Supply and Demand together at last!

Law of Demand: Buyer Behavior High prices mean low demand

Law of supply: Seller/Producer Behavior High price means high supply

SUPPLY and DEMAND Together, S & D graphically explain market conditions These two laws directly oppose one another…how will anything be bought or sold?! EQUILIBRIUM! The point where supply = demand

Supply and demand Equilibrium or market clearing price The point at which sellers are willing to sell as much as buyers are willing to buy Qd=Qs

Equilibrium/Market Clearing Price Found through trial and error! Buyers and sellers interact until quantity demanded equals quantity supplied Example: Encryption (pictured) tries to sell concert tickets for $10 but no one buys them, so the price must be lowered until it reaches the demand (turns out it’s -$2)

Surplus (a.k.a. excess supply): Surplus (a.k.a. excess supply): When quantity supplied is greater than quantity demanded P Q Example: If P = $5, S D Surplus then QD = 9 lattes and QS = 25 lattes resulting in a surplus of 16 lattes 7

Surplus (a.k.a. excess supply): Surplus (a.k.a. excess supply): When quantity supplied is greater than quantity demanded P Q S D Surplus Facing a surplus, sellers try to increase sales by cutting price. This causes QD to rise and QS to fall… …which reduces the surplus. 8

Surplus (a.k.a. excess supply): When quantity supplied is greater than quantity demanded P Q Facing a surplus, sellers try to increase sales by cutting price and output. S D Surplus This causes QD to rise and QS to fall. Prices continue to fall until market reaches equilibrium. 9

Shortage (a.k.a. excess demand): Shortage (a.k.a. excess demand): When quantity demanded is greater than quantity supplied P Q Example: If P = $1, S D then QD = 21 lattes and QS = 5 lattes resulting in a shortage of 16 lattes Shortage 10

Shortage (a.k.a. excess demand): When quantity demanded is greater than quantity supplied P Q Facing a shortage, sellers raise the price, S D causing QD to fall and QS to rise, …which reduces the shortage. Shortage 11

Shortage (a.k.a. excess demand): When quantity demanded is greater than quantity supplied P Q S D Facing a shortage, sellers raise the price, causing QD to fall and QS to rise. Prices continue to rise until market reaches equilibrium. Shortage 12

Law of Demand: Buyer Behavior High prices means low demand Determinants of Demand Income: normal good, inferior good or neutral good Preferences and tastes Price of related goods: substitute or complement Number of buyers Future expectations

Law of supply: Seller/Producer Behavior High price means high supply Determinants of supply Changes in resource/input costs Government influences: taxes, subsidies and quotas Future expectations of prices Weather Number of suppliers Technological advances

Bell Ringer! List each of the factors that shift the SUPPLY curve. What is equilibrium and how is it determined?

Three Steps to Analyzing Changes in Equilibrium To determine the effects of any event, 1. Decide whether event shifts S curve, D curve, or both. 2. Decide in which direction curve shifts. 3. Use supply-demand diagram to see how the shift changes equilibrium P and Q. Step one requires knowing all of the things that can shift D and S – the non-price determinants of demand and of supply. 16

EXAMPLE: The Market for Hybrid Cars Q price of hybrid cars S1 D1 P1 Q1 quantity of hybrid cars 17

EXAMPLE 1: A Shift in Supply or Demand? EVENT TO BE ANALYZED: Increase in price of gas. P Q S1 D2 D1 STEP 1: D curve shifts because price of gas affects demand for hybrids. S curve does not shift, because price of gas does not affect cost of producing hybrids. P2 Q2 STEP 2: D shifts right because high gas price makes hybrids more attractive relative to other cars. P1 Q1 STEP 3: The shift causes an increase in price and quantity of hybrid cars. 18

EXAMPLE 1: A Shift in Supply or Demand? Notice: When P rises, producers supply a larger quantity of hybrids, even though the S curve has not shifted. P Q S1 D2 D1 P2 P1 Q1 Always be careful to distinguish b/w a shift in a curve and a movement along the curve. Q2 19

EXAMPLE 2: A Shift in Supply or Demand EVENT: New technology reduces cost of producing hybrid cars. P Q S1 S2 D1 STEP 1: S curve shifts because event affects cost of production. D curve does not shift, because production technology is not one of the factors that affect demand. STEP 2: S shifts right because event reduces cost, makes production more profitable at any given price. P1 Q1 P2 Q2 STEP 3: The shift causes price to fall and quantity to rise. 20

Answer the questions on your notes using the following graph!

Terms for Shift vs. Movement Along Curve Change in supply: a shift in the S curve occurs when a non-price determinant of supply changes (like technology or costs) Change in the quantity supplied: a movement along a fixed S curve occurs when P changes Change in demand: a shift in the D curve occurs when a non-price determinant of demand changes (like income or # of buyers) Change in the quantity demanded: a movement along a fixed D curve “Supply” refers to the position of the supply curve, while “quantity supplied” refers to the specific amount that producers are willing and able to sell. Similarly, “demand” refers to the position of the demand curve, while “quantity demanded” refers to the specific amount that consumers are willing and able to buy. If you’d like to be a rebel, delete this slide and all references to the jargon it contains, and just use the terms “movement along a curve” and “shift in a curve.” Note, however, that this is not the official recommendation of Cengage/South-Western or Dr. Mankiw. If you’d like to cover this slide but make it move more quickly, delete the text next to each second-level bullet (starting with “occurs when”). Instead, give the information to your students verbally or rely on them to read it in the textbook. 22 22

Bell Ringer!!! 1. Which graph (top or bottom) shows a change in demand? Which shows a change in quantity demanded? 2. Which graph (left or right) shows a change in supply? Which shows a change in quantity supplied?

Price Controls Price Floor: A legislated (government-created) price for a good or service that is set above equilibrium. In other words—an artificially-set price that prevents the market from reaching the equilibrium price. Example: Minimum wage. The government has imposed the lowest price that can be paid for labor at $7.25/hour. The result is a surplus of workers (that’s part of the reason we have an unemployment rate!)

Price Controls Price Ceiling: A legislated (government-created) price for a good or service that is set below equilibrium. In other words, an artificially-set price that prevents the market from reaching the equilibrium price. Example: Rent control. In order to try to maintain affordable housing, local governments may set a price above which landlords may not charge for rent. This results in a shortage of apartments.

Unit Two Packet Demand Guided Notes Elasticity WS Supply Guided Notes Supply and Demand Together Notes Unit Two Study Guide Bell Ringers!