Demand No change in price I’m making more money without dropping my prices. They are so cheap that even dogs are buying boats © 2007 Thomson South-Western

Substitutes – Direct [Increase in price of one; increase in “D” of the other] increase D 2 D P P 2 D 1 QD QD QD P 1 QD 2 QD 1 Demand for Microsoft’s Zune Price of i. Pod Video 1977, Bill was arrested for running a stop sign and driving without a license. © 2007 Thomson South-Western

P 1 D P 2 Diminishing Marginal Utility • • QD 1 Each additional unit of an item purchased gives less marginal utility (happy points) than the previous unit. Therefore, the only way I will buy more is if the price is lower. Ex. When I’m hungry, I typically will buy 2 breakfast tacos. The reason I don’t buy a third taco is because the marginal utility of the third taco is less than the price of the taco. But, if the price of the taco is less than the marginal utility of the taco, then I will buy the third taco © 2007 Thomson South-Western

Disutility [or negative utility]? I ate one hamburger, and it tasted great. The next two tasted okay. I wish I hadn’t have eaten the 5 th. I can’t finish the 6 th. . DIMINISHING MARGINAL UTILITY Utility (satisfaction) decreases as more of the same product satisfaction is consumed. © 2007 Thomson South-Western

11. Elasticity of D – the way price affects QD. 12. Elastic - QD that is very responsive to price 13. Inelastic - a chg in price has little impact on QD. QD Elastic (flexible) Demand 1. Substitutes (butter) Substitutes 2. Luxury (mink coat) Luxury 3. Expensive (car) Expensive 4. Has durability (refrigerator) Has durability 5. Lasts a long time (gas-guzzling car) Lasts a long time Inelastic (inflexible) Demand 1. No substitutes (milk) No substitutes 2. Necessity (insulin) Necessity 3. Inexpensive (safety pin) Inexpensive 4. No durability (pencil) No durability 5. Lasts only a short time (bread) Lasts only a short time © 2007 Thomson South-Western

Increase in “QD” [caused by a “decrease in price”] Decrease in “QD” D [caused by an “increase in price”] D 1. Price change 2. Movement 3. Point to point P 1 P 2 [“Snap shot of 1 pt in time] P 2 P 1 QD 2 QD 1 QD 2 D 1 D 2 P Change in “D” [“TIMER”] 1. Non-price 2. Whole curve 3. Shift D 1 P D 2 [“Time passes”] “Decrease in D” “Increase in D” What could cause an “increase in Demand? ” 5. Expectations of a shortage 1. Increase in taste 6. Expectations of a price increase 2. Increase in income [normal good] 7. Expectations of positive future income good 3. Decrease in income [inferior good] 8. Incr in price of a substitute for product “X” good 4. Increase in market size [# of consumers] 9. Decr in price of a complement of product “X” consumers © 2007 Thomson South-Western

+/- D/QD Graph The Black Boldfaced Items + D ___ 1. A population increase affects sales of Blackberry phones. - D ___ 2. Consumer incomes in the city of Plano decrease, with the result that jewelry sales are affected. + ___ QD 3. A camera store has a sale that features 25% off the price of all cameras - ___ QD 4. Texas imposes a 15% luxury tax on the sale of sailboats ___ 5. A frost in Florida destroys 60% of the orange crop and increases + D expectations about a future price increase of oranges - D ___ 6. Consumers expect the price of i. Pads to decrease next month. - D ___ 7. The sale of DVDs is affected by a 20% increase in the price of DVD players D P 2 DVD Players D 1 [Complements - INVERSE] P 1 DVDs + ___ 8. The sale of. QD 2 QD 1 is affected by a 20% decrease in the price of complement ___ D buns QD 2 QD 1 hamburger meat Hamburger meat D 1 D [Complements - INVERSE] P 1 P 2 Buns + D ___ 9. The sale of Kangaroo meat in Europe [Roo Steak] is affected by a 25% increase in the price of beef, which is a substitute for roo steak QD 1 QD 2 P 1 D D 1 Beef [Substitutes - DIRECT] Kangaroo meat + QD 10. Dunkin Donuts lowers the price of donuts & experiences a change in sales. ___ QD 2 QD 1 © 2007 Thomson South-Western

[D – “TIMER; QD – price change [inverse] A __1. Which will cause an “Increase in Demand” for the Blackberry Curve? a. increase in income c. increase in the price of the Blackberry Curve b. decrease in income d. decrease in the price of the Blackberry Curve C ___2. Which will cause an “Increase in QD” for the Blackberry Curve? a. decrease in income c. decrease in the price of the Blackberry Curve b. increase in income d. increase in the price of the Blackberry Curve ___3. Which will cause a “Decrease in Demand” for projectors? C a. increase in the price of projectors c. decrease in # of consumers b. decrease in the price of projectors d. increase in projector taste A ___4. Which will cause a “Decrease in QD” for projectors? a. increase in the price of projectors b. decrease in the price of projectors c. decrease in # of consumers d. increase in projector taste © 2007 Thomson South-Western

NS 27 -38 1. An increase in the price of Pepsi causes the demand curve for Coke to move to the (right/left). 2. If there is a sale on shirts, the demand curve for ties will move sale on shirts to the (right/left). 3. If a man’s workplace is about to close down, his demand man’s workplace is about to close down curve for major purchases would move to the (right/left). 4. If a cure for lung cancer were found, the demand curve for cigarettes would move to the (right/left). 5. If the price of pancakes decreases, the demand price of pancakes decreases for syrup, a complement, will (increase/decrease). syrup 6. If the price of butter decreases, the demand for margarine will (incr/decr). butter decreases 7. A “change in QD” is caused by (price change/TIMER) [a “movement”] 8. A “change in D” is caused by (price change/TIMER) [a “shift”] e © 2007 Thomson South-Western

Definitions • Supply (S) – the various amounts sellers are willing and able to produce/sell at a series of possible prices at a given point in time • Quantity Supplied (QS) – the amount sellers are willing and able to produce/sell at a specific price at a given point in time. © 2007 Thomson South-Western

Figure 5 Ben’s Supply Schedule and Supply Curve Price of Ice-Cream Cone $3. 00 1. An increase in price. . . 2. 50 2. 00 1. 50 1. 00 0. 50 0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of Ice-Cream Cones 2. . increases quantity of cones supplied. © 2007 Thomson South-Western

Change in Quantity Supplied Price of Ice. Cream Cone S C $3. 00 A rise in the price of ice cream cones results in a movement along the supply curve. A 1. 00 0 1 5 Quantity of Ice-Cream Cones © 2007 Thomson South-Western

Decrease in “QS” [caused by a “decrease in price”] P 1 S P 2 1. Price change 2. Movement 3. Point to point Increase in “QS” [caused by an “increase in price”] S P 2 P 1 [“Snap shot of 1 pt in time] QS 1 QS 2 QS 1 Change in “S” [RATNEST] S 1 S 2 P “Increase in S” 1. Non-price 2. Whole curve 3. Shift [“Time passes”] What could cause an “increase in supply? ” 1. Decrease in resource cost [wages/raw materials] 2. Decrease in the price of an alternative output for “X” 3. Increase in technology P S 2 S 1 “Decrease in S” 4. Increase in number of producers 5. Producer expectations of $ decrease 6. Increase in subsidies 7. Decrease in taxes © 2007 Thomson South-Western

S 2 S 1 S 3 P Resource Cost [wages & raw materials] [inverse] inverse 58. Increase in wages (increases/decreases) supply. Ex: A decrease in the price of computer chips (increases/decreases) the supply of computers. © 2007 Thomson South-Western

These are “things that can be supplied with the same resources”. I only have 200 acres P 2 Broccoli Corn S S 2 S 1 P P 1 QS 2 Producers want to produce more of the good where price is increasing, P 1 Corn Broccoli S S 1 S 2 P P 2 QS 1 QS 2 or at least, where the price is not going down. “Substitutes in production” [Remember, productive resources are scarce] © 2007 Thomson South-Western

“Can’t wait till milking time. ” This lowers production costs & increases “S”. Ex: Suppose a new milking machine called “The Invisible Hand” has a very soothing “The Invisible Hand” effect on cows; cows find the new machine so “udderly” delightful that they produce “udderly” 30% more milk. This technological advance 30% more milk will cause a shift to the right. 54 shift to the right © 2007 Thomson South-Western

S 3 S 1 S 2 P 56. If more firms enter an industry, the supply curve will shift to the (left/right). • When the American Basketball League began play in 1968, there was a (bigger/smaller) supply of basketball games each week. 60. A new professional football league will (increase/decrease) the supply of football games. © 2007 Thomson South-Western

[“INVERSE”] S 2 Oil Prices expected P to decrease S 1 S 2 Oil Prices expected to increase 59. If oil producers expect future oil prices to decline, 59. expect future oil prices to decline they will (increase/decrease) current production. If oil producers expect future oil prices to increase, expect future oil prices to increase they will (increase/decrease) current production. For example, if the cattle farmer expects higher prices for beef in the cattle farmer expects higher prices future, he will send (more/less) cattle to market now. He will keep them on the farm now and would send the cattle to the market in the future when prices are expected to be higher. © 2007 Thomson South-Western

S 3 [Direct] S 1 S 2 P Free money from the government (subsidies) subsidies induces suppliers to supply more. If subsidies are taken away, then suppliers are losing money and will decrease supply. © 2007 Thomson South-Western

S 3 I’m losing profits. ” [Inverse] S 1 S 2 P If business have their taxes decreased, decreased it moves the supply curve to the right. 55. If business have their taxes increased, increased it moves the supply curve to the (left/right). © 2007 Thomson South-Western

45. Elastic Supply – a small increase/decrease in price 45 causes significant change in QS. Elastic supply is very responsive to price changes. Elastic (Flexible) Supply 1. Can be made quickly 2. Little expense (few capital resources required) 3. (47) Unskilled workers 4. Long time 5. Don’t need scarce natural resources Examples: (50) T-shirts, hats, T-shirts shot glasses, and posters Inelastic (Inflexible) Supply 1. Cannot be made quickly 2. Great Expense (large capital resources required) 3. (48) Skilled workers Skilled 4. Short time 5. Scarcity of natural resources Examples: Gold, diamonds, and (49) computers © 2007 Thomson South-Western

46. Inelastic Supply - regardless of price, producers are unwilling/unable to increase/decrease QS. (QS is inflexible and unresponsive to price changes) 51. Elastic supply 51 Elastic supply results in a more horizontal line & horizontal 52. inelastic 52 supply results in a more vertical line. Elastic supply is very supply responsive to price & responsive inelastic supply is unresponsive to price. 0 1000 2000 3000 4000 5000 © 2007 Thomson South-Western

• 6. Show what happens to the Demand for Apples if they are found to fight cancer. • 7. Show what happens to the Demand for Gasoline if a Hurricane is heading toward us. • 8. Show what happens to the Production of a Chemical Plant if the Govt cuts restriction on pollution. • 9. Show what happens to the Demand for Coach Days tutoring as the Test Approaches. • 10. Show what happens to the Supply of Labor in a Job that has Great Benefits © 2007 Thomson South-Western

• 11. Show what happens to the Demand for Labor If the Govt raises the Minimum Wage. • 12. Show what happens to the supply of Labor if the Govt raises the Minimum Wage. • 13. Show what happens to the Demand for Cars if the govt lowers the Legal driving Age. • 14. Show what happens to the Demand for Beer if the govt raises the legal drinking age. • 15. Show what happens to the demand of diapers if there is an influx of new immigrants. © 2007 Thomson South-Western

• 16. Show what happens to the demand for Flashlights if a hurricane is expected. • 17. Graph the demand for Coke and Pepsi if coke goes on Sale. • 18. Graph the supply of Coke and Pepsi if they both raise their prices. • 19. Graph the Demand for Coke and Pepsi if they both lower their prices. • 20 What is the Law of demand. © 2007 Thomson South-Western

SUPPLY AND DEMAND TOGETHER • Equilibrium Price – The price that balances quantity supplied and quantity demanded. – On a graph, it is the price at which the supply and demand curves intersect. • Equilibrium Quantity – The quantity supplied and the quantity demanded at the equilibrium price. – On a graph it is the quantity at which the supply and demand curves intersect. © 2007 Thomson South-Western

Raising price above Pe • What is created if price is increased above PE? P S P PE P → ____ QD ____ QS QS QD ? D Creates a: __________ surplus How do you eliminate a surplus? QD _____ P QE QS Q _____ QD ____ QS until _____. © 2007 Thomson South-Western

Equilibrium • Surplus • When price > equilibrium price, then quantity supplied > quantity demanded. • There is excess supply or a surplus. • Suppliers will lower the price to increase sales, thereby moving toward equilibrium. © 2007 Thomson South-Western

Figure 9 Markets Not in Equilibrium (a) Excess Supply Price of Ice-Cream Cone Supply Surplus $2. 50 2. 00 Demand 0 4 Quantity demanded 7 10 Quantity supplied Quantity of Ice-Cream Cones © 2007 Thomson South-Western

Equilibrium • Shortage • When price < equilibrium price, then quantity demanded > the quantity supplied. • There is excess demand or a shortage. • Suppliers will raise the price due to too many buyers chasing too few goods, thereby moving toward equilibrium. © 2007 Thomson South-Western

Lowering price below Pe • What is created if price is dropped below PE? P → ____ QD ____ QS QS P S PE QD ? Creates a: __________ P D shortage This is called the “rationing function of prices – the price allocates the good. How do you eliminate a shortage? QS _____ P QE QD Q _____ QD ____ QS until _____. © 2007 Thomson South-Western

• Price floor- price minimum that buyers are required to pay • Price ceiling- maximum price that sellers are allowed to charge for a service Which category would a rent-controlled apartment fall into? © 2007 Thomson South-Western

Government Intervention P • Producers complain market price is too low. Price Floor • ______ _establishes a PE legal minimum price below which the price cannot fall • Creates: • ______ Surplus _ Examples: Farm price supports; minimum wage S D QE Q © 2007 Thomson South-Western

Negative impacts of price floors • Reduces the quantity available • Inefficient allocation of sales among sellers - those willing to sell the good at the lowest price are not able to sell it • Inefficiently high quality- suppliers spend more on the goods to make them higher quality but consumers aren’t willing to pay for the higher quality of the good © 2007 Thomson South-Western

Government Intervention • Consumers complain market price is too high. Price Ceiling • _______ establishes a legal maximum price above which the price cannot rise • Creates: • _______ Shortage P S PE D QE Q Example: rent controls in big cities. © 2007 Thomson South-Western

Figure 9 Markets Not in Equilibrium (b) Excess Demand Price of Ice-Cream Cone Supply $2. 00 1. 50 Shortage Demand 0 4 Quantity supplied 7 10 Quantity of Quantity Ice-Cream demanded Cones © 2007 Thomson South-Western

Negative impacts of price ceiling • Wasted resources • Inefficient allocation to consumers- people who want the good and are willing to pay the higher price don’t get it and those willing to pay a lower price do get it • Inefficiently low quality- sellers offer lower quality goods at a low price even though buyers would prefer higher quality at a higher price © 2007 Thomson South-Western

COKE RAISES ITS PRICE SURPLUS OF COKE P S 1 1. 50 How many Buyers? 50 EP 1 1. 00 IF COKE RAISES ITS PRICE THEY WILL MAKE MORE COKE BUT LESS PEOPLE WILL BE BUYING IT BECAUSE THE PRICE WENT UP How many made? 150 D 1 50 EQ 1 150 Q © 2007 Thomson South-Western

P S Pe D Qe If the increase in supply and the increase in demand are of equal amounts, the price increasing effect of the increase in demand will be offset by the price decreasing effect of the increase in supply -- thus no change will occur in the price. Q Pe Qe © 2007 Thomson South-Western

“Increase in D” S D 1 D 2 P 1 P 2 QD 1 QD 2 (A) TIMER QD 2 QD 1 “Increase in S” D S 1 S 2 P 1 P 2 “Decrease in S” S 2 D S 1 P 2 P 1 QD 2 “Decrease in D” D 1 S P 1 D 2 QD 1 (C) (B) RATNEST (D) A ___1. Decrease in income on market for used cars B ___2. Decrease in income on market for new cars B ___3. Consumer expectations about a price decrease. Consumer expectations price decrease C ___4. Producer expectations about a price decrease C ___5. Increase in # of producers on the market for computers. # of producers computers A ___6. Increase in # of consumers on the market for used cars. # of consumers used cars A ___7. Increase in # of consumers on the market for new cars. # of consumers new cars A ___8. Decrease in the price of i. Pods upon the market for i. Tune songs i. Pods C ___9. Decrease in business taxes on the market for computers. business taxes computers A ___10. Consumer expectations of a shortage of apples. Consumer expectations apples C ___11. Decrease in resource cost on market for computers. resource cost computers D ___12. Increase in price of wheat upon market for corn. wheat corn A ___13. Consumer expectations of a shortage of cell phones. Consumer expectations D ___14. Producers expectations about a price increase. Producers expectations A ___15. Increase in income on the market for i. Pod videos. income i. Pod videos © 2007 Thomson South-Western

A ___1. Increase in income on the market for camcorders. income camcorders A ___2. Increase in # of consumers on market for computers. consumers D ___3. Producer expectations about a price increase. ___4. Consumer expectations about a price increase. A ___5. Increase in # of producers on market for digital cameras. C ___6. Increase in resource cost on the market for bagels. D ___7. Increase in the price of Apple’s i. Phone on A the market for Google’s Nexus One phone. B ___8. Increase in the price of tea on the market for lemon. ___9. Increase in business taxes on the market for SUVs. D A ___10. Consumers expect a shortage of cell phones © 2007 Thomson South-Western

Effect of Changes in “D” or “S” on Price and Quantity 6. A decrease in taste for Fuzzy Wuzzies would: a. increase D, increase P, & increase Q. c. increase S, increase P, & increase Q. b. decrease D, increase P, & decrease Q. d. decrease D, decrease P, & decrease Q. 7. A reduction in the number of firms producing laptops: a. increase S, increase P, & increase Q. c. decrease S, increase P, & decrease Q. b. increase D, increase P, & increase Q. d. decrease S, decrease P, decrease Q. 8. An increase in the price of pancakes, a complement for syrup would: a. increase D, increase P, & decrease Q. c. decrease D, decrease P, & decrease Q. b. decrease D, decrease P, & increase Q. d. do none of the above 9. A decrease in income upon the market for spam would: a. decrease S, increase P, & decrease Q. c. increase D, decrease P, & increase Q. b. decrease S, increase P, & increase Q. d. increase D, increase P, & increase Q. 10. Consumer expectations that the price of i. Pad will increase by 50% in the future will: a. decrease S, decrease P, & decrease Q. c. decrease D, decrease P, & decrease Q. b. increase D, increase P, & increase Q. d. decrease D, decrease P, & increase Q. © 2007 Thomson South-Western