HouseholdsBusinesses Product Markets Factor Markets

Selling Quantity Price Demanded $ 3 $ 2 $ 1 $ $ 5

Price Quantity $6 $5 $4 $3 $2 $ Demand Downsloping left -Plot the points Graphing: -Connect the dots to right Demand

Selling Quantity Price Supplied $ 3 $ 2 $ 1 $ $ 5

Price Quantity $6 $5 $4 $3 $2 $ Upsloping right -Plot the points Graphing: -Connect the dots to left Supply

Selling Quantity Price Demanded Supplied $ 3 $ 2 $ 1 $ $ $ 3 25

Price Quantity $6 $5 $4 $3 $2 $ D -Plot Demand Graphing: -Plot Supply D S S

Selling Quantity Price Old New 0 $ 3 $ 2 $ 0 $ 1 $ 4 1 $ $ DecInc Caused by a Change in a Determinant Movement OF the curve

Price Quantity $6 $5 $4 $3 $2 $ Old Increase in Demand shifts out or to the right Decrease in Demand shifts in or to the left

1 Why the curve shifts Consumer Tastes Price of Other Goods Consumer Incomes Number of Consumers Consumer Expectations

1 Consumer Tastes - beanie hats make a comeback Demand increases -Hula Hoops go out of style Demand decreases Or why the curve shifts

2 Price of Other Goods If airlines cut ticket prices More demand for Luggage Less demand for train tickets

Tickets and Luggage are compliments Airlines and Trains are Substitutes If ticket prices decrease, demand for Luggage increases If ticket prices increase, demand for Luggage decreases If air tickets increase, demand for Train tickets also increases Compliments are consumed or used together (inverse relationship) Substitutes replace each other (direct relationship) If air tickets decrease, demand for Train tickets also decreases

3Consumer Incomes +tax cuts increase net incomes Consumers have more money to spend, demand increases -the $ depreciates against the Euro Imported goods from Europe cost more dollars, demand decreases For Normal Goods!!!

-the $ depreciates against the Euro Domestic travel looks better, demand increases For Inferior Goods Consumers switch to better goods, demand for Hot Dogs decreases +tax cuts increase net incomes

4 Number of Consumers (also Demographics) -Hurricanes arrive on Labor Day weekend Fewer tourists touring, demand decreases Canada sells to 290 million US consumers, demand for their goods increases +NAFTA North American Free Trade Agreement

5Consumer Expectations - dealers reduce car prices in August Car buyers wait, demand decreases - heavy rains have damaged coffee crop Consumers expect shortages and higher prices so they buy more now, demand increases

Quantity $6 $5 $4 $3 $2 $ Supply Current Equilibrium Price P1P1 P2P2 P3P3 Q3Q3 Q1Q1 Q2Q2 Caused by a change in a Determinant of Demand Shifting the Demand Curve decrease increase Demand P Q

1 Why the curve shifts Consumer Tastes Price of Other Goods Consumer Incomes Number of Consumers Consumer Expectations

Selling Quantity Supplied Price Old New 6 $ 3 $ 2 $ 1 $ 4 5 $ $ DecInc Caused by a Change in a Determinant Movement OF the curve

Price Quantity $6 $5 $4 $3 $2 $ Old Increase in Supply shifts out or to the right Decrease in Supply shifts in or to the left

1 Resource Prices Why the curve shifts 2 Changes in Technology 3Prices of other goods Taxes and Subsidies 4 5Number of Producers

1 Resource Prices - gas is discovered under CVCC Supply increases -Minimum wage goes up Supply decreases Or why the curve shifts

2 Changes in Technology + If a more powerful computer is developed Makes production easier (and cheaper) - If stronger pollution controls are required Makes production harder (and costly)

3Elements of Nature/Prices of other goods Shift resources away from high production cost goods. Caused by natural disasters or market price of other goods

+ subsidies encourage production Taxes and Subsidies - taxes discourage production 4

5Number of Producers -fewer firms decrease supply +more firms increase supply

6Producer Expectations - if prices are expected to increase, more production about prices and resource availability - if prices are expected to decrease, less production

1 Resource Prices Why the curve shifts 2 Changes in Technology 3Prices of other goods Taxes and Subsidies 4 5Number of Producers 6Producer Expectations

Consumers responding to a Change in the Price of the good Caused by factors related to production of the good Harder or costlier to produce, price goes up Movement ALONG the curve Quantity $6 $5 $4 $3 $2 $ Demand Supply Curve Current Price Price P Q decrease increase Easier or less expensive to produce, price goes down What makes the Supply Curve Shift?? P1P1 P2P2 P3P3 Q2Q2 Q1Q1 Q3Q3 The Supply Schedule!! What makes the Supply Curve Shift??

Quantity $6 $5 $4 $3 $2 $ Demand Current Equilibrium Price P Q decrease increase P1P1 P2P2 P3P3 Q2Q2 Q1Q1 Q3Q3 Supply Caused by a change in a Determinant of Supply Shifting the Supply Curve

Response to a Change in the Price of the good Caused by factors related to consumers Movement ALONG the curve Quantity $6 $5 $4 $3 $2 $ Supply Current Price Price P1P1 P2P2 P3P3 Q2Q2 Q1Q1 Q3Q3

Economic Examples

A reduction in the supply of unskilled labor … pushes the wage rates of fast-food workers upward. Resources Market Employment $7.50 DRDR S1S1 Price (wage) E1E1 E2E2 S2S2 $6.25 Resource Prices, and Product Markets Price Product Market Q1Q1 DPDP Q2Q2 S1S1 Quantity S2S2 $2.25 $2.00 Higher wages cause a reduction in supply. This leads to higher hamburger prices.

2. Increase in the Demand for Loanable Funds r2r2 Q1Q1 r1r1 Q2Q2 Interest rate Quantity of loanable funds At the interest rate r the quantity of loanable funds demanded by borrowers into equals quantity supplied by lenders. An increase in demand will move D 1 to D 2 Higher interest rates encourage additional savings, making it possible to fund more borrowing. the interest rises to r 2 and increasing borrowing to Q 2 S D 1 D 2 Lending Borrowing

3. Increase in the Demand for Foreign Exchange 0.20 Q1Q1 Q2Q2 Exchange rate ($ per quetzal) Quantity of quetzal exchange S D 1 U.S. sales to Guatemala U.S. purchases from Guatemala D Begin in equilibrium, where the dollar price of the quetzal is $.10 (10 cents = 1quetzal). An increase in American demand for Guatemalan coffee will also increase the demand for quetzals (with which American importers pay Guatemalan coffee growers). Equilibrium occurs where the new demand D 2 just equals the supply S – at $.20 per quetzal with Q 2 > Q 1 quetzals clearing the market.

Price Controls

It stops the price from rising to the equilibrium level. –Example: rent control The direct effect of a price ceiling is a shortage: quantity demanded exceeds quantity supplied. 1. Price Ceilings Price ceiling is a legally established maximum price that sellers may charge.

In the rental housing market the price (rent) P 0 would bring the quantity of rental units demanded into balance with the quantity supplied. A price ceiling like P 1 sets a price below equilibrium … quantity demanded Q D … exceeds quantity supplied Q S … resulting in a shortage. The Impact of a Price Ceiling Price (rent) Quantity of housing units Price ceiling D QSQS QDQD P0P0 S P1P1 Shortage Rental housing market

Price floor is a legally established minimum price that buyers must pay. It stops the price from dropping down to equilibrium level. –Example: minimum wage The direct effect of a price floor above the equilibrium price is a surplus: quantity supplied exceeds quantity demanded. 2. Price Floors

A price floor like P 1 imposes a price above market equilibrium … causing quantity supplied Q D … Because prices are not allowed to direct the market to equilibrium, non-price elements of exchange will become more important in determining where scarce goods go. to exceed quantity demanded Q S … results in a surplus. The Impact of a Price Floor Price Quantity Price floor D QDQD QSQS P0P0 S P1P1 Surplus

Employment and the Minimum Wage Price (wage) Quantity (employment) Minimum wage level D E1E1 E0E0 S $ 5.15 Excess supply $ 4.00 Consider where a price (wage) of $4.00 could bring the quantity of labor demanded into balance with the quantity supplied. A minimum wage (price floor) of $5.15 would increase the earnings of those who were able to maintain employment (E 1 ), but would reduce the employment of others. Those who lose their job (E 0 to E 1 ) would be pushed into either the unemployment rolls or some other less preferred form of employment.

Elastic demand – quantity demanded is sensitive to small changes in price. –Easy to substitute away from good. Inelastic demand – quantity demanded is not sensitive to changes in price. –Difficult to substitute away from good. Elastic and Inelastic Demand Curves

Percent change in Quantity demanded Percent change in Price Measuring Elasticity > 1 : Elastic sensitive to Price changes < 1 : Inelastic not sensitive to Price changes Price Quantity (by more %) TR Price Quantity (by less %) TR

2. Necessity vs Luxury What affects Elasticity??? 3. Proportion of Income 1. Available Substitutes 4. Time to shop around

And the Drug Problem Demand Price P1P1 Q1Q1 Supply Quantity Inelastic Demand - necessity

Change supply: Inelastic Demand Price decrease increase P1P1 P2P2 P3P3 Q2Q2 Q1Q1 Q3Q3 Supply Quantity or Q then P Q then P eradication legalization

Elastic supply – quantity supplied is sensitive to changes in price. Inelastic demand – quantity supplied is not sensitive to changes in price. Elastic and Inelastic Supply Curves Price Quantity

a. Market Period What affects Elasticity of Supply??? b. Short Run 1. Time c. Long Run