+ How are prices determined in our economy??? Consumers: Want to buy products at as low of a price as possible. + Producers: Want to sell a product at as high of a price as possible. The Result: A compromise price is reached that satisfies both consumers and producers. This price is called the Market Equilibrium.

Market Equilibrium The price at which the quantity demanded by consumers is the same as the quantity supplied by producers.

Supply and Demand Determine Prices Quantity supplied will Increase. Quantity demanded will decrease. If the price for the product increases, what will happen to the quantity supplied? If price goes up, what happens on the quantity demanded? The price that producers and consumers agree to. Market Equilibrium Price The quantity that consumers will demand, and producers will supply the same amount.

Surplus: A situation when the quantity supplied by producers is greater than the quantity demanded by consumers. Surplus Price Quantity Demanded: Quantity Supplied:

Market Equilibrium Price Shortage: A situation when the quantity supplied by producers is less than the quantity demanded by consumers. Market Equilibrium Price Price is lowered Shortage

Shortage To put it plainly: Surplus An increase in price causes a …. A decrease in price causes a … Shortage

Why are Diamonds so Expensive? Is it a SCAM? Video!

Blood Diamond Video Clip

Leonardo DiCaprio says… In order to keep diamonds expensive… “Control the supply and keep the demand high.” Supply low: “There’s an underground vault, where they keep all the stones off the market.” Demand high: “Tell some poor sap he’s supposed to pay three month’s salary on a diamond engagement ring.” They are not financing the war, but they’re making a situation that makes war very profitable What is the shifter?

Why are diamonds so expensive??? Price S1 When the diamond company held diamonds off the market hoping that this would increase price, this decreased the supply. Consumer tastes and preferences changed when diamonds were linked to marriage increasing demand. The Quantity supplied decreased because of the rise in price. Quantity demanded increased because of a rise in price. Price 3 Price 2 Price 1 D1 Quantity Quantity 1 Quantity 2 Quantity 3

Practice Price Changing What would happen to the price of Oreos if milk goes on sale? Step 1: Would this affect SUPPLY (selling) or DEMAND (buying)? (Think of the shifters) Answer: Demand! (Buying; Cost of related good) It INCREASES!

Step 2 Is Supply being affected? NO! (In our problems, EITHER supply will change OR demand will change. NEVER both, for the sake of keeping it simple.) Demand Supply Price Quantity

Step 3: GRAPH IT! Price Price 2 Price 1 Quantity1 Quantity2

Step 4. Figure out what happened to price and quantity Using the graph, we can clearly see that price increased and quantity increased. Demand Supply Price Quantity

Practice Price Changing What would happen to the price and quantity of cars if metals become more expensive? Step 1: Would this affect SUPPLY (selling) or DEMAND (buying)? (Think of the shifters) Answer: Supply! (Selling); Cost of inputs. More expensive to sell) It DECREASES!

Step 2 Is Demand being affected? NO! (In our problems, EITHER supply will change OR demand will change. NEVER both, for the sake of simplicity.) Demand Supply Price Quantity

Step 3: GRAPH IT! Price Price 2 Price 1 Q1 Q2

Step 4. Figure out what happened to price and quantity Using the graph, we can clearly see that price increased and quantity decreased. Demand Supply Price Quantity