ECONOMICS
What does it mean to me?
Part IV:
•Supply & Demand
•Shifts in Supply & Demand
•Linked Markets
•Complementary Goods
•Substitute Goods
•Change in Quantity Demanded
•Change in Quantity Supplied
LAW of SUPPLY
LAW of DEMAND
The LAW of SUPPLY states that producers are
willing and able to produce more of a good as
its price rises.
S (supply)
$80
P
R
I
C
E
$70
$60
$50
$40
$30
$20
….or produce less
of a good as its
price decreases.
$10
0
100 200 300 400 500 600
QUANTITY
(Food, sleep, date,
study, etc.)
The Ps and Qs have an inverse relationship.
Math:
Y = mX + b
Economics: P = mQ + b
S (supply)
$80
P
R
I
C
E
$70
$60
$50
$40
$30
$20
$10
0
100 200 300 400 500 600
QUANTITY
(Food, sleep, date,
study, etc.)
The LAW of DEMAND states that consumers
are willing and able to consume less of a good
as its price rises. …..or consume more of a
good as its price
$80
decreases.
P $70
R
I
C
E
$60
$50
$40
$30
$20
D (demand)
$10
0
100 200 300 400 500 600
QUANTITY
(Food, sleep, date,
study, etc.)
The Ps and Qs have an inverse relationship.
Math:
$80
P
R
I
C
E
Y = -mX + b
Economics: P = -mQ + b
$70
$60
$50
$40
$30
$20
D (demand)
$10
0
100 200 300 400 500 600
QUANTITY
(Food, sleep, date,
study, etc.)
Table A-1 Novels Purchased by Emma
*Mankiw
Figure A-3 Demand Curve
*Mankiw
Figure A-4 Shifting Demand Curves
*Mankiw
Figure A-5 Calculating the Slope of a
Line
*Mankiw
Putting these two curves together gives us the point of
EQUILIBRIUM…equilibrium gives us the optimum point
of production at the price people are willing to pay.
$80
P
R
I
C
E
S (supply)
$70
$60
$50
E (equilibrium)
$40
$30
$20
D (demand)
$10
0
100 200 300 400 500 600
QUANTITY
(Food, sleep, date,
study, etc.)
In a market economy,
the price of a good
signals to consumers
the cost of producing
a good. MARKET
PRICE also signals to
producers the value
that consumers place
on a good. Market
price coordinates the
actions of consumers
(demand) and
producers (supply).
What happens when
changes occur in the
economy?
How do these
changes affect
supply and demand?
The Chicago
Cubs have a
winning season.
What happens to
the price of
World Series
tickets?
Does this affect the supply or
demand curve?
Chart I: Demand increase (P ; Q )
The Chicago Cubs have a winning season. What
happens to the price of World Series tickets?
S
Price
goes
up
E1
P P1
R
P0
I
E0
C
E
D1
D0
Q0 Q1
QUANTITY
Quantity
goes up
Gas prices
increase
dramatically.
What happens
to the market
for big
automobiles?
Does this affect the supply or
demand curve?
Chart II: Demand decrease (P ; Q )
Gas prices increase dramatically. What happens to the
market for big automobiles?
S
Price
goes
down
P
R
P0
I
P1
C
E
E0
E1
D1
Q1 Q0
QUANTITY
D0
Quantity
goes
down
Plentiful oil fields are
discovered in Nevada.
What happens to the
market for oil?
Does this affect the supply or
demand curve?
Chart III: Supply Increase (P ; Q )
Plentiful oil fields are discovered in Nevada. What happens to
the market for oil?
S0
Price
goes
down
S1
P
R
P0
I
P1
C
E
E0
E1
D
Q0 Q1
QUANTITY
Quantity
goes up
A drought has depleted
the corn crop. What
happens to the market
for corn?
Does this affect the supply or
demand curve?
Chart IV: Supply Decrease (P ; Q )
A drought has depleted the corn crop. What happens
to the market for corn?
S1 S0
Price
goes
up
P
P1
R
P0
I
E1
E0
C
E
D
Q1 Q0
QUANTITY
Quantity
goes
down
Let’s look at a shift using numbers:
The government adds a
$1 tax to cigarettes.
Does this affect supply or
demand?
Chart IV: Supply Decrease (P ; Q )
Congress adds $1 tax to cigarettes.
S1 S0
$6
Price
goes
up
P
R
I
C
E
$5
$4
$3
This area
represents
the $1 tax.
E1
E0
$2
D
$1
0
1K 2K 3K 4K 5K
QUANTITY
Quantity
goes
down
LINKED
MARKETS
LINKED MARKETS pertain to
those goods which affect other
goods.
For instance:
Coffee => Cream
Peaches => Blueberries
Vegetarianism => Leather Coats
Coffee beans are
hit by an unusual
frost. What
happens to the
price and quantity
of cream?
Which of the charts (I, II, III, or
IV) will pertain to these
markets?
Chart IV represents the
depleted coffee crop.
Price
goes
up
Quantity
goes
down
The demand for cream decreases
as graphed in Chart II.
Price
goes
down
Quantity
goes
down
So, a decrease in the supply of
coffee causes the price of coffee
to rise. People who do not want
to pay the high price for coffee
will have a reduced demand for
cream to go into the coffee.
Coffee and cream are considered
complementary goods.
A complementary good is defined as a
good who, when its price rises causes
a decrease in the demand of another
good (or visa versa).
Complementary goods have an
inverse relationship between price of
one good and demand for another.
Pa
Db
Pa
Db
A virus attacks
broccoli. What
happens to the price
and quantity of
brussels sprouts?
Which of the charts (I, II, III, or
IV) will pertain to these markets?
Chart IV represents the
depleted broccoli crop.
Price
goes
up
Quantity
goes
down
Chart I represents the increase
in demand of brussels sprouts.
Price
goes
up
Quantity
goes up
So, the virus creates a
diminished supply of
broccoli which drives up the
price. Consumers who don’t
wish to pay the higher price
will look for a substitute
good such as brussels
sprouts.
A substitute good is defined as a
good who, when its price rises
causes a increase in the demand
of another good (or visa versa).
Substitute goods have a direct
relationship between price of one
good and demand for another.
Pa
Db
Pa
Db
Which of the charts (I, II,
III, or IV) will pertain to
these markets?
The demand for the new cloth
increases as graphed in Chart I.
Price
goes
up
Quantity
goes up
The demand for cotton decreases as
graphed in Chart II.
Price
goes
down
Quantity
goes
down
So…..people
using, or
demanding, less
cotton will cause
the price to go
down and less of
the fabric to be
made.
Are these goods
substitute or
complementary?
Vegetarianism expands
greatly, what happens to the
P & Q of leather coats?
Which of the charts (I, II, III,
or IV) will pertain to these
markets?
Chart I shows what happens to
the P & Q of vegetables.
Price
goes
up
Quantity
goes up
The demand for beef decreases as
graphed in Chart II.
Price
goes
down
Quantity
goes
down
Chart IV shows what happens to
the P & Q of leather coats.
Price
goes
up
Quantity
goes
down
So…..the increase in the purchase of
vegetables will create a lack of demand
for beef. This will cause fewer cows to be
slaughtered, creating less leather to be
available, or a decrease in supply, which
will cause the price to go up on leather
coats.
Demand and
Supply:
Single Markets
where both curves
shift.
Now let’s see what
happens when an
event occurs and
impacts both the
supply and the
demand….
What is the short term
impact of the
government legalizing
marijuana?
Will this affect the supply
curve or the demand curve?
Or both?
Chart V: (D ; S )
What is the short term impact of the government legalizing
marijuana?
S
The demand
curve moves
right
P
indicating
an increase. R P
0
The supply C
curve moves E
right
indicating
an increase.
E1
E0
I
S1
D1
D0
Q0
QUANTITY
Q1
Chart V: (D ; S )
This chart shows and increase in both supply and demand.
As a result:
S
PRICE
P0
S1
E1
E0
D1
D0
Q0
Q1
QUANTITY
Quantity
will
increase
Frost hits coffee growing
areas, while coffee is
“cleared” as a cause of
cancer.
Will this affect the supply
curve or the demand curve?
Or both?
Chart VI: (D ; S )
Frost hits coffee growing areas, while coffee is “cleared” as a
cause of cancer.
S
The demand
curve moves
P1
right
P
indicating
an increase. R P
0
E1
S0
E0
I
The supply C
curve moves E
left
indicating
an decrease.
1
D1
D0
Q0
QUANTITY
Chart VI: (D ; S )
In this chart, demand will increase while supply decreases.
This will result in:
S
1
E1
P
S0
P1
Price will R
P0
increase.
E0
I
C
E
D1
D0
Q0
QUANTITY
Quantity will be
indeterminate.
A sturdy, shippable
tomato that tastes
like cardboard is
introduced into the
market.
Will this affect the supply
curve or the demand curve?
Or both?
Chart VII: (D ; S
)
A sturdy, shippable tomato that tastes like cardboard is
introduced into the market.
S0
The demand
S1
curve moves
left
P
indicating
an decrease. R P
E
I
0
The supply C P
1
curve moves E
right
indicating
an increase.
0
E1
D1
Q0
QUANTITY
D0
Chart VII: (D ; S
)
When demand is decreased and supply is increased, this
results in:
S0
PRICE
Price will
decrease.
P0
E0
P1
E1
D1
Q0
S1
D0
Quantity will be
QUANTITY indeterminate.
Newspapers report
high levels of
salmonella in
chickens, many
must be destroyed.
Will this affect the supply
curve or the demand curve?
Or both?
Chart VIII: (D ; S )
Newspapers report high levels of salmonella in chickens, many
must be destroyed.
S1 S0
The demand
curve moves
left
P
indicating
E1
an decrease. R P
E
I
The supply C
curve moves E
left
indicating
an decrease.
0
0
D1
Q1
Q0
QUANTITY
D0
Chart VIII: (D ; S )
This chart shows what happens when demand and supply are
both decreased.
S1 S0
PRICE
E1
P0
E0
D1
Q1
Q0
D0
QUANTITY
Quantity
will
decrease
Economics is
mostly about
changes--not
levels.
Several years ago, Baby M was born
to a surrogate mother who had been
paid $10,000 to give birth to the baby.
The birth mother changed her mind
and sued in court to have the child
returned to her. The judge agreed.
What impact did this have on the
supply of surrogate mothers?
What impact did this have on the
demand for babies born to surrogate
mothers?
Exercise One:
Using supply and demand
analysis, explain why the price
of roses always seems to rise just
before Valentine’s Day.
Using supply and demand
analysis, determine how a freeze
that kills half the rose crop
would affect the price of roses.
Using supply and
demand analysis,
determine how a
freeze that kills half
the rose crop would
affect the price of fine
chocolates.
Exercise Two:
Some time ago,the city
of Ft.Lauderdale had
an initiative on the
general election ballot
that asked voters to
raise the minimum
wage in that city to a
level 40 percent above
the national minimum
wage.
This year the initiative
would make the
minimum wage be $7.35
in Ft. Lauderdale and
$5.25 elsewhere.
•How would things in Ft. Lauderdale
have changed if the initiative had
passed?
•What would be the same?
•What would change?
•Predict the
effect of the
legislation on
the markets for
labor in Ft.
Lauderdale and
in the suburbs
outside the city.
•Would you
rather work in Ft.
Lauderdale or
outside the city
•Would you be
more likely to find
a job in Ft.
Lauderdale or
outside the city?
There is a small business
person who is planning to
re-locate to the Ft.
Lauderdale area.
*Would you advise the business person to set up business in Ft.
Lauderdale or in a suburb of Ft. Lauderdale? What is your
reasoning?
Exercise Three:
Suppose you run a lawn mower business. You charge $15 per standard size lawn
and can mow five lawns in an eight hour day. You currently have more people
asking you to mow their lawns than you can satisfy and estimate that you could
sign up as many as 25 additional customers. You have two strategies that will
permit you to expand your business.
Strategy One…….is to hire your
friend Jim to work for you. Jim
is a good worker who will work
for $8 an hour.
Strategy Two….is to rent a riding
lawn mower that will permit you
to mow seven lawns per day. Rent
for the riding mower is $100 per
week. Gas and oil for the mower
cost $25 per week.
OPTION 0:
Actually, there are 3 options--the first
being “status quo.”
($15 per lawn) X (25 lawns per week)
= $375 per week
OPTION 1:
Hire Jim to work by the hour.
It takes him 8 / 5 = 1.6 hours to mow a
lawn
Marginal Revenue per lawn = $15
Marginal loss per lawn = ($8 per hour)
X (1.6 hours to mow) = $12.80
$15 - 12.80 = $2.20 extra profit per
lawn
If Jim mows 25 lawns per week:
25 X $2.20 = $55 profit per week
YOUR NET REVENUE IS:
$375 + 55 = $430
OPTION 2:
Rent Lawn Mower
MARGINAL REVENUE
(7 lawns per day) X (5 days) = 35 lawns
per week
35 lawns X $15 per lawn = $525
MARGINAL LOSS = $125
YOUR NET REVENUE IS:
$525 -125 = $400
•Should you expand
your business? Why or
why not?
•Which strategy, if
any, should you use?
Why?
•If the riding lawn
mower permitted you to
mow 8 lawns per day,
would your strategy
change? Why or why
not?
OPTION 4:
Rent Lawn Mower (8 lawns per day)
MARGINAL REVENUE
(8 lawns per day) X (5 days) = 40 lawns
per week
40 lawns X $15 per lawn = $600
MARGINAL LOSS = $125
YOUR NET REVENUE IS:
$600 -125 = $475
CHANGE IN DEMAND
vs
CHANGE IN QUANTITY
DEMANDED
The Basic Determinants of Demand
are:
1) consumer tastes and preferences
2) number of consumers in the market
3) consumers’ money incomes
4) prices of related goods
5) consumer expectations about future
prices and incomes
1) Change in consumer tastes
A favorable change in consumer tastes means that
more of it will be demanded and shift the demand
curve rightward. Conversely, an unfavorable change
in consumer tastes means that less will be
demanded and shift the demand curve left.
Changes may occur because:
*a new product comes to the market
*health concerns
*fads
2) Number of buyers
An increase in the number of consumers in a market
means that more “stuff” will be demanded and shift
the demand curve rightward. Conversely, a decrease
change in consumers in a market means that less
“stuff” will be demanded and shift the demand curve
to the left.
Factors affecting numbers include:
*improvements in communication
*aging baby boomers
*increased life expectancy
3) Consumer Income
For most commodities, a rise in income causes an
increase in demand. Conversely, demand will
decline as incomes fall.
Commodities whose demand varies directly with
money income are called superior, or NORMAL
GOODS..
Similarly, rising incomes may cause demand for
hamburger and charcoal grilles to decline as
wealthier consumers switch to T-bones and gas
grilles. Goods whose demand varies inversely with
money income are called INFERIOR GOODS.
4) Prices of related goods
A change in the price of a related good may increase
or decrease the demand depending upon whether
the related good is a substitute good or a
complementary good.
*When two products are substitutes the price of one
and the demand for the other move in the same
direction.
*When two products are complements, the price of
one good and the demand for the other good move
in opposite directions.
5) Expectations of the future
Consumer expectations of higher future prices may
prompt them to buy now to “beat” the anticipated
price rise, thus increasing today’s demand.
Conversely, expectations of lower prices may delay
purchases.
A change in the demand schedule or, graphically, a
shift in the location of the demand curve is called a
CHANGE IN DEMAND. This is caused by a change
in one or more of the determinents of demand.
S
PRICE
P2
P0
P1
E0
E1
D2
D1
Q1 Q0
Q2
D0
QUANTITY
By contrast, a CHANGE IN QUANTITY
DEMANDED designates the movement of one point to
another--from one price quantity to another--on a fixed
demand curve, resulting from (I.e.) a change in price.
$80
P
R
I
C
E
$70
$60
$50
$40
$30
$20
D (demand)
$10
0
100 200 300 400 500 600
QUANTITY
Changes in Quantity Demanded
Price of IceCream
Cones
B
$2.00
A tax that raises the
price of ice-cream
cones results in a
movement along the
demand curve.
A
1.00
D
0
4
8
Quantity of Ice-Cream Cones
CHANGE IN SUPPLY
vs
CHANGE IN QUANTITY
SUPPLIED
The Determinants of Supply are:
1) resource prices
2) technique of production
3) taxes and subsidies
4) prices of other goods
5) price expectations
6) number of sellers in the market.
1) Resource Prices
An increase in the price of resources used in
production will increase production costs and
squeeze profits. This reduction in profits reduces
the incentive for firms to supply output at each
product price.
2) Technology
Improvements in technology enable firms to
produce units of output with fewer resources. Since
resources are costly, using fewer of them lowers
production costs and increases supply.
3) Taxes and subsidies
An increase in sales or property taxes will increase
production costs and reduce supply.
4) Prices of Other Goods
Firms that produce one good can sometimes use
their plant and equipment to produce alternative
goods. Higher prices of these “other goods” can
sometimes entice producers to switch production to
them in order to make more profit.
5) Expectation of future
Expectations of future prices can affect the
willingness of a producer to supply that product.
6) Number of sellers
The larger the number of sellers, the larger the
supply. As more firms enter an industry, the curve
moves to the right. As firms leave an industry the
curve shifts to the left.
A CHANGE IN SUPPLY means a change in the
entire schedule and a shift of the entire curve,
which is caused by a change in one or more of the
determinants of supply.
S1
P
P2
R
P0
I
P1
C
E
S0
E1
E0
E1
D
Q2 Q0 Q1
QUANTITY
S1
In contrast, a CHANGE IN QUANTITY
SUPPLIED is a movement from one point to
another on a fixed supply curve. The cause of which
is a change in price of a specific product.
S (supply)
$80
P
R
I
C
E
$70
$60
$50
$40
$30
$20
$10
0
100 200 300 400 500 600
QUANTITY
Change in Quantity Supplied
Price of IceCream
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
In 1993, Congress was expected to pass more
stringent gun control laws. How would consumer
expectations affect supply and demand?
If freezing weather were to destroy most of
Florida’s citrus crop, how might consumers react?
What would be their rationale?
The price of beef rises. How will this affect the
price of chicken?
International trade agreements such as NAFTA and
GATT have reduced foreign trade barriers on
American farm products. How does this affect
supply and demand? What determinant shifts the
curve?
The local grocer lowers the price of grapes, which
increases demand. Is this a change in demand or a
change in quantity demanded?
The price of coffee decreases. What happens to
the demand for cream? These two products are
called _____________.
Farmers anticipate the price of corn will rise in a
few months. What is likely to happen affecting
supply and demand?
The price of gasoline falls and, as a result, you
drive your car more. How will this affect demand
for complementary goods? What kinds of goods
are affected?
THE END
Compiled by Virginia Meachum, Economics Teacher,
Coral Springs High School, Broward County, FL