Unit 2: Supply, Demand, and Consumer Choice

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Unit 2 Supply, Demand, and Consumer Choice
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• VERY IMPORTANT COW!

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Demand Review

• What are the two key aspects of the definition of
  demand?
• What is the Law of Demand?
• Give an example of the substitution effect
• Give an example of the income effect
• Give an example of the law of diminishing
  marginal utility
• Explain how the law of diminishing marginal
  utility causes the law of demand
• How do you determine the MARKET demand for a
  particular good? (from reading)
• Name 10 fast food places

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Shifts in Demand

• CHANGES IN DEMAND
• Ceteris paribus-all other things held constant.
• When the ceteris paribus assumption is dropped,
  movement no longer occurs along the demand curve.
  Rather, the entire demand curve shifts.
• A shift means that at the same prices, more
  people are willing and able to purchase that
  good.
• This is a change in demand, not a change in
  quantity demanded

Changes in price DONT shift the curve!
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Change in Demand
Price of Cereal
Demand Schedule
What if cereal makes you smarter?
5 4 3 2 1
Price Quantity Demanded
5 10
4 20
3 30
2 50
1 80
Demand
o
Q
10 20 30 40 50 60 70
80
Quantity of Cereal
5
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Change in Demand
Price of Cereal
Demand Schedule
5 4 3 2 1
Price Quantity Demanded
5 10
4 20
3 30
2 50
1 80
Demand
o
Q
10 20 30 40 50 60 70
80
Quantity of Cereal
6
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Change in Demand
Price of Cereal
Demand Schedule
5 4 3 2 1
Price Quantity Demanded
5 10
4 20
3 30
2 50
1 80
Demand
o
Q
10 20 30 40 50 60 70
80
Quantity of Cereal
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Change in Demand
Price of Cereal
Demand Schedule
5 4 3 2 1
Price Quantity Demanded
5 30
4 40
3 50
2 70
1 80 100
Demand
o
Q
10 20 30 40 50 60 70
80
Quantity of Cereal
8
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Change in Demand
Price of Cereal
Demand Schedule
Increase in Demand Prices didnt change but
people want MORE cereal
5 4 3 2 1
Price Quantity Demanded
5 30
4 40
3 50
2 70
1 80 100
D2
Demand
o
Q
10 20 30 40 50 60 70
80
Quantity of Cereal
9
10
Change in Demand
Price of Cereal
Demand Schedule
What if cereal causes baldness?
5 4 3 2 1
Price Quantity Demanded
5 10
4 20
3 30
2 50
1 80
Demand
o
Q
10 20 30 40 50 60 70
80
Quantity of Cereal
10
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Change in Demand
Price of Cereal
Demand Schedule
5 4 3 2 1
Price Quantity Demanded
5 10
4 20
3 30
2 50
1 80
Demand
o
Q
10 20 30 40 50 60 70
80
Quantity of Cereal
11
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Change in Demand
Price of Cereal
Demand Schedule
5 4 3 2 1
Price Quantity Demanded
5 10
4 20
3 30
2 50
1 80
Demand
o
Q
10 20 30 40 50 60 70
80
Quantity of Cereal
12
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Change in Demand
Price of Cereal
Demand Schedule
5 4 3 2 1
Price Quantity Demanded
5 0
4 5
3 20
2 30
1 80 60
Demand
o
Q
10 20 30 40 50 60 70
80
Quantity of Cereal
13
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Change in Demand
Price of Cereal
Demand Schedule
5 4 3 2 1
Decrease in Demand Prices didnt change but
people want LESS cereal
Price Quantity Demanded
5 0
4 5
3 20
2 30
1 80 60
Demand
D2
o
Q
10 20 30 40 50 60 70
80
Quantity of Cereal
14
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Change in Demand
Price of Cereal
Demand Schedule
What if the price of MILK goes up?
5 4 3 2 1
Price Quantity Demanded
5 10
4 20
3 30
2 50
1 80
Demand
o
Q
10 20 30 40 50 60 70
80
Quantity of Cereal
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What Causes a Shift in Demand?

• 5 Shifters (Determinates) of Demand
• Tastes and Preferences
• Number of Consumers
• Price of Related Goods
• Income
• Future Expectations
• Changes in PRICE dont shift the curve. It only
  causes movement along the curve.

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Prices of Related Goods
The demand curve for one good can be affected by
a change in the price of ANOTHER related good.

• Substitutes are goods used in place of one
  another.
• If the price of one increases, the demand for the
  other will increase (or vice versa)
• Ex If price of Pepsi falls, demand for coke will

• 2. Complements are two goods that are bought and
  used together.
• If the price of one increase, the demand for the
  other will fall. (or vice versa)
• Ex If price of skis falls, demand for ski boots
  will...

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Substitutes
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Substitutes
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Substitutes
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Substitutes
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Substitutes
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Substitutes
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Substitutes
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Complements
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Income
The incomes of consumer change the demand, but
how depends on the type of good.

• Normal Goods
• As income increases, demand increases
• As income falls, demand falls
• Ex homes, Sea Food, jewelry,

• 2. Inferior Goods
• As income increases, demand falls
• As income falls, demand increases
• Ex Top Romen, used cars, used cloths,

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Inferior Goods
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Change in Qd vs. Change in Demand
There are two ways to increase quantity from 10
to 20
Price of Cereal
P

1. A to B is a change in quantity demand (due to a
   change in price)
2. A to C is a change in demand (shift in the curve)

A
C
3 2
B
D2
D1
o
Q Cereal
10 20
Quantity of Cereal
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Practice
First, identify the determinant (shifter) then
decide if demand will increase or decrease
Shifter Increase or Decrease Left or Right
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2
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5
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Practice
First identify the determinant (Shifter). Then
decide if demand will increase or decrease

• Hamburgers (a normal good)
• Population boom
• Incomes fall due to recession
• Price for Carne Asada burritos falls to 1
• Price increases to 5 for hamburgers
• New health craze- No ground beef
• Hamburger restaurants announce that they will
  significantly increase prices NEXT month
• Government heavily taxes shake and fries causes
  their prices to quadruple.
• Restaurants lower price of burgers to .50

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