Unit 2: Supply, Demand,
and Consumer Choice
Do you see the cow?
1
Review
1. Explain the Law of Demand
2. Explain the Law of Supply
3. Identify the 5 shifters of demand
4. Identify the 6 shifters of supply
5. Define Subsidy
6. Explain why price DOESN’T shift the
curve. Arrggg matey !!!
7. Define Equilibrium
8. Define Shortage
9. Define Surplus
10.Identify 10 stores found in a mall
2
Putting Supply and
Demand Together!!!
3
Supply and Demand are put together to determine
equilibrium price and equilibrium quantity
Demand P Supply
S Schedule
Schedule $5
P Qd 4
P Qs
$5 10 $5 50
3
$4 20 $4 40
2
$3 30 $3 30
$2 50 1 $2 20
D
$1 80 o $1 10
10 20 30 40 50 60 70 80 Q
4
Supply and Demand are put together to determine
equilibrium price and equilibrium quantity
Demand P Supply
S Schedule
Schedule $5
P Qd 4
P Qs
$5 10 $5 50
3 Equilibrium Price = $3
$4 20 (Qd=Qs) $4 40
2
$3 30 $3 30
$2 50 1 $2 20
D
$1 80 o $1 10
10 20 30 40 50 60 70 80 Q
Equilibrium Quantity is 30 5
Supply and Demand are put together to determine
equilibrium price and equilibrium quantity
Demand P Supply
S Schedule
Schedule $5
P Qd 4
P Qs
$5 10
3
What if the price $5 50
$4 20 $4 40
2 increases to $4?
$3 30 $3 30
$2 50 1 $2 20
D
$1 80 o $1 10
10 20 30 40 50 60 70 80 Q
6
At $4, there is disequilibrium. The quantity
demanded is less than quantity supplied.
Demand P Supply
S Schedule
Schedule $5 Surplus
(Qd<Qs)
P Qd 4
P Qs
$5 10 How much is the $5 50
3 surplus at $4?
$4 20 Answer: 20 $4 40
2
$3 30 $3 30
$2 50 1 $2 20
D
$1 80 o $1 10
10 20 30 40 50 60 70 80 Q
7
How much is the surplus if the price is $5?
Demand P Supply
S Schedule
Schedule $5
P Qd 4
P Qs
$5 10
3
What if the Answer:
price 40 $5 50
$4 20 $4 40
2 decreases to $2?
$3 30 $3 30
$2 50 1 $2 20
D
$1 80 o $1 10
10 20 30 40 50 60 70 80 Q
8
At $2, there is disequilibrium. The quantity
demanded is greater than quantity supplied.
Demand P Supply
S Schedule
Schedule $5
P Qd 4
P Qs
$5 10 How much is the $5 50
3 shortage at $2?
$4 20 Answer: 30 $4 40
2
$3 30 $3 30
Shortage
$2 50 1 (Qd>Qs) D $2 20
$1 80 o $1 10
10 20 30 40 50 60 70 80 Q
9
How much is the shortage if the price is $1?
Demand P Supply
S Schedule
Schedule $5
P Qd 4
P Qs
$5 10 Answer: 70 $5 50
3
$4 20 $4 40
2
$3 30 $3 30
$2 50 1 $2 20
D
$1 80 o $1 10
10 20 30 40 50 60 70 80 Q
10
The FREE MARKET system automatically
pushes the price toward equilibrium.
Demand P Supply
S Schedule
Schedule $5
When there is a
P Qd 4
surplus, producers P Qs
lower prices
$5 10 $5 50
3 When there is a
$4 20 shortage, producers $4 40
2 raise prices
$3 30 $3 30
$2 50 1 $2 20
D
$1 80 o $1 10
10 20 30 40 50 60 70 80 Q
11
Shifting Supply and
Demand
12
Assume shifts in supply or demand change
equilibrium P and Q instantaneously
13
Supply and Demand Analysis
Easy as 1, 2, 3
1. Before the change:
• Draw supply and demand
• Label original equilibrium price and quantity
2. The change:
• Did it affect supply or demand first?
• Which determinant caused the shift?
• Draw increase or decrease
3. After change:
• Label new equilibrium?
• What happens to Price? (increase or decrease)
• What happens to Quantity? (increase or decrease)
Let’s Practice! 14
S&D Analysis Practice
Packet Activity 1-9 (pgs 43-45)
1. Before Change (Draw equilibrium)
2. The Change (S or D, Identify Shifter)
3. After Change (Price and Quantity After)
Analyze Hamburgers
1. Price of sushi (a substitute) increases
2. New grilling technology cuts production time in half
3. Price of burgers falls from $3 to $1.
4. Price for ground beef triples
5. Human fingers found in multiple burger restaurants.
15
Double Shifts
• Suppose the demand for sports cars fell at the
same time as production technology improved.
• Use S&D Analysis to show what will happen to
PRICE and QUANTITY.
If TWO curves shift at the same
time, EITHER price or quantity
will be indeterminate.
16
Use S&D to explain this double shift for gasoline
17
Voluntary Exchange
In the free-market, buyers and sellers voluntarily come
together to seek mutual benefits.
18
Voluntary Exchange
In the free-market, buyers and sellers voluntarily come
together to seek mutual benefits.
19
Voluntary Exchange
In the free-market, buyers and sellers voluntarily come
together to seek mutual benefits.
20
Voluntary Exchange
In the free-market, buyers and sellers voluntarily come
together to seek mutual benefits.
21
Example of Voluntary Exchange and Consumer
(CS) and Producer(PS) Surplus (pgs 27-28, 34-36)
Ex: You want to buy a truck so you go to the local dealership.
You are willing to spend up to $20,000 for a new 4x4. The
seller is willing to sell this truck for no less than $15,000.
After some negotiation you buy the truck for $18,000.
Analysis:
Buyer’ Maximum- $20,000
Sellers Minimum- $15,000
Price- $18,000
Consumer’s Surplus-$2,000
Producer’s Surplus- $3,000 22
Voluntary Exchange Terms
Consumer Surplus is the difference
between what you are willing to pay
and what you actually pay.
CS = Buyer’s Maximum – Price
Producer’s Surplus is the difference
between the price the seller received
and how much they were willing to sell
it for.
PS = Price – Seller’s Minimum 23
Consumer and Producer’s Surplus
P Calculate the area using (½ b x h) of:
1. Consumer Surplus
2. Producer Surplus
$10
3. Total Surplus S
8
6 CS 1. CS= $25
$5 2. PS= $20
4 3. Total= $45
PS
1 D
2 4 6 8 10 Q 24
Pearl Exchange
Activity
25
Voluntary Exchange Activity
26
