Unit 2 – Demand and Supply
Typical Supply and Demand Diagram
Price (paid by buyers)
$6
$5
$4
Supply
$3
Demand
$2
$1
$0
0
1
2
3
4
5
6
7
8
Quantity Supplied and Demanded
9
10
11
Part 1 - Demand
1. What is a market? Provide 4 examples of markets.
2. What is demand? What is a demand schedule? What is a
demand curve?
3. Explain the “law of demand.”
4. How do the law of diminishing marginal utility, the
income effect, and the substitution effect all explain the
relationship between price and quantity demanded? (Explain
each separately.)
5. How is the market demand for a product related to an
individual’s demand for that product?
6. What factors can cause a change in demand? (List each.)
7. What is the difference between “normal” goods and
“inferior” goods?
8. Explain the difference between demand and quantity
demanded. What is the only factor that can cause a change in
quantity demanded?
Part 1 - Demand
Key Points:
1. In this unit, we’re looking at competitive markets,
where neither individual sellers nor buyers have the
ability to set prices. Prices are determined “by the
market.”
2. Demand – the quantities of a product or service
that consumers are willing and able to buy at various
prices during a particular period.
3. The demand curve is a graph of this data for a
particular good. It is almost always downward sloping.
Part 1 - Demand
Why is the demand curve downward sloping?
1. The law of diminishing marginal utility.
2. The income effect.
3. The substitution effect.
What happens to demand when price changes? Careful.
NOTHING! Quantity demanded changes with price, not
demand.
P
D
0
Q
What factors can change demand, i.e. shift the demand
curve?
P
D
0
Q
To show a change in demand, simply draw and label a
new demand curve.
P
D
0
Q
To show a change in demand, simply draw and label a
new demand curve.
What could have caused
this demand curve to
shift to the right?
P
D1
0
Q
D2
To show a change in demand, simply draw and label a
new demand curve.
What could have caused
this demand curve to
shift to the left?
P
0
D2
D1
Q
Draw a correctly labeled graph of demand
for coffee.
P
D
0
Coffee
Q
Starbucks creates a new mocchiolattato
cre’me’ coffee drink that everyone loves.
P
D1
0
Coffee
Q
D2
The price of cream goes up significantly.
P
D2
0
Coffee
D1
Q
The price of tea goes down significantly.
P
D2
0
Coffee
D1
Q
Income in the U.S. rises by 8% in 2013.
P
D1
0
Coffee
Q
D2
Doctors publish a new report that drinking
coffee can help prevent some forms of cancer.
P
D1
0
Coffee
Q
D2
Draw a correctly labeled graph of demand
for solar panels.
P
D
0
Solar Panels
Q
Development of Marcellus shale gas drives
the price of natural gas down .
P
D2
0
Solar Panels
D1
Q
Political turmoil in the Middle East drives the
price of heating oil up.
P
D1
0
Solar Panels
Q
D2
The government announces that, beginning on October 1, 2016, it will
begin offering a major tax break for installing solar panels. Draw the
short-run (~ 1 year) effect on demand.
P
D2
0
Solar Panels
D1
Q
Draw a correctly labeled graph of demand
for Raman noodles.
P
D
0
Raman Noodles
Q
Income among college students rises by 20%.
Note: Raman noodles are
famous for being something
people eat a lot of when
they can’t afford anything
else, so they are an inferior
good.
P
D2
0
Raman Noodles
D1
Q
Homework:
Read Chapter 3, Pages 59 – 67. (Stop at
“Applications: Govt. Set Prices”).
Answer:
Discussion Questions: 3, 4, 5, & 6
AP Review Questions: 1 – 4
Problem #4
Supply
P
S
The supply curve can
shift (reasons on p.
60 – 61).
- resource prices
- technology
- taxes/subsidies
- prices of other
goods
- expectations
- # of sellers
Quantity supplied
changes when price
changes.
0
Raman Noodles
Q
Now let’s add supply, and establish market equilibrium.
This is the equilibrium (or market clearing) price. At any other price,
there will be shortages or surpluses.
Typical Supply and Demand Diagram
Price (paid by buyers)
$6
S
$5
$4
Supply
$3
Demand
$2
$1
D
$0
0
1
2
3
4
5
6
7
8
Quantity Supplied and Demanded
9
10
11
Now let’s add supply, and establish market equilibrium.
If demand goes up (shifts right), what happens to price and quantity?
Typical Supply and Demand Diagram
Price (paid by buyers)
$6
S
$5
$4 P2
$3
Supply
Demand
P1
$2
D2
$1
Q1
$0
0
1
2
3
4
D
Q2
5
6
7
8
Quantity Supplied and Demanded
9
10
11
If demand goes down, what happens to price and quantity?
P
S
P1
P2
D
0
D2
Q2
Q1
Q
If supply goes down, what happens to price and quantity?
S2
P
S
P2
P1
0
D
Q2
Q1
Q
If supply goes up, what happens to price and quantity?
P
S
P1
P2
0
D
Q1
Q2
Q
S2
What if both change at the same time?
It depends. Let’s look:
Supply Goes Up &
Demand Goes Down.
P
S2
S
Supply goes up means:
P↓ and Q↑
Demand goes down
means: P↓ and Q↓.
Price goes down, but the
change in quantity is
“indeterminate.”
P1
P2
0
D
D2
Q1 Q2
Q
Chapter 3, Problem Set 1
Homework:
Read pages 67 - 71 and 85 - 90 in textbook.
Do Chapter 4 Discussion Questions 1 & 2 (p 105)
Do Chapter 4 AP Review Questions 1 - 3 (p 105)