Chapter 3 Supply and Demand © OnlineTexts.com p. 1

Supply Curve The supply curve has a positive slope, consistent with the law of supply. © OnlineTexts.com p. 2

The Law of Supply Let's say that you own a farm and you sell apples along with other fruits. One day, you sell your apples at the farmer's market for fifty cents per apple and sell out. The next day you sell your apples for a dollar a piece and you run out of apples again. Now you are making twice as much revenue from apples. Since you know you can sell apples for a dollar a piece, will you bring more or less apples to the market? Will you plant more or less apples next year? When the price of a good rises, the supply for that good increases and when the price of a good falls, the supply for that good decreases. The law of supply holds that other things equal, as the price of a good rises, its quantity supplied rises. As the price falls, the quantity supplied falls Why do producers produce more output when prices rise? They seek higher profits They can cover higher marginal costs of production © OnlineTexts.com p. 3

Demand Curve The demand curve has a negative slope, consistent with the law of demand. © OnlineTexts.com p. 4

The Law of Demand Let's say that you buy 7 apples a week at a price of fifty cents per apple. If the price of those apples goes up to one dollar per apple, will you buy more or less apples? When the price of a good rises, the demand for that good decreases and when the price falls, the demand for that good increases. This is the law of demand The law of demand holds that other things equal, as the price of a good or service rises, its quantity demanded falls. The reverse is also true: as the price of a good or service falls, its quantity demanded increases. © OnlineTexts.com p. 5

Equilibrium In economics, an equilibrium is a situation in which: there is no inherent tendency to change, quantity demanded equals quantity supplied © OnlineTexts.com p. 6

Equilibrium Equilibrium occurs at a price of $3 and a quantity of 30 units. © OnlineTexts.com p. 7

Shortages and Surpluses A shortage occurs when quantity demanded exceeds quantity supplied. A shortage implies the market price is too low. A surplus occurs when quantity supplied exceeds quantity demanded. A surplus implies the market price is too high. © OnlineTexts.com p. 8

Shift in the Demand Curve A change in any variable other than price that influences quantity demanded produces a shift in the demand curve or a change in demand. Factors that shift the demand curve include: Change in consumer incomes Population change Consumer preferences Prices of related goods: Substitutes: goods consumed in place of one another Complements: goods consumed jointly © OnlineTexts.com p. 9

Shift in the Demand Curve This demand curve has shifted to the right. Quantity demanded is now higher at any given price. © OnlineTexts.com p. 10

Equilibrium After a Demand Shift The shift in the demand curve moves the market equilibrium from point A to point B, resulting in a higher price and higher quantity. © OnlineTexts.com p. 11

Shift in the Supply Curve A change in any variable other than price that influences quantity supplied produces a shift in the supply curve or a change in supply. Factors that shift the supply curve include: Change in input costs Increase in technology Change in size of the industry © OnlineTexts.com p. 12

Shift in the Supply Curve For an given rental price, quantity supplied is now lower than before. © OnlineTexts.com p. 13

Equilibrium After a Supply Shift The shift in the supply curve moves the market equilibrium from point A to point B, resulting in a higher price and lower quantity. © OnlineTexts.com p. 14

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Warmup Feb. 1 Wednesday, Feb. 1, 2017 5. When an economy produces more houses and fewer typewriters, it is answering the ________ question. A. Where B. for whom C. how D. what 6. When China builds a dam using few machines and a great deal of labor, it is answering the ________ question. A)"how" B)"what" C) "where" D)"for whom" © OnlineTexts.com p. 16

Literacy Feb. 1 (RL 6.4) Read the following passage from “O! Pioneers” by Willa Cather. Write three examples of the use of personification.  “We hadn’t any of us much to do with it, Carl. The land did it. It had its little joke. It pretended to be poor because nobody knew how to work it right; and then, all at once, it worked itself. It woke up out of its sleep and stretched itself, and it was so big, so rich, that we suddenly found we were rich, just from sitting still.”   © OnlineTexts.com p. 17

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Supply and Demand On your own sheet of paper with shoulder partners, NEATLY do the following: 1. Free sketch a graph and label the supply and demand axes 2. Freehand what a demand curve on the graph looks like and write the Law of Demand. 3. Freehand what a supply curve looks like and write the Law of Supply 4. Draw a sketch to show how we determine the price of a product using supply and demand and label it with the correct term. 5. On the top grid of the sheet you were given, graph the information that is on the board and determine the equilibrium. © OnlineTexts.com p. 20

Supply and Demand What if market price is above or below equilibrium? What would result from that? Draw a straight, horizontal line across your graph at $1.50 and $.50. https://www.youtube.com/watch?v=APUrVaG0qW4 Prices can be set by the government to either be higher or lower than equilibrium. Why would the government interfere with prices to make them higher or lower? © OnlineTexts.com p. 21

Price Ceilings & Floors A price ceiling is a legal maximum that can be charged for a good. Results in a shortage of a product Common examples include apartment rentals and credit cards interest rates. A price floor is a legal minimum that can be charged for a good. Results in a surplus of a product Common examples include soybeans, milk, minimum wage © OnlineTexts.com p. 22

Price Ceiling A price ceiling is set at $2 resulting in a shortage of 20 units. © OnlineTexts.com p. 23

Price Floor A price floor is set at $4 resulting in a surplus of 20 units. © OnlineTexts.com p. 24

Exit Slip Draw a simple coordinate graph that shows the following: labeled axes, labeled demand line, labeled supply line, shortage and surplus, equilibrium. © OnlineTexts.com p. 25