andDemand P Q S1S1 D1D1 D2D2 D3D3 S3S3 S2S2 “OK, I was wrong. It is a matter of supply and demand, and now I think you da “man”.

Consumers and Producers Feel Differently About High and Low prices Producers supply more at the higher price because the opportunity cost increases if they don’t. Consumers consume less at the higher price because they now have less money to spend. Producers supply less at the lower prices because the opportunity cost decreases if they don’t. Consumers consume more at the lower price because they now have more money to spend. I was going to buy a Honda but this car is $4,000 cheaper. I’m saving money at the lower price. I normally eat one, but at this low price, I’m having two.

“Bread & Butter” of Economics [“perfectly competitive markets”] Law of Supply The Law of Supply says QSdirectlyprice QS varies directly with price. P2P2P2P2 QS 1 QS 2 S Direct – price and QS move in the same direction. (increase together or decrease together) P1P1P1P1 Supply (& Demand ) Law Of Demand The Law Of Demand says QD inversely price QD varies inversely with price.

“Bread & Butter” of Economics [“perfectly competitive markets”] “Bread & Butter” of Economics [“perfectly competitive markets”] learned in The law of supply and demand is learned in infancy. Infants demand clean diapers infancy. Infants demand clean diapers and supply peace and quiet are willing to supply peace and quiet in Mothers demand peace and quiet exchange. Mothers demand peace and quiet supply clean diapers and are willing to supply clean diapers in exchange. The terms of trade are arranged.. “One scream equals one diaper. The price of one diaper is one scream.” “willingness to sell.” Supply – producers “willingness to sell.” Or, the “amount of products offered at each price during a specific time period.” Supply (and Demand)

Supply ( and Demand) “Bread & Butter” [“perfectly competitive markets ”] Supply ( and Demand) “Bread & Butter” of Economics [“perfectly competitive markets ”] Law of Supply QSdirectlyprice Law of Supply – QS varies directly with price. Suppliers offer more higher prices Suppliers offer more for sale at higher prices consumers than at lower prices. The consumers, being on the paying end, tend to buy a small buy more if amount of the product, but will buy more if price is loweredsupplier the price is lowered. The supplier, on the price as an incentive receiving end, considers price as an incentive to sell a product. The higher the price, the more incentive he has. Bread Butter

SUPPLY DEFINED SUPPLY SCHEDULE $12345P QS CORN Various Amounts And why is talk so cheap? Supply is excessive. Cut Supply & you will increase demand.

LAW OF SUPPLY increases - As price increases increases …Q S also increases DirectPQS Direct relationship between P & QS P2P2P2P2 P1P1P1P1 QS 1 QS 2 S P1P1P1P1 P2P2P2P2 S “Let’s make more.” “Take it. We are losing money.” QS 2 QS 1 decreases -As price decreases decreases … QS also decreases

. Broccoli “ Suppliers produce smaller/ larger quantities at each price.” “Substitutes in production” I only have 200 acres S 3 S 1S2 S 3 S 1 S2 Change in “Supply” [Curve] RATNEST 1. “Non-price change” [RATNEST] 2. Whole supply curve “shifts” [There was a QS change but it was not caused by a change in price] S Corn S1S1S1S1 P S2S2S2S2 QS1 QS2 Alternative Output Price Change [INVERSE] QS 1 QS 1 P2P1P2P1 P S1S2S1 S2S1S2S1 S2 [new football league- bigger “S ” of games ] Don’t confuse these two with Chg in QS. QS 2 QS 3 “Supply Shifters” [RATNEST] R INVERSE 1. R esource Cost [wages /raw materials ] [INVERSE] A INVERSE 2. A lternative Output Prices [INVERSE] TDIRECT 3. Technology [DIRECT] N DIRECT 4. N umber of Suppliers [DIRECT] E INVERSE 5. E xpectations [about future price] [INVERSE] S DIRECT 6. S ubsidies [DIRECT] T INVERSE 7. T axes [INVERSE]

R inverseR esource C ost [ wages & raw materials ] [ inverse ] A inverseA lternative O utput price changes [ inverse ] T directTechnology [ direct ] N directNumber of S uppliers [ direct ] E inverseE xpectation(Suppliers) about future price [ inverse ] S directS ubsidies [ direct ] T inverse T axes [ inverse ] Bigger supply of games “Take this money.” Decr in “S” of broccoli down Up Supply Shifters [“RATNEST”]

DETERMINANTS [Shifters] OF SUPPLY [RATNEST – non PL ] R inverse1. R esource C ost [ wages & raw materials ] [ inverse ] Increase in wages (increases/decreases) supply. Ex: A decrease in the price of computer chips (increases/decreases) the supply of computers. A inverse2. A lternative O utput price changes [ inverse ] If the price of corn decreases, the supply of broccoli (increases/decreases). AS3 AS1 AS2 P Supply P S1 S2S1 S2S1 S2S1 S2

Technological Improvement 3. Technological Improvement increases “S”. This lowers production costs & increases “S”. Ex: Suppose a new milking machine called “The Invisible Hand” “The Invisible Hand” has a very soothing effect on cows; cows find the new machine “udderly” so “udderly” delightful that they produce 30% more milk 30% more milk. This technological advance shift to the right will cause a shift to the right. 54 “Can’t wait till milking time.”

4. Number of producers [direct] If more firms enter an industry, the supply curve will shift to the (left/right). When the American Basketball League began play in 1968, there was a (bigger/smaller) supply of basketball games each week A new professional football league will (increase/decrease) the supply of football games. AS 3 AS 1 AS 2

P roducer E xpectations about Future Price [ Inverse ] 5. P roducer E xpectations about Future Price [ Inverse ] 59expect 59. If oil p roducers expect future oil prices to decline, they will (increase/decrease) current production. AS 3 AS 1 AS 2 Supply Oil Prices Expected to decrease P

6. Subsidies – free money from “G” Taxes 7. Taxes – take away business profits and decrease supply Businesses have their taxes increased which moves the supply curve to the (left/right). Free money from the government (subsidies) induces suppliers to supply more.

Shortage of Face Masks for S Shortage of Face Masks for S ARS Young Hong Kong ballet dancers wear masks to protect themselves from SARS. 770 people died from this disease.

So What to use if there is a shortage?

$1200 $600 $ D1D1 Effects of an Increase in Demand on Equilibrium D2D2D2D2 $900 S P Q 16 QD=16 QS=8 Shortage Shortage

$40 30 $30 $ D2D2D2D2 S D1D1D1D1 $20 Effects of a Decrease in Demand on Equilibrium P QS=30 QD=10 Surplus Q

$4 $ D $3 $2 S1S1S1S1 Effects of an Increase in Supply on Equilibrium S2S2S2S2 QS=80 QD=40 Surplus P Q

$800 $ D $600 S1S1S1S1 S2S2S2S2 $400 Effects of an Decrease in in Supply on Equilibrium QS=2 QD=6 Shortage P Q

Decrease in Supply DS1S1 P1P1 Q1Q1Q1Q1 P2P2P2P2 Q2Q2Q2Q2 S2S2S2S2 Shortage

Increase in Supply D S1S1S1S1 P1P1P1P1 Q2Q2Q2Q2 P2P2P2P2 Q2Q2Q2Q2 S2S2S2S2 Surplus $

rise fallstay the same Decide if the price of oranges is going to rise, fall, or stay the same. ___1. All of the growers meet & agree to grow fewer oranges next year. ___2. Growers plant more acres of orange trees. ___3. Orange growers run an advertising campaign promoting oranges as a symbol of good health. ___4. One grower [out of thousands] retires and stops growing oranges. ___5. Growers develop a bigger and better tasting orange. ___6. Orange growers are struck by the disease-causing Mediterranean fruit fly. Quantity of Oranges R F R S R R Juicy “Orange” Prices

“ Increase in D ” “Decrease in D ” “Increase in S ” “Decrease in S ” incomeused cars ___1. Decrease in income on market for used cars. incomenew cars ___2. Decrease in income on market for new cars. Consumer expectationsprice decrease ___3. Consumer expectations about a price decrease. Producer expectations price decrease ___4. Producer expectations about a price decrease. # of producerscomputers ___5. Increase in # of producers on the market for computers. # of consumersused cars ___6. Increase in # of consumers on the market for used cars. # of consumersnew cars ___7. Increase in # of consumers on the market for new cars. moviespopcorn ___8. Decrease in the price of movies upon the market for popcorn. business taxescomputers ___9. Decrease in business taxes on the market for computers. Consumer expectationsapples ___10. Consumer expectations of a shortage of apples. resource costcomputers ___11. Decrease in resource cost on market for computers. wheatcorn ___12. Increase in price of wheat upon market for corn. Consumer expectations ___13. Consumer expectations of a shortage of cell phones. Producers expectations ___14. Producers expectations about a price increase. incomeiPod nanos ___15. Increase in income on the market for iPod nanos. B B C C A A C A D C A A A A D D 1 D 2 (A) (B) (C) (D) D1D1D1D1 D2D2D2D2 S S S1S1S1S1 S1S1S1S1 S2S2S2S2 S2S2S2S2 D D TIMER RATNEST P2P2P2P2 P1P1P1P1 P1P1P1P1 P2P2P2P2 P1P1P1P1 P2 P2P2P2P2 P1P1P1P1 QD 1 QD 2 QD 2 QD1 QD 1 QD2 QD 2 QD1

MARKET DEMAND & SUPPLY MARKET DEMAND & SUPPLY 7 S Q o $5 4$ PQDQD $5 $4$3 $2 $1 2,000 4,0007,000 11,000 16,000 $5 $4$3 $2 $1 12,000 10,0007,000 4,000 1,000 D P QSQS Price of Corn Quantity of Corn CORN MARKET CORN MARKET Market Clearing Equilibrium

Banana Supply & Demand Q o D1D1D1D1 Quantity Price (per pound) S1S1S1S1 S2S2S2S2 P Q1Q1Q1Q1 Q2Q2Q2Q2 P1P1P1P1 P2P2P2P2 Crop Freezing Damage…

Price Floor minimum pricesurpluses Price Floor – minimum price [creates surpluses]. $2.50 S P Q D Surplus Such as: Minimum Wage Agricultural Price Supports The price has to be IN IN the house. It can’t be below the floor. Some call agricultural price “ udder insanity.” supports “ udder insanity.” Price Floor-minimum price QS exceeds QD Millions of gallons per month 1.90 Price per gallon Equilibrium price for milk

Price Ceilingmaximum priceshortages Price Ceiling - maximum price [creates shortages] 7 S P o D Shortage Such as: Rent controls in NYC Wartime price controls Rock concert prices Super Bowl tickets The price has to be in in the house. It can’t be above the ceiling. Super Bowl T icket P rices E-Bay E-Bay $ $500$2-6, $500 $2-6,000 Reliant Stadium NFL could raise the price & make another $150 M but the average man couldn’t attend Price Ceiling-maximum price QD exceeds QS Millions of Dwellings Rented $2,000 1, NYC Rent Controls