Econ 2000 - Supply and Demand Section: Applications and Extensions
Slide 1-4: Intro
We are another step up in climbing the economic mountain and the next step is the
Supply and Demand one which students in this class often consider to be the hardest so
make sure you stay with me and keep coming to class because I will take you through it
step by step.
Slide 5: Law of demand
 This just means that when the price goes up, the quantity demanded goes down
(and when price goes down the quantity demand goes up). You already know
this!
 We read graphs like we read everything else in this country, from left to right. So
a downward sloping curve (running down hill) means that when one goes up the
other goes down. (ex. GPA and hours partying or GPA and hours smoking illegal
substances).
Slide 6: Deriving the demand curve
Ex. Poll the class about the amount of pizzas they would buy if a large pizza is $8, $10,
$12, $15, $20
Ex. Kashi Honey Almond Flax Cereal
Price
Quantity Demanded
$4.50
0
$4.00
1
$3.50
2
$3.00
3
$2.50
4
Graph:
P
D
Q
1
Slide 7: The Demand Curve
Another way to think of it is that the height of the demand curve represents the marginal
value derived by the consumption of that unit (marginal value of consumption is equal to
the maximum willingness to pay). At 1 box of cereal, the maximum amount that I am
willing to pay for that first box is $4.00. At 4 boxes of cereal, the most I am willing to
pay for that fourth box is $2.50.
Slide 8: Consumer Surplus
 Ex. Who missed lunch? How much would you pay for a pizza? What is the
consumer surplus.
 Ex. If the price is $3.50. What is the consumer surplus of the first unit, the
second unit, etc. add up the consumer surplus of all the units to get the consumer
surplus (above price but below the demand curve).
 If price goes up, then consumer surplus goes down. Ex. return to student pizza
example
 If price goes down, then consumer surplus goes up.
Graph:
P
D
Q
Slide 9: Demand vs. Quantity Demanded
The most missed question in all of principles of economics classes (red ink question of
the year).
Ex. Change in quantity demanded is a change between two points on the same curve.
 A move from point A to point B: increase in quantity demanded
 A move from point B to point A: decrease in quantity demanded
Ex. Your out at the club and there is a drink special that goes from 11:00 – 12:00, so all
drinks are cheaper. This will increase you quantity demanded for alcohol.
Graph:
2
P
D
Q
Ex. What causes a change in quantity demanded of Budweiser beer.
Slide 10: Demand Vs. Quantity Demanded
Ex.. A change in demand is a change from one demand curve to another.
A move from D1 to D2: Increase in Demand
A move from D2 to D1: Decrease in Demand
P
D2
D1
Q
Ex. What causes a change in the demand for Budwieser beer (a change in the price of
Miller, change in income, etc.).
Ex. Think about a romantic relationship: as your significant other drinks you reach a
different stage in the same relationship (movement along the curve). Trading up to a new
significant other is a whole new relationship:
Graph:
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Slide 11: Change in Consumer Income
1. Change in consumer income:
Ex. What is a product that you don’t like, but buy because it is cheap. What is a product
that you would like to buy but is too expensive.
 Normal goods: (shrimp) When income increases, demand for a normal good
increases (direct relationship). I  DN I  DN 
 Inferior goods: (Roman Noodles) When income increases, demand for an inferior
good decreases (inverse relationship). I  DI I  DI
Graph:
P
D2
D3
D1
Q
Slide 12: Change in the number of consumers (1)
2. Change in the number of consumers: Imagine if the class had twice as many people
when deriving the demand curve (demand would shift right)? Half as many people
(demand would shift left)?
Ex. During the summer, when everybody leaves, the demand for goods falls.
Slide 13: Change in the number of consumers (2)
Watch I Am Legend Video Clip (1:43): The world’s population has been decimated to
the point where there is only Will Smith left and so he sets up a number of mannequins to
talk too to keep sane. The loss in number of consumers has drive demand so low, that
price is actually zero.
Slide 14: Change in the price of a related good
 Substitutes: (butter and margarine) When the price of a good increases, the
demand for its substitute good increases (direct relationship). P  Dsub P
 Dsub
 Compliments: (peanut butter and jelly) When the price of a good increases, the
demand for its complimentary good decreases (inverse relationship). P 
Dcomp P  Dcomp
Slide 15: Changes in expectations
Ex. If you thought the price of gas was going to go down to $2.00 a gallon tomorrow,
would you fill up your tank now, or wait until tomorrow?
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

Change in expected price (NOT CURRENT PRICE!): If you expect future
price to increase, you will demand more now (direct relationship) Pfut  D
Pfut  D
Change in expected income: If you expect future income to increase, then you
will demand more now (direct relationship) Ifut  D
Ifut  D
Think, if you knew you were going to have a lot more money in the future then
you would start spending now (even if you did not have it yet, you would borrow
and/or run up credit and then repay it when you had the money. You would make
it rain!).
Slide 16: Changes in tastes and preferences (I include change in demographics into this
category, which your book includes separately).
Ex. Compare the level of demand for a Britney Spears Poster today compared to eight
years ago. What about Eminem posters? Originally he was unpopular then he signed
with Dr. Dre and became very popular for a while then kind of tapered off.
Ex. A report indicating that tuna fish has dangerous levels of mercury would cause the
demand for Tuna fish to go down.
Ex. What do you think will happen to the demand for Michael Phelps posters after he
won the eight gold medals? What about after he got caught with the bong pipe?
Slide 17: Shifting Demand: change in consumer tastes and preferences
Watch Hudsucker Proxy: a change in demand (3:00)
Slide 18: Examples
1. The demand for beef would increase
2. The demand for steak would decrease
3. Nothing: The quantity demanded for milk would increase (shift along the curve)
Slide 19: law of supply
The more money we can get for a good, the more we want to sell
 This just means that when the price goes up, the quantity supplied goes up (and
when price goes down the quantity supplied goes down). You already know this!
 We read graphs like we read everything else in this country, from left to right. So
a upward sloping curve (running up hill) means that when one goes up the other
goes down. (ex. GPA and hours studying).
Slide 20: Deriving the supply curve
Ex. Poll the class about how many people would be willing to tutor somebody for $3 an
hour? $5, $8, $15 an hour (or Naked Supply Curve)
Ex. Joab’s Rock Stand (not rocks as in drugs, but as in actual rocks)
Price
Quantity Supplied
0
0
$.50
1
$1.00
2
$1.50
3
$2.00
4
5
Graph:
P
S
Q
Slide 21: The height of the supply curve
Or you can think of the height of the supply curve as the opportunity cost of producing
that additional unit. How can it be both? The minimum price required to induce a
supplier to sell a unit is exactly the marginal cost of producing it. The minimum price I
am willing to accept for the first cup of rocks is $0.50.
Slide 22: Producer Surplus
Producer Surplus is different from profit. Producer Surplus is the net gains of all people
who produced the good (including those who are employed by the firm), not the benefit
that accrues to the owners of a company.
 Ex. Who owns a car? What value do you place on your car? What is the producer
surplus if I bought it for some amount?
 Ex. If the price is $1.50, how much producer surplus for the first unit, second
unit, etc. Add up the whole area until you get the total producer surplus (area
above the supply curve bit below price.
 If price goes up, producer surplus goes up. If price goes down, producer surplus
goes down.
Slide 23: Example of consumer and producer surplus
Watch Pretty Woman Clip: Consumer and Producer Surplus (2:09)
Edward’s Max willingness to pay: $4,000 CS = $1,000
Vivian’s Min willingness to accept: $2,000 PS = $1,000
Price: $3,000
Slide 24: Changes in Supply vs. Quantity Supplied
Ex. Change in quantity supplied is a change between two points on the same curve.
 A move from point A to point B: increase in quantity supplied
 A move from point B to point A: decrease in quantity supplied
What would cause a change in the quantity supplied of Budweiser beer
Graph:
6
P
S
Q
Slide 25: Supply Vs. Quantity Supplied
Ex.. A change in supply is a change from one supply curve to another.
A move from S1 to S2: Increase in Supply
A move from S1 to S3: Decrease in Supply
P
S3
S1
S2
Q
Ex. What causes a change in the Supply of Budweiser beer (an increase in the price of
Barley, a new and improved fermenting process, an increased tax on beer etc.).
Slide 26: Change in resource price
 Ex. If the price of steel goes up (like it did when President Bush imposed the
steel tariff in 2002) then there is a reduction in the supply of all products that use
steel (automobiles).
 Ex. If the cost of lemons goes up then you will make less lemonade.
 Ex. workers are a resource used to make goods, and increase in wages (minimum
wage for example) will decreases supply
Slide 27: Change in Technology
Ex. With the invention of the printing press, there is an increase in the supply of books
and newspapers.
Ex. With the invention of frozen concentrate lemonade comes an increase in the supply
of lemonade
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Slide 28: Change in nature and politics
Ex. OPEC (Organization of Petroleum Exporting Countries) reduced the supply of oil
with the 1973 oil embargo
Ex. a crop freeze reduces that destroys the lemon crop will reduce the supply of lemonade
Slide 29: Change in taxes
Ex. Previously mentioned yacht example: a luxury tax on yachts drastically reduced the
supply of yachts
Ex. If the government imposed a tax on lemonade that made you give them half the
revenue for each cup, then you would sell less lemonade.
Slide 30: elasticity of demand (depends on availability of substitutes)
A. Inelastic demand: for goods where there are not a lot of substitutes and goods that are
addictive or necessary. Ex. cigarettes
B. Elastic demand: goods with a lot of available substitutes Ex. Hamburgers
Ex. Graphs: Cigarettes and Hamburgers
P
DH
Dc
Q

Perfectly inelastic: Vertical demand curve, quantity demanded stays the same
regardless of price. Ex. chemotherapy (looks like letter I)
Graph:
P
D
Q
8

Perfectly elastic: Horizontal demand curve, quantity demanded is zero if the price
is above $1, and quantity demanded is infinite if it is less than $1. ex. Farmer
Jones’ Wheat
Graph:
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D
Q


The narrower the definition of the good, the more elastic it is (McDonalds
hamburgers and hamburgers, Marboro cigarettes and cigarettes).
It works the same way with supply curves as well.
Graph:
P
S
S1
2
Q
Slide 31: Market Equilibrium!
Philosophically: The perfect blending of two forces into a state of harmony (ying-yang)
Economically: When quantity demanded is equal to quantity supplied.
Graph:
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P
S
P*
D
Q
Q*
Slide 32: Market Equilibrium!
 Remember the demand curve is the buyer’s maximum willingness to pay and the
supply curve is the seller’s minimum willingness to accept. So all beneficial trade
will happen when the demand curve is above the supply curve.
 When the supply curve is above the demand curve, the trade will not be mutually
beneficial.
 Producer surplus + Consumer surplus is maximized
Graph:
P
S
P*
D
Q*
Q
Slide 33: Market Equilibrium!
No Excess Supply: Qs > QD (price is too high)
No Excess Demand: QD > QS (price is too low)
Graph:
10
P
S
P*
D
Q
Q*
Slide 34: How does a change in demand affect equilibrium price and quantity
A change in demand causes price and quantity to move in the same direction: D  P,
Q / D  P, Q
Graph:
P
S
P*
D
Q*
Q
Ex. A new study shows that Vitamin C can help prevent some forms of cancer!
Slide 35: Changes in Supply
How does a change in Supply affect equilibrium price and quantity
A change in demand causes quantity to move in the same direction, price to move in the
opposite direction: S  P, Q / S  P, Q
Graph:
11
P
S
P*
D
Q
Q*
Ex. A freeze destroyed the orange crop in Florida
Slide 36: Double Shifts
Ex. A new study shows that Vitamin C can help prevent some forms of cancer and a
freeze destroyed the orange crop in Florida.
D  P, Q
S  P, Q
P, Q?
Graph:
P
S
P*
D
Q*
Q
Do possible double shift activity here (or at least post it on blackboard)
Slide 37: labor market
Just like there is a market for goods, there is a market for labor. It works the same way.
Graph:
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W
SL
W*
DL
E
E*
Slide 38: labor demand
It is important to remember that firms demand your labor (ask student where he or she
works). You are not demanding that you work, but firms demand your labor
Graph:
W
DL
E
Slide 39: Changes in demand for labor
Dl   W E
Dl   W E
Graph:
W
SL
W*
DL
E*
E
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Slide 40: Labor Supply
People supply labor. People (the laborers) will be the ones who supply labor (use
previous example).
Graph:
W
SL
E
Slide 41: Changes in the supply of labor
Sl   W E
Sl   W E
Graph:
W
SL
W*
DL
E*
E
Slide 42: Linking the markets
How is the resource (Labor) market related to the market for goods and services?
The two markets are interrelated. What goes on in one market affects what happens in
another market.
Slide 43: Linking the markets
Ex. If the demand for cars increases, then the demand for labor to produce cars will
increase.
Graph:
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Slide 44: Price Floor
 When the price is not allowed to go below a certain level (think about a real floor,
you can’t go below it).
 If the floor is above equilibrium, it creates a surplus, but if the floor is below
equilibrium then it does nothing. The market will still get to equilibrium (alright
if floor is below you, but if the floor is above you it causes a problem).
Graph: Quantity supplied increases and quantity demanded decreases
P
S
P*
D
Q
Q*
Slide 45: Application: Minimum Wage (1)
raising the minimum wage increases unemployment. However, those who keep their job
at the new wage will be better off.
Graph:
W
SL
W*
DL
E*
E
Slide 46: Application: Minimum Wage (2)
Watch Video Clip: Stossel 2011: The Unintended Consequences of Minimum Wage
(4:29) – may not work through PowerPoint, must open it directly from USB.
Slide 47: Price ceiling
 When the price is not allowed to go above a certain level (think about a real
ceiling, you can’t go above it)
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
If the price ceiling is below equilibrium price it creates a shortage, if it is above
equilibrium price then it does nothing. The market will still get to equilibrium
(alright if the ceiling is above you, but if it is below you it causes a problem).
Graph: Quantity demanded increases and quantity supplied decreases
P
S
P*
D
Q*
Q
Slide 48: Disaster Markets
 Price ceilings were used to prevent price gouging in Charleston, South Carolina.
Before the regulation was imposed, the prices sky-rocketed so that bags of ice went
from $1 up to $10, gasoline was close to $11 a gallon, plywood cost $200 per sheet,
etc.
 This caused people to bring in these goods from outside of the city in order to sell
them at higher prices. Once price controls that made it illegal for people to sell goods
at a price higher than the pre-hurricane level were instituted, than the inflow of goods
stopped.
As a result, gasoline powered electric generators were distributed to friends and families,
rather than the highest bidder (so businesses, including those that operated ATM’s were
out of luck – remember there are many ways to ration goods, price is most efficient).
Some generators were taken out of the city and sold in for higher prices in less damaged
markets
 Watch: Stossell Myth 2 – Price Gouging (4:35)
Slide 49: Rent Controls
Government steps in and says that you can not charge more than a certain amount for
rent. A price ceiling intended to protect individuals from high housing prices.
Graph:
16
P
S
P*
D
Q*
Q
1. Decline in supply of future rental housing: price controls cause investors to take
their money elsewhere whether then build new and better rental housing
2. The quality of rental housing will deteriorate. Since landlords can’t raise price,
they have no incentive to keep apartments nice, so quality deteriorates (Morgantown).
3. Non-Price methods of Rationing: People will rent apartments based on lines
(waiting lists), discrimination, as favors to friends and families. (No longer go to
those who are willing to pay the most).
4. Housing mismatch: people will stay in apartments that do not suit them (too much
room, because they are afraid that they might not find another one).
5. Black markets: People will make an under the table payment for apartments.
However, black markets operate outside of the legal system so you have more
delinquent goods and contracts (apartments do not have to be up to code), more
violence, higher prices, and higher profits for those who do not get caught. (Christmas
gift of the year).
Slide 50: Black Markets
 Should we legalize drugs (marijuana)? What are the costs and benefits?
1. Benefits: safer and less potent drugs, more regulation, tax revenue, less crime,
better use of police resources, less police corruption, etc.
2. Costs: possibly have more people use drugs, drugs are easier to get, less
productive society
 Should we legalize prostitution? What are the costs and benefits?
1. Benefits: safer prostitutes, more regulation, tax revenue, less crime and violence,
better use of police resources, etc.
2. Costs: possibly have more people visit prostitutes, prostitution is more visible,
more marital strife, etc.
 Note on black markets: Baptists and Bootleggers for Prohibition (1920-1933),
legalizing drugs.
 Why are we arguing these crimes and not other crimes like theft and murder?
Because these crimes are based on voluntary exchange where both people expect to
be made better off. In such cases, legal markets work better than illegal markets.
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Slide 51: Impact of a tax – Lessons from Snooki
Watch this short video clip of how the tanning tax has altered Snooki’s behavior and
witness the great editing of one of our economics professors.
Video Clip: Snooki Tanning Tax upgraded edition – (0:30)
Slide 52: Impact of a tax
Ex. Graph
P
S
P*
D
Q
Q*
Slide 53: Deadweight loss
Ex. Think if the trade had not happened during the candy game, the numbers would have
been lower.
This area does not go to the government but is lost. The top part of the triangle is that
lost in consumer surplus, the bottom part is that which is lost to producer surplus.
Slide 54: Tax Incidence
 On whose shoulders does the tax fall? Buyers or Sellers?
 It does not depend on whom the tax is imposed:
Graph: A tax imposed on buyers shifts the demand curve left instead of the supply curve.
But everything else remains unchanged.
P
S
P*
D
Q*
Q
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Slide 55: Tax incidence does depend on elasticity
Ex. 1. Demand is more inelastic
2. Supply is more inelastic
Slide 56: Average Tax Rate
Ex. K-fed makes $100 and pays $5 in taxes, so the ATR = 5/100 = 0.05 or 5%
Slide 57: Tax System
1. A person makes $200 and pays $20 in taxes, so the ATR = 20/200 = 0.10 or 10%
2. A person makes $200 and pays $5 in taxes, so the ATR = 5/200 = 0.025 or 2.5%
3. A person makes $200 and pays $10 in taxes , so the ATR = 10/200 = .05 or 5%
makes
$100
$200
$200
$200
taxed
ATR
$5
$20
$5
$10
type
5%
10%
2.50%
5%
progressive
regressive
proportional
Slide 58: Marginal tax rate
Ex. K-fed gets a raise and makes $200 and pays $15 (ATR = 7.5%) in taxes, so the MTR
is $15 - $5 = $10 / $200 - $100 = $100 so the MTR is $10/$100 = .10 or 10%.
Ch. 4
Income
20,000
30,000
40,000
Tax
Liability
1,000
3,000
10,000
ATR
5%
10%
25%
MTR
20%
70%
Progressive
Slide 59: fairness and efficiency
1. Is the tax system economically efficient - No
Graph:
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SL
W*
DL
E*
E
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2. Is the progressive tax system fair (subjective)?
 Ex. What if I redistribute points from people with A’s in the class to people with
F’s class (is that fair?)
 How much should the richest 1% of Americans (those that make over $300,000 a
year) pay in taxes (5% of all taxes, 10% of all taxes?). How much do you think is
fair?
 How much do you think they actually pay? (As of 2006, the richest 1% pays
39.9% of all income taxes. Top 5% pays 60.1%. Top 50% pays 97% (bottom
half of the country pays little to no income taxes).
Slide 60: The Laffer Curve
Graph:
Higher tax rates could result in lower tax revenue!
Slide 61: Subsidies
Graph:
P
S
P*
D
Q*
Q
Ex. The government has been known to subsidize agricultural producers as well as
education.
Ex. the cost of subsidies is often underestimated. If the government put a $50 subsidy on
treadmills the cost is assumed to be 50 x 10 million = 500 million, when it would really
be 50 x 11 million = 550 million. It also ignores the cost of the deadweight loss incurred
by imposing a tax to pay for the subsidy.
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Slide 62: Farm Subsidies
Watch Stossell: Micro – Farm Subsidies (4:46)
Slide 63: Review (1)
1. Demand: as the price increases, quantity demanded decreases (inverse relationship)
Supply: as the price increases, quantity supplied increases (direct relationship)
2. Consumer Surplus: area above price but below the demand curve
Producer Surplus: area below price but above the supply curve
3. Shifters of demand are:
 Change in consumer income: I  DN / I  DI
 Change in number of consumers:
 Change in price of related good: P  Dsub / P  Dcomp
 Change in expectations: Pfut  D / Ifut  D
 Change in tastes and preferences:
4. Shifters of supply are:
 A change in resource price
 A change in technology
 A change in nature and politics
 Changes in taxes
5. Characteristics of market equilibrium
 Occurs at the intersection of supply and demand curves
 Quantity demanded = Quantity supplied
 Where you find efficient quantity and price
 No excess demand and supply
6. I will give you two situations, tell me what happens to equilibrium price and quantity
Slide 64: Review (2)
7. As wage decreases, firms will demand more labor. As wage increases, employees will
supply more labor
8. A price ceiling under the equilibrium price will cause a shortage
A price floor above the equilibrium price will cause a surplus
9. The impact of a tax
Know-:
 How much buyer pays
 How much seller receives
 Amount of a tax
 Amount sold after taxes
 Amount of government revenue
 Amount of Deadweight loss
10. ATR = Tax Liability / Taxable Income
MTR = Change in Tax liability / Change in Taxable income
11. Know what the Laffer curve looks like and how it works.
12. Understand the impact of subsidies and where that money comes from
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