Unit 2: Supply, Demand, and
Consumer Choice
1
Demand Review
1.
2.
3.
4.
5.
6.
7.
8.
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?
Name 10 fast food places
2
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
Changes
in
price
curve. Rather, the entire demand curve shifts.
• A shift means that at the same prices, more
DON’T
shift
people are willing and able to purchase that
good.
the
curve!
This is a change in demand, not a change in
quantity demanded
3
Change in Demand
Price of Cereal
Demand
Schedule
Price
$5
Quantity
Demanded
$5
10
$4
20
What if cereal
makes you smarter?
4
3
2
$3
30
$2
50
1
$1
80
o
Demand
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
4
Change in Demand
Demand
Schedule
Price
Quantity
Demanded
$5
10
$4
20
Price of Cereal
$5
4
3
2
$3
30
$2
50
1
$1
80
o
Demand
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
5
Change in Demand
Demand
Schedule
Price
Quantity
Demanded
$5
10
$4
20
Price of Cereal
$5
4
3
2
$3
30
$2
50
1
$1
80
o
Demand
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
6
Change in Demand
Demand
Schedule
Price
Quantity
Demanded
$5
10 30
$4
20 40
Price of Cereal
$5
4
3
2
$3
30 50
$2
50 70
1
$1
80 100
o
Demand
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
7
Change in Demand
Demand
Schedule
Price
Quantity
Demanded
$5
10 30
$4
20 40
Price of Cereal
Increase in Demand
Prices didn’t change but
people want MORE
cereal
$5
4
3
2
$3
30 50
D1
$2
50 70
1
$1
80 100
o
Demand
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
8
Change in Demand
Price of Cereal
Demand
Schedule
Price
$5
Quantity
Demanded
$5
10
$4
20
4
What if cereal
causes baldness?
3
2
$3
30
$2
50
1
$1
80
o
Demand
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
9
Change in Demand
Demand
Schedule
Price
Quantity
Demanded
$5
10
$4
20
Price of Cereal
$5
4
3
2
$3
30
$2
50
1
$1
80
o
Demand
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
10
Change in Demand
Demand
Schedule
Price
Quantity
Demanded
$5
10
$4
20
Price of Cereal
$5
4
3
2
$3
30
$2
50
1
$1
80
o
Demand
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
11
Change in Demand
Demand
Schedule
Price
Quantity
Demanded
$5
10
$4
20
Price of Cereal
$5
4
3
2
$3
30
$2
50
1
$1
80
o
Demand
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
12
Change in Demand
Demand
Schedule
Price
Quantity
Demanded
$5
10
$4
20
Price of Cereal
$5
4
3
2
$3
30
$2
50
1
$1
80
o
Demand
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
13
Change in Demand
Demand
Schedule
Price
Quantity
Demanded
$5
10 0
$4
20 5
Price of Cereal
$5
Decrease in Demand
Prices didn’t change but
people want LESS cereal
4
3
2
$3
30 20
$2
50 30
1
$1
80 60
o
D2
10
20
30
40
50
60
Demand
70
Quantity of Cereal
80
Q
14
Change in Demand
Price of Cereal
Demand
Schedule
Price
$5
Quantity
Demanded
$5
10
$4
20
4
What if the price
of MILK goes up?
3
2
$3
30
$2
50
1
$1
80
o
Demand
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
15
What Causes a Shift in Demand?
5 Shifters (Determinates) of Demand:
1. Tastes and Preferences
2. Number of Consumers
3. Price of Related Goods
4. Income
5. Future Expectations
Changes in PRICE don’t shift the curve. It
only causes movement along the curve.16
Tastes and Preferences
Good examples here are fads in fashion or diet.
When an item is popular or we have a preference for
it, DEMAND increases.
Examples: Silly-bands, Beats-by-Dre
When the item loses popularity, DEMAND decrease.
17
Number of Consumers
Demand for a product is based upon the number of
potential consumers.
On game day afternoons in
Athens the DEMAND for
food and beverages
increases.
By the next morning,
DEMAND has decreased
with the departure of fans.
18
Prices of Related Goods
The demand curve for one good can be affected by a
change in the price of ANOTHER related good.
1. 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 Oreos falls, demand for the genaric brand
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..19.
Substitutes
20
Substitutes
21
Substitutes
22
Substitutes
23
Substitutes
24
Substitutes
25
Substitutes
26
Complements
27
Income
The incomes of consumer change the demand, but
how depends on the type of good.
1. Normal Goods
– As income increases, demand increases
– As income falls, demand falls
– Ex: Luxury cars, Sea Food, jewelry, homes
2. Inferior Goods
– As income increases, demand falls
– As income falls, demand increases
– Ex: Top Ramen, used cars, used clothes,
28
Inferior Goods
29
Future Price Expectations
When you hear that the latest I-Phone will be sold
at half-price during the month of December your
DEMAND for it now _________________.
Decreases
However, if you hear that the price of the I-Phone
will double for the Christmas shopping season,
Increases
your DEMAND for it now ________________.
30
Change in Qd vs. Change in Demand
Price of Cereal
P
$3
There are two ways to increase
quantity from 10 to 20
A
C
B
$2
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)
D2
D1
o
10
20
Quantity of Cereal
Q Cereal
Practice
First, identify the determinant (shifter) then
decide if demand will increase or decrease
Shifter
Increase or
Decrease
Left or Right
1
2
3
4
5
6
7
8
32
Practice
First identify the determinant (Shifter). Then
decide if demand will increase or decrease
1.
2.
3.
4.
5.
6.
7.
8.
Hamburgers (a normal good)
Population boom
Incomes fall due to recession
Price for Chicken Sandwiches 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
33