Bell Work

Supply and Demand Together at last!

Adam Smith coined the term “The Invisible Hand” meaning that the marketplace is self-regulating. This is the idea that consumers get the products they want at prices that closely reflect the cost of producing them. -Happens without any central plan or direction -Competition causes more production and moderates firms’ quests for higher prices. Invisible hand guides a nation’s resources to their most productive use. Self-interest drives invisible hand. Balance (pg 32 text)

The point where the supply and demand curves meet is called the EQUILIBRIUM Equilibrium- the point at which quantity demanded and quantity supplied are equal. At equilibrium, the market for a good is stable. Buyers will purchase exactly as much as firms are willing to sell. Buyers who are willing to purchase goods at EQ price will fine ample supplies on store shelves. Firms willing to sell at EQ price will find enough buyers for their goods. EQ price = market price (the one that consumers will pay producers) EQ quantity = market quantity (the amount that consumers will get from producers)

What is the equilibrium price? Consumers agree to . . . BUY! Producers/Suppliers agree to . . . SELL! The EQ is where consumers and producers compromise. DEMAND •The EQ is where producers and consumers agree on a specific price and specific quantity of a specific good/service. • All consumers willing (or only ABLE) to pay the prices BELOW the EQ are priced out and cannot consume the good, even though they demand it at a higher quantity •All consumers willing to pay the prices ABOVE the EQ don’t demand as much quantity of the good at the EQ SUPPLY •All producers below the EQ are not willing to make as much quantity as at the EQ (and thus, wouldn’t charge as much for each unit of the good/service) •All producers above the EQ are willing to produce more of the good and charge more for each unit.

If the market price or quantity supplied is anywhere but at the equilibrium, the market is in a state of disequilibrium. Disequilibrium can produce 2 different outcomes: a. Shortage (excess demand) b. Surplus (excess supply) Disequilibrium0 describers any price or quantity not at equilibrium; when quantity supplied is not equal to quantity demanded in a market.

If the price is set below EQUILIBRIUM, there will be a shortage Shortage is excess demand; when quantity demanded is more than quantity supplied. When the price in a market is below EQ price, you have excess demand because a low price encourages buyers and discourages sellers. •What is the EQ price and quantity? ($2 and 7 cones) •How many cones are demanded at $1.50 per cone? (10) •How many cones supplied at $1.50 per cone? (4) •Result: shortage of 6 cones not supplied (because price is too low – see law of supply

If the price is set above EQUILIBRIUM, there will be a surplus Excess Supply= surplus. When quantity supplied is more than quantity demanded. If price is too high, market will face an excess in supply •How many cones supplied at $2.50 per cone? (10) •How many cones demanded at $2.50 per cone? (4) •Result: Surplus of 6 cones due to price being too high for some consumers

Government Intervention Markets tend toward equilibrium, but in some cases, the government steps in to control prices.

The government can decide that the price of a good cannot go above a certain amount (PRICE CEILING) Price ceiling- a maximum price, set by law, that can be legally charged for a good or a service. •Example here: apartment rent control (NYC Gov) •What is the positive outcome? Lower rent for tenants •negative outcome? SHORTAGE of apts. Because producers will not want to provide as many to the market at lower prices (they will turn some into condos and sell them, etc.) (also, see law of supply); reduces quantity and quality of apts

There are two ways to get back to and equilibrium from a price ceiling. Increase supply to the price of the ceiling Decrease demand to the price of the ceiling

The government can decide that the price of a good cannot go below a certain amount (PRICE FLOOR) Price Floor- a minimum price, set by the government, that must be paid for a good or service. Often imposed when government wants sellers to receive some minimum reward for their efforts. •Ex. Corn prices for farmers •Positive outcome: higher prices for their goods (ability to stay in business) •Negative outcome: higher prices for consumers as well as a SURPLUS of corn.

There are two ways to get back to equilibrium from a price floor. Increase demand to the price of the floor Decrease supply to the price of the floor

Check for Understanding Where do most producers and consumers reach agreement? Why? If the government passes a minimum wage law, what policy is that? What would the effect be? If the government passed a law capping gas prices at $3.00/gallon, what type of policy is this? What would the effect be of this policy? Price floor; surplus Price ceiling; shortage

The equilibrium price/quantity can change when we take into consideration the factors of supply and/or demand.

When SUPPLY INCREASES, the equilibrium price decreases and quantity increases. •Come up with an example of supply shift factor that would cause this (increased suppliers, advances in technology, new government subsidies, changes in prices of input, etc.) -Shift of entire supply curve will change the EQ price and quantity.

When SUPPLY DECREASES, the equilibrium price increases, and quantity decreases. When will supply decrease? New taxes, less sellers, less availability of resources, rise of cost of input •Ex. More sellers, increased availability of resources, etc. -Market price is higher than before and the quantity sold is lower.

When DEMAND INCREASES, equilibrium price AND quantity INCREASES. When does demand increase? Ex. Increased consumers, price of compliment decreases, price of substitute increases, etc.

When DEMAND DECREASES, equilibrium price AND quantity DECREASE •Ex. Decreased consumers, increased price of compliments, decreased price of substitutes, etc.

What is the result of an INCREASE in BOTH supply and demand? Lower price and higher quantity sold

What is the result of a DECREASE in BOTH supply and demand? Higher price and lower quantity sold.

Graph, showing the change in price, supply or demand Graph, showing the change in price, supply or demand. Identify the determinant and the change in equilibrium. 1. Show what will happen in the market for Waffles when the price of Maple Syrup increases. Draw the market for Waffles.

Graph, showing the change in price, supply or demand Graph, showing the change in price, supply or demand. Identify the determinant and the change in equilibrium. 2. The U.S. government subsidizes Solar Panel companies by giving each company $10 million. How will this effect the market for Solar Panels?

Graph, showing the change in price, supply or demand Graph, showing the change in price, supply or demand. Identify the determinant and the change in equilibrium. 3. a. A world wide shortage of sugar causes its price to increase. How will this effect the market for sugary cereal? b. A new study shows that sugary cereals are healthy! On the same graph, show what happens.

Supply and Demand Practice Exercises