Supply and Demand

Table of Contents The Basics The Law of Demand The Law of Supply Equilibrium Price and Quantity Equilibrium and Disequilibrium (2 slides) Shifts in Demand Shifts in Supply Double Shifts in Supply and Demand Price Controls - Price Floors and Price Ceilings Consumer and Produce Surplus Impacts of Price Control on Consumer/Produce surplus and deadweight lose Price Elasticity of Demand Price Elasticity of Supply Cross Price Elasticity of Demand Income Elasticity of Demand Market Failures- externalities

Supply and Demand The Basics Demand (D) Quantity (Q) Price (P) Supply (S) Equilibrium (Qs= Qd) P e Q e TC Y X

Supply and Demand The Law of Demand Demand- Different Quantities of goods and services that people are willing and able to buy at different prices. Quantity (Q) Price (P) The Law of Demand Price:Quantity Demanded Price and Quantity Demanded have an Inverse Relationship Q1 P1 P2 Q2 3 reasons why Substitution effect Income effect- loss of purchasing power. The more expensive the less you can buy Law of Diminishing maximum utility TC

Student Demand for a Slice of Pizza at a specific price P Qd

Supply and Demand The Law of Supply Supply- Different Quantities of goods and services that people are willing and able to produce at different prices. Quantity (Q) Price (P) The Law of Demand Price:Quantity Supplied Price and Quantity Supplied have an Direct Relationship Q1 P1 P2 Q2 Trade off between Labor and Leisure. The more money that can be made the more likely you will trade of leisure for labor. Opportunity Cost. TC

Supply and Demand Equilibrium Equilibrium- The quantity where price has adjusted so that quantity demanded is equal to quantity supplied. The amount that the buyers are willing and able to purchase matches the amount that producers are willing and able to sell. TC Demand (D) Quantity (Q) Price (P) Supply (S) Equilibrium (Qs= Qd) P e Q e In nature water seeks its own level. Price does the same thing. Both Quantity supplied and Quantity demand works towards each other.

Supply and Demand Equilibrium and Disequilibrium- Surplus TC Demand (D) Quantity (Q) Price (P) Supply (S ) Equilibrium (Qs= Qd) $5 P e Q e $20 Price Floor Qd Qs Surplus Surplus happens when Quantity supplied is greater than the quantity demanded Almost always result from price controls

Supply and Demand Equilibrium and Disequilibrium- Shortages TC Demand (D) Quantity (Q) Price (P) Supply (S ) Equilibrium (Qs= Qd) $5 P e Q e $2 Price Ceilings Qd Shortage Shortages happens when Quantity demanded is greater than the quantity supplied Almost always result from price controls. Q s

Demand (D) Quantity (Q) Price (P) Supply (S ) Equilibrium (Qs= Qd) $5 P e Q e Supply and Demand Price Floors and Price Ceilings $20 P Price Floor Demand (D) Quantity (Q) Price (P) Supply (S ) Equilibrium (Qs= Qd) $5 P e Q e $2 P Price Ceiling Surplus Shortage Qd Qs Qd Price Floors are created to keep prices over equilibrium. Qd is less than Q s= surplus Example- Minimum wage Price Ceilings are created to keep prices under equilibrium. Qs is less than Qd= shortage Example- Rent Control TC Price Controls are inefficient Clip 2 Clip 1

CS Supply and Demand Consumer and Producer Surplus TC Q e Demand (D) Quantity (Q) Price (P) Supply (S ) Equilibrium (Qs= Qd) $2 P e Consumer Surplus-= (Price that the consumer is willing to pay – The Equilibrium price) Price consumers are willing to pay. “I bought it for $5 but I would have paid $8.” Demand is value Producer Surplus-= (The Equilibrium price- Price that the producer is willing to sell) $4 $1 PS Price producers are willing to sell. “I sold it for $5 but I would have sold it for $2.” Supply is production cost. Products are consumed by the consumers who want them the most and would be willing to pay more if they had to. Products are produced by the producers at the lowest price because they are willing to sell it for less.

Supply and Demand Consumer and Producer Surplus with a Price Ceiling TC Q e 100 Demand (D) Quantity (Q) Price (P) Supply (S ) Equilibrium (Qs= Qd) $2 P e Consumer Surplus-= (Price that the consumer is willing to pay – The Equilibrium price) Producer Surplus-= (The Equilibrium price- Price that the producer is willing to sell) $4 $1 $1.50 Price Ceiling Q s 50 Q d CS PS Dead weight loss Dead weight loss- represents product that was never produced. Ceilings result in shortages

Supply and Demand Shifts in Demand- besides current price changes what other factors shift demand? TC (D) Quantity (Q) Price (P) Supply (S ) Equilibrium (Qs= Qd) $5 P e Q e When there is an increase in Quantity demand Price increases (direct) (D1) Q 1 P 1 When there is an decrease in Quantity demand Price decreases (direct) (D) Quantity (Q) Price (P) Supply (S ) Equilibrium (Qs= Qd) $5 P e Q e Q 1 P 1 (D1) 5 Demand Shifters 1. Change in Taste (Direct) 2. Change in income- normal products- direct, inferior products- inverse 3. Change in market size (number of consumers) - direct 4. Expectations of consumers (future price, future availability, future income) 5. Price of related goods (substitutes – direct, complements- inverse)

Supply and Demand Shifts in Supply- besides current price changes what other factors shift supply? TC (D) Quantity (Q) Price (P) (S) Equilibrium (Qs= Qd) $5 P e Q e When there is an increase in Quantity supplied Price decreases Q 1 P 1 When there is an decrease in Quantity supplied Price increase (D) Quantity (Q) Price (P) Supply (S ) Equilibrium (Qs= Qd) $5 P e Q e Q 1 P 1 (S1) 7 Supply Shifters 1. Resource Cost (wages and raw materials)- inverse 2. Alternative output price change - inverse 3. Technological improvements 4. Number of Suppliers - direct 5. Producer expectations about future- inverse 6. Subsides – government gives money to produce - direct 7. Taxes- inverse

TC

D1 D1 D1 D1 D2D2D2D2 P QD 1 QD 2 increase in taste An increase in taste for DVDs results in an increase in demand increase in demand. decrease in taste A decrease in taste for videos results in a decrease in demand decrease in demand. D3D3D3D3 QD 3 TC

. “Decrease in demand” after the salmonella scare. D1D1 D2D2 P 11 have died and 529 have gotten sick. [430 peanut products recalled] Wall Street has gotten so bad that stockholders try to kill themselves by eating peanuts. TC

Increase in demand for dark chocolate after studies revealed that there were health benefits from eating it. Scientists have discovered that smokers who ate dark c hocolate had less hardening of the arteries and a lowered risk of blood clots. D1D1D1D1 D2D2D2D2 P TC

D1 D1 D1 D1 D2 D2 D2 D2 P QD 1 QD 2 More income results in more demand for new cars; less demand for used cars. New Cars Used Cars Less income results in more demand for used cars; less demand for new cars. TC

D1 D1 D1 D1 D2 D2 D2 D2 P QD 1 QD 2 More demand for both normal & inferior goods New Cars Used Cars one billion Chinese new potential This is what we told one billion Chinese, as new potential consumerstrade relations 1972 consumers, when we opened trade relations with them in TC

D1 D1 D1 D1 D2 D2 D2 D2 P QD 1 QD 2 iRate I f Steve Jobs responds to iRate customers who iPhone iSorry bought the iPhone at $599 and says, “iSorry, we will raise the price back to $599 in 3 weeks.” iPhone $399 Buy it now to save money. TC

D1 D1 D1 D1 D2 D2 D2 D2 P QD 1 QD 2 major shortage of toilet tissue If there is expected to be a major shortage of toilet tissue, then consumers will stock up now or risk not getting any. TC

D1 D1 D1 D1 D2 D2 D2 D2 P QD 1 QD 2 coming out of recession Let’s say that we are coming out of recession & consumers Positive future income feel secure about their jobs. [ Positive future income ] TC

D1 D1 D1 D1 D2D2D2D2 P QD 1 QD 2 going into a recession Let’s say that we are going into a recession and consumers Negative future income don’t feel secure about their jobs. [ Negative future income] TC

Complement [ Inverse ] Substitute [ Direct ] Milk Cereal Pop Tarts D1D1D1D1 D2D2D2D2 P P1P1P1P1 QD 1 P2P2 D1D1D1D1 D2D2D2D2 D P QD 2 TC

1. Resource Cost [wages & raw materials ] [Inverse] Wages Raw Materials Intel Pentium Chip S If resource cost decreases supply Increases [making more $] If resource cost increases supply Decreases [making less $] S S P

P1 QS1 Broccoli “Substitutes in production” I only have 200 acres S Corn S1S1S1S1 P S2S2S2S2 QS1 QS1 S1S1S1S1 P S2S2S2S2 S Corn Producers want to produce more of the good where price is increasing, or at least, where the price is not going down. Broccoli P2 QS2 QS2

S Because cows produce more milk, farmers don’t have to have as many cows. [ saves $ ] S P We love these cow waterbeds because we get better blood flow and can produce 30% more milk. Supply curve “udderly” moves “udderly” to the right. Less skin abrasions so happier cows produce more milk. Mooooove over and give me that waterbed. Waterbedsforcows.com

NFL S1S1P Q $50 $50 Supply of FB games increased when the XFL was formed. S2S2S2S2 QS 1 QS 2 XFL in 2001 XFL in 2001 Supply of FB games each week XFL [Extreme Football League] 8 new teams More games each year

Bubba Gump Shrimp C ompany shrimp prices to increase more I f the Bubba Gump Shrimp C ompany expects shrimp prices to increase more in the future, they will supply (more/less) shrimp to the market now. Bubba Gump Shrimp C ompany shrimp prices to decrease more I f the Bubba Gump Shrimp C ompany expects shrimp prices to decrease more in the future, they will supply (more/less) shrimp to the market now. S1S1S1S1 [“INVERSE”] P S2S2S2S2 S2S2S2S2 TC

S3S3S3S3 [Direct] P subsidies Free money from the government (subsidies) induces suppliers to supply more. S1S1S1S1 S2S2S2S2 If subsidies are taken away, then suppliers are losing money and will decrease supply. TC

S3S3S3S3 [Inverse] P taxes decreased If business have their taxes decreased, it moves the supply curve to the right. S1S1S1S1 S2S2S2S2 taxes increased If business have their taxes increased, it moves the supply curve to the left. I’m losing profits.” TC

Market Failures Imperfect Information- (making irrational decisions) Principal Agent Problems- (Conflict of Interest) Non- Competitive Markets (imperfect competition) – Monopolies, Oligopolies, and cartels) Public Goods- when the private sector will not produce something Externalities- Spillover effect both positive and negative TC

Market Failure Positive Externalities (spillover benefit) (D) MB (private) (Q) (P) (S)- MSC P fm Q fm TC D1- MSB Q optimal MSC= MSB Problem: At Q free market, to little is being produced. Q fm Solution: Because the demand has increased, the price may increase as well. Government give a subsidy to consumer to help pay for the extra cost.

Market Failure Positive Externalities (D) MSB (Q) (P) (S)- private P fm Q fm TC S1- MSC Q optimal MSC= MSB Problem: At Q free market, to little is being produced. Q fm Solution: The Government can give the private supplier an incentive to increase the supply by paying them a subsidy to make up for the decrease in price due to the increase in supply

Market Failure Negative Externalities (spillover cost) (D)= MSB (Q) (P) (S) private P fm Q fm TC S1- msc msc= private cost + external cost Q MSC= MSB Problem: At Q free market, to much is being produced. Q fm Solution: Per unit tax on producers

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Market Failures TC