AP Microeconomics

1. AP Microeconomics Unit 1: Demand, supply and equilibrium price

2. Topic 1: DEMAND • What is Demand? • What consumers are willing and able to buy at different prices. • (Ex: Bill Gates is able to purchase a Ferrari, but if he isn’t willing he has NO demand for one) • Law of Demand? • There is an INVERSE relationship between price and quantity demanded 2

3. LAW OF DEMAND As Price Falls… …Quantity Demanded Rises As Price Rises… …Quantity Demanded Falls Quantity Demanded Price 3

4. Why does the Law of Demand occur? The law of demand is the result of three separate behavior patterns that overlap: The Substitution effect The Income effect The Law of Diminishing Marginal Utility 4

5. If price goes up, consumers buy less (look for substitutes) When price of item goes up, it takes more income to buy (purchasing power goes down) Why does the Law of Demand occur? 1. The Substitution Effect 2. The Income Effect 5

6. There is a decreasing amount of additional utility from consuming more of an item Why does the Law of Demand occur? 3. Law of Diminishing Marginal Utility 6

7. Can you see the Law of Diminishing Marginal Utility in Disneyland’s pricing strategy?

8. Demand Schedule • Table that shows the amount demanded at each and every price

9. Where do you get the Market Demand? Billy Jean Other Individuals Market

10. Graphing Demand 10

11. The Demand Curve A demand curve is a graphical representation of a demand schedule. The demand curve is downward sloping When reading a demand curve, assume all outside factors, such as income, are held constant. (This is called ceteris paribus) 11

12. GRAPHING DEMAND Demand Schedule Price of Cereal $5 4 3 2 1 o Q 10 20 30 40 50 60 70 80 Quantity of Cereal 12

13. GRAPHING DEMAND Demand Schedule Price of Cereal $5 4 3 2 1 Demand o Q 10 20 30 40 50 60 70 80 Quantity of Cereal 13

14. Change in Demand Demand Schedule What if cereal makes you smarter? Price of Cereal $5 4 3 2 1 Demand o Q 10 20 30 40 50 60 70 80 Quantity of Cereal 14

15. Change in Demand Demand Schedule Price of Cereal $5 4 3 2 1 Demand o Q 10 20 30 40 50 60 70 80 Quantity of Cereal 15

16. Change in Demand Demand Schedule Price of Cereal $5 4 3 2 1 Demand o Q 10 20 30 40 50 60 70 80 Quantity of Cereal 16

17. Change in Demand Demand Schedule Price of Cereal $5 4 3 2 1 Demand o Q 10 20 30 40 50 60 70 80 Quantity of Cereal 17

18. Change in Demand Demand Schedule Price of Cereal Increase in Demand Prices didn’t change but people want MORE cereal $5 4 3 2 1 D1 Demand o Q 10 20 30 40 50 60 70 80 Quantity of Cereal 18

19. Change in Demand Demand Schedule What if cereal causes baldness? Price of Cereal $5 4 3 2 1 Demand o Q 10 20 30 40 50 60 70 80 Quantity of Cereal 19

20. Change in Demand Demand Schedule Price of Cereal $5 4 3 2 1 Demand o Q 10 20 30 40 50 60 70 80 Quantity of Cereal 20

21. Change in Demand Demand Schedule Price of Cereal $5 4 3 2 1 Demand o Q 10 20 30 40 50 60 70 80 Quantity of Cereal 21

22. Change in Demand Demand Schedule Price of Cereal $5 4 3 2 1 Demand o Q 10 20 30 40 50 60 70 80 Quantity of Cereal 22

23. Change in Demand Demand Schedule Price of Cereal $5 4 3 2 1 Decrease in Demand Prices didn’t change but people want LESS cereal D2 Demand o Q 10 20 30 40 50 60 70 80 Quantity of Cereal 23

24. Changes in demand • When demand increases, the curve shifts to the right of the original curve (follows same slope of original) • example: price D1 D quantity

25. When demand decreases, curve shifts to the left of original curve • Example: D D1

26. Reasons for changes in demand: • Determinants of demand – things that SHIFT the D curve

27. 1. Change in income

28. 2. change in tastes or preferences influenced by fads, expert testimony, advertising, publicity

29. E.T. movies increases demand for Reese’s Pieces

30. 3. change in # of consumers

31. 4. change in expectations for the future

32. 5. change in demand for substitute good

33. 6. change in demand of complementary good

34. Change in Quantity demanded vs. change in demand • Change in Demand = results in a new curve CAUSED BY A DETERMINANT • Change in Quantity demanded = movement along original curve CAUSED BY A CHANGE IN PRICE OF ITEM • Change in demand and change in Quantity demanded are NOT the same thing

35. Change in Quantity demanded vs. change in demand

36. Practice • Determine in the demand for hamburger curve will shift or not 36

37. 1. There is a population boom…. • 2. Incomes fall due to a recession… • 3. Price of hot dogs, a substitute good for hamburgers, goes down…

38. 4. A new health craze emerges: No ground beef…. • 5. Hamburger restaurants announce that they will increase the price of hamburgers NEXT month….

39. 6. The price of milkshakes, a complementary good for hamburgers, increases… • 7. The price of hamburgers increases…

40. Topic 2: Elasticity

41. THE LAW OF DEMAND SAYS... Consumers will buy more when prices go down and less when prices go up HOW MUCH MORE OR LESS? 41

42. Price Elasticity of Demand • Measurement of consumers responsiveness to a change in price. • Shows if product has elastic or inelastic demand

43. Inelastic Demand

44. Inelastic Demand Inelastic = Price has LITTLE impact on quantity demanded AN INELASTIC demand curve is steep • Examples: • Gasoline • Milk • Diapers D

45. Inelastic Demand • General Characteristics of Inelastic Goods: • Few Substitutes • Necessities • Small portion of income • Required now, rather than later

46. Perfectly Inelastic Same quantity is demanded no matter what price EX: medicine needed to survive D

47. Elastic Demand

48. Elastic Demand Elastic = Price has a BIG impact on quantity demanded • Examples: • Soda • Boats • Beef D

49. Elastic Demand • General Characteristics of Elastic Goods: • Many Substitutes • Luxuries • Large portion of income • Plenty of time to decide

50. Perfectly Elastic • Any increase in price take Q demanded to ZERO Example: A farmer Raises his price, And doesn’t sell anything D