Unit 2: Supply, Demand,
and Price Determination
An Economic Model That Shows How Markets in a Free Market Economy Works and How Prices are Set
Demand
Unit 2-Chapter 5 Reading (HW
p.79-82 Reading on Demand, 1-3 on your study guide)
Be able to:
Distinguish between Demand and Quantity Demanded.
Draw a correctly labeled Demand curve and recognize how events can cause
Demand
The amount of a good or service
people are willing and able to
consume at each and every price
The amount of a good or service
people are willing and able to
consume
at a given price
Quantity Demanded
How do we know the demand for a car wash?
A demand schedule shows the quantity
The Law of Demand
Consumers want less of a good or service as the price goes up and more of a good when price
When price changes quantity demanded changes, so we move along the curve!
Two effects explain this:
When the price of a good increases, it has the effect of lowering our income (income effect) so
Movement Along the Demand Curve vs. Shift of the Demand Curve
These are two
different events:
movement is a change in
price on the curve & shift
is a change in the entire
When demand increases or decreases,
a
shift
in the curve occurs!
Shifts of the Demand Curve
What are the 5 shifters? [T.I.M.E.R. Shifters]
1) Changes in Tastes or Preferences.
Is a product hot, or not? Is it in fashion? Etc. These are
taste/preference questions.
A. When preference increases for a
product, demand goes up.
B. When preferences diminish, demand
goes down.
Preferences change over time thanks to advertising and other factors. What is something you were and are willing and able to buy but now you no longer
Demand Shifter #2
2) Changes in Income (increased income leads to increased demand right? It depends…)
Right: Normal Goods
A good is “normal” if demand for it increases
when your income increases and vice versa.
Wrong: Inferior Goods
A good is “inferior” if demand for it decreases
when income increases and vice versa.
Demand Shifter #3
3) Changes in
Market Size
(customer base) or
Population
A. When there is a baby boom, or
immigration boom, or trade with a new country opens up, demand increases.
B. When the opposite occurs (loss of
Demand Shifter # 4
4) Changes in Expectations. What we expect to happen to price in the
future shifts demand today.
• Car owners … if TV News says that gas will increase to $4.50 on Wednesday, what will you do?
• When consumers think price will increase in the future, demand goes up for a product today.
Demand Shifters 5a and 5b
(or 5 and 6)
5) Changes in the Prices of Related Goods Substitutes (Goods used in place of another). When price of a good
increases, demand for a substitute
increases and vice versa. Examples… Complements (A complement is a
Identify the best underlined word for 1-2:
1) The Law of Demand suggests that as price of
a normal good increases / decreases the
quantity demanded will increase.
2) A decrease in Demand is shown by a left /
right shift in the Demand curve.
3) Provide an example of two substitute goods.
4) Provide an example of an inferior good (a
Supply
Unit 2-Chapter 5 Reading
HW: Read pp. 74-87, 1-6 on
blue study guide
•Distinguish between Supply and Quantity Supplied.
Supply
The amount of a good or service
people (or firms) are willing and able
to produce
at each and every price.
Quantity Supplied
The amount of a good or service
How do we know the supply for t-shirts?
The Law of Supply
When price changes, quantity supplied changes, so we move along the curve!
When supply increases or decreases, a
shift
in the curve occurs!
What are some supply curve
shifters (determinants)? The T.I.R.E.S. shifters.
1) Changes in
Technology (T)
Improved technology has the capacity
to increase supply at each and every
price.
Can you think of examples?
Supply Curve
Shifters
2) Changes in Input Prices (I)
• An input is a good, or service in the case of labor, that is used to produce another good just like resources.
• When input prices go up, a producer must spend more to produce the same amount as he did before. Therefore, with a given amount of money the
Supply
Shifters
3.
Regulations (R)
enacted by the
government (
quotas
,
taxes
, etc.)
Ø Increased taxes on businessesdecrease supply and vice versa
Ø Increased environmental regulations
decrease supply and vice versa
Ø Increased subsidies (payment that
Supply Curve
Shifters
4. Changes in
Expectations (E)
When a producer expects to sell at a lower price in the future, they sell more today regardless of price.
When suppliers expect that prices will increase in the future, they supply less today and wait to take
advantage of future prices.
Number of
Suppliers (S)
5. The greater the number of
suppliers in the market the
greater the supply.
• What happens to supply when a
lot of businesses shut down?
N-TIRES? Not in your guided
notes.
• Your book adds a shifter for supply to the list, that I’ve never seen explicitly stated in a text before.
• Natural Disasters/Catastrophic Acts
– I’ve always just sort of thought of this as a decrease in the number of suppliers, or…
– If there is a plague that effects corn crops, that might increase the input prices for cattle feed, restricting the supply of beef.
Movement Along the Supply Curve vs. Shift of the Supply Curve
Again, these are
two
Identify the best underlined word in 1 and 2:
1) The Law of Supply suggests that as price
increases / decreases the quantity supplied
will increase.
2) A decrease in Supply is shown by a left & up /
right & down shift in Supply.
3) Provide specific examples of two input costs
a producer might have to face.
4) Provide an example of a government
Prices and Quantities at
Equilibrium
(Where supply and demand
cross—like the Wheat Market Game)
Market Equilibrium
What is Equilibrium?
• Equilibrium is the point where quantity
demanded and quantity supplied are equal and the point where the market is most stable and balanced.
How does equilibrium change?
The shifters of demand (T.I.M.E.R.) and supply (T.I.R.E.S.) shift supply and demand
Market Equilibrium
In a market, prices naturally hover around (E). Prices are the language of trade and the invisible hand
Equilibrium and Shifts of the Demand Curve
Equilibrium and Shifts of the Supply Curve (What happens to price and
Prices are the language of trade.
Producers and consumers use prices to help weigh the costs and benefits of each decision to buy or sell.
If someone charges above or below the equilibrium price you will have
surpluses (excess supply) and
shortages (excess demand), and prices adjust so that the surplus is sold off or the shortage is
Businesses and individuals can
choose to trade at any price,
but the market pushes people
and companies to do
predictable things.
The government tries to
control prices but the market
has a mind of its own and
Price Above Equilibrium Creates a Surplus
Wage (per week)
Quantity of Workers Price Floor
Minimum wage is a price floor — How does a price floor
affect hiring in this job market? High unemployment at that wage, illegal low wage labor is hired.
Price Below Equilibrium Creates a Shortage
Wage (per week)
Price Ceiling
Quantity of Workers
Rent Control—What does rent control do to this market
for apartments? It creates a shortage and a black market!
