3 - 1

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

Supply & Demand

The Product Market

3 - 2

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

LAW OF DEMAND

• As Price Falls…

…Quantity Demanded Rises

• As Price Rises…

…Quantity Demanded Falls

An inverse relationship exists between price and quantity demanded

3 - 3

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

3 - 4

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

LAW OF DEMAND

• Demand Curve• Market Demand• Individual Demand

• Horizontal Summation

3 - 5

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

• Diminishing Marginal Utility

DOWNWARD SLOPE

3 - 6

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

• Diminishing Marginal Utility

DOWNWARD SLOPE

• Income Effect

3 - 7

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

• Diminishing Marginal Utility

DOWNWARD SLOPE

• Income Effect • Substitution Effect

3 - 8

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

GRAPHING DEMANDP

Qo

$5

4

3

2

1

P QD

$54321

1020355580

Price of Corn

Quantity of Corn

CORN Plot the Points

10 20 30 40 50 60 70 80

3 - 9

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

55

P

Qo

$5

4

3

2

1

P QD

$54321

1020355580

Price of Corn

Quantity of Corn

CORN Plot the Points

10 20 30 40 50 60 70 80

GRAPHING DEMAND

3 - 10

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

35

P

Qo

$5

4

3

2

1

P QD

$54321

1020355580

Price of Corn

Quantity of Corn

CORN Plot the Points

10 20 30 40 50 60 70 80

GRAPHING DEMAND

3 - 11

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

P

Qo

$5

4

3

2

1

P QD

$54321

1020355580

Price of Corn

Quantity of Corn

CORN Plot the Points

10 20 30 40 50 60 70 80

GRAPHING DEMAND

3 - 12

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

P

Qo

$5

4

3

2

1

P QD

$54321

1020355580

Price of Corn

Quantity of Corn

CORN Plot the Points

10 20 30 40 50 60 70 80

GRAPHING DEMAND

3 - 13

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

P

Qo

$5

4

3

2

1

P QD

$54321

1020355580

D

Price of Corn

Quantity of Corn

CORN Connect the Points

10 20 30 40 50 60 70 80

GRAPHING DEMAND

3 - 14

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

P

Qo

$5

4

3

2

1

P QD

$54321

1020355580

D

Price of Corn

Quantity of Corn

CORN

10 20 30 40 50 60 70 80

What if

Demand

Increases?

GRAPHING DEMAND

3 - 15

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

P

Qo

$5

4

3

2

1

P QD

$54321

D1

Price of Corn

Quantity of Corn

CORN

10 20 30 40 50 60 70 80

D2

Increase

in

Demand

Increase

in Quantity

Demanded1020355580

30406080 +

GRAPHING DEMAND

3 - 16

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

P

Qo

$5

4

3

2

1

P QD

$54321

1020355580

D

Price of Corn

Quantity of Corn

CORN

10 20 30 40 50 60 70 80

What if

Demand

Decreases?

GRAPHING DEMAND

3 - 17

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

P

Qo

$5

4

3

2

1

P QD

$54321

1020355580

D1

Price of Corn

Quantity of Corn

CORN

10 20 30 40 50 60 70 80

-- 10204060

D3

Decrease

in

Demand

Decrease

in Quantity

Demanded

GRAPHING DEMAND

3 - 18

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

DETERMINANTS OF DEMAND

• Tastes (Preferences)• Prices of Related Goods

– Substitutes & Complements– Unrelated Goods

• Income– Normal (Superior) & Inferior

Goods• Number of Buyers• Expectations

3 - 19

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

DETERMINANTS OF DEMAND

• Tastes (Preferences)• Prices of Related Goods

– Substitutes & Complements– Unrelated Goods

• Income– Normal (Superior) & Inferior

Goods• Number of Buyers• Expectations

3 - 20

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

Practice Problems

• Activity 1-4 Parts A & B• Activity 1-5

3 - 21

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

LAW OF SUPPLY

• As Price Rises…

…Quantity Supplied Rises

• As Price Falls…

…Quantity Supplied Falls

A direct relationship exists between price and quantity supplied

3 - 22

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

5

P

Qo

$5

4

3

2

1

10 20 30 40 50 60 70 80

$54321

60503520 5

P QS

Price of Corn

Quantity of Corn

CORN

Plot the PointsGRAPHING SUPPLY

3 - 23

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

P

Qo

$5

4

3

2

1

10 20 30 40 50 60 70 80

$54321

60503520 5

P QS

Price of Corn

Quantity of Corn

CORN

Plot the PointsGRAPHING SUPPLY

3 - 24

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

35

P

Qo

$5

4

3

2

1

10 20 30 40 50 60 70 80

$54321

60503520 5

P QS

Price of Corn

Quantity of Corn

CORN

Plot the PointsGRAPHING SUPPLY

3 - 25

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

P

Qo

$5

4

3

2

1

10 20 30 40 50 60 70 80

$54321

60503520 5

P QS

Price of Corn

Quantity of Corn

CORN

Plot the PointsGRAPHING SUPPLY

3 - 26

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

P

Qo

$5

4

3

2

1

10 20 30 40 50 60 70 80

$54321

60503520 5

P QS

Price of Corn

Quantity of Corn

CORN

Plot the PointsGRAPHING SUPPLY

3 - 27

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

SP

Qo

$5

4

3

2

1

10 20 30 40 50 60 70 80

$54321

60503520 5

P QS

Price of Corn

Quantity of Corn

CORN

Connect the Points

GRAPHING SUPPLY

3 - 28

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

SP

Qo

$5

4

3

2

1

10 20 30 40 50 60 70 80

$54321

60503520 5

P QS

Price of Corn

Quantity of Corn

CORN

What if

Supply

Increases?

GRAPHING SUPPLY

3 - 29

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

S1P

Qo

$5

4

3

2

1

10 20 30 40 50 60 70 80

Price of Corn

Quantity of Corn

$54321

60503520 5

P QS

CORN

8070604530

S2Increase

in

Supply

Increase

in Quantity

Supplied

GRAPHING SUPPLY

3 - 30

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

SP

Qo

$5

4

3

2

1

10 20 30 40 50 60 70 80

$54321

60503520 5

P QS

Price of Corn

Quantity of Corn

CORN

What if

Supply

Decreases?

GRAPHING SUPPLY

3 - 31

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

S1P

Qo

$5

4

3

2

1

10 20 30 40 50 60 70 80

$54321

60503520 5

P QS

Price of Corn

Quantity of Corn

CORN

S3

453020 0 --

Decrease

in

Supply

Decrease

in Quantity

Supplied

GRAPHING SUPPLY

3 - 32

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

DETERMINANTS OF SUPPLY

• Resource Prices• Prices of Other Goods• Technology• Taxes & Subsidies• Expectations• Number of Sellers

3 - 33

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

DETERMINANTS OF SUPPLY

• Resource Prices• Prices of Other Goods• Technology• Taxes & Subsidies• Expectations• Number of Sellers

3 - 34

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

Practice Problems

• Activity 1-6 Parts A & B• Activity 1-7

3 - 35

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

DETERMINANTS OF SUPPLY

• Resource Prices• Technology• Taxes & Subsidies• Prices of Other Goods• Price Expectations• Number of Sellers

Combining

with

Demand

3 - 36

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

7

SP

Qo

$5

4

3

2

1

2 4 6 8 10 12 14 16

P QD

$54321

2,0004,0007,000

11,00016,000

$54321

12,00010,000

7,0004,0001,000

D

P QS

Price of Corn

Quantity of Corn

CORN

MARKET

CORN

MARKET

Market Clearing Equilibrium

MARKET DEMAND & SUPPLY

3 - 37

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

7

SP

Qo

$5

4

3

2

1

2 4 6 8 10 12 14 16

P QD

$54321

2,0004,0007,000

11,00016,000

$54321

12,00010,000

7,0004,0001,000

D

P QS

Price of Corn

Quantity of Corn

CORN

MARKET

CORN

MARKETSurplusAt a $4 price

more is being

supplied than

demanded

MARKET DEMAND & SUPPLY

3 - 38

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

117

SP

Qo

$5

4

3

2

1

2 4 6 8 10 12 14 16

P QD

$54321

2,0004,0007,000

11,00016,000

$54321

12,00010,000

7,0004,0001,000

D

P QS

Price of Corn

Quantity of Corn

CORN

MARKET

CORN

MARKET

At a $2 price

more is being

demanded than

supplied

Shortage

MARKET DEMAND & SUPPLY

3 - 39

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

117

SP

Qo

$5

4

3

2

1

2 4 6 8 10 12 14 16

P QD

$54321

2,0004,0007,000

11,00016,000

$54321

12,00010,000

7,0004,0001,000

D

P QS

Price of Corn

Quantity of Corn

CORN

MARKET

CORN

MARKET

Shortage

MARKET DEMAND & SUPPLY Surplus

3 - 40

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

MARKET EQUILIBRIUM • Equilibrium Price & Quantity• Rationing Function of Prices• Changes in Demand• Changes in Quantity

Demanded• Changes in Supply• Changes in Quantity Supplied

3 - 41

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

Single Shifts• Supply Increases• Supply Decreases• Demand Increases• Demand Decreases

3 - 42

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

Double Shifts• Supply Increases &

Demand Decreases• Supply Decreases &

Demand Increases• Supply Increases &

Demand Increases• Supply Decreases &

Demand Decreases

3 - 43

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

Double Shifts

• Supply increase; Demand decrease

• Supply decrease; Demand increase

• Supply increase; Demand increase

• Supply decrease; Demand decrease

Price Quantity

?

?

?

?

3 - 44

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

Consumers, Producers, and the Efficiency

of Markets

3 - 45

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

Welfare Economics

• Welfare economics is the study of how the allocation of resources affects economic well-being.

• Market equilibrium maximizes the total welfare of buyers and sellers.

3 - 46

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

CONSUMER SURPLUS

• Consumer surplus is the buyer’s willingness to pay for a good minus the amount the buyer actually pays for it.

3 - 47

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

How the Price Affects Consumer Surplus

Consumersurplus

Quantity

(a) Consumer Surplus at Price P

Price

0

Demand

P1

Q1

B

A

C

3 - 48

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

How the Price Affects Consumer Surplus

Initialconsumer

surplus

Quantity

(b) Consumer Surplus at Price P

Price

0

Demand

A

BC

D EF

P1

Q1

P2

Q2

Consumer surplusto new consumers

Additional consumersurplus to initial consumers

3 - 49

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

PRODUCER SURPLUS

• Producer surplus is the amount a seller is paid for a good minus the seller’s cost.

3 - 50

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

How the Price Affects Producer Surplus

Producersurplus

Quantity

(a) Producer Surplus at Price P

Price

0

Supply

B

A

C

Q1

P1

3 - 51

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

How the Price Affects Producer Surplus

Quantity

(b) Producer Surplus at Price P

Price

0

P1B

C

Supply

A

Initialproducersurplus

Q1

P2

Q2

Producer surplusto new producers

Additional producersurplus to initialproducers

D EF

3 - 52

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

MARKET EFFICIENCY Consumer Surplus

+ Producer Surplus

=Total Surplus

Efficiency • Free markets maximize efficiency

(total surplus) at equilibrium

3 - 53

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

Consumer and Producer Surplus in the Market Equilibrium

Producersurplus

Consumersurplus

Price

0 Quantity

Equilibriumprice

Equilibriumquantity

Supply

Demand

A

C

B

D

E

3 - 54

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

Free Response Prompts• “Show” means to use a diagram to illustrate

your answer. Correct labeling is necessary to receive full credit.

• “Explain” means to take the reader through all of the steps or linkages in the line of economic reasoning. Graphs and symbols are acceptable as part of the explanation.

• “Identify” means to provide a specific answer or a label on a graph, without any explanation or elaboration.

• “Calculate” means to use mathematical operations to determine a specific numerical response, along with providing your work.

3 - 55

Demand

Changes in Demand

Supply

Changes in Supply

Equilibrium

Surpluses & Shortages

Welfare Economics

Free Response Strategies• Circle the verbs• Label everything• Messy work loses points• Don’t say too much• Don’t contradict yourself