Basic Assumption Ceteris Paribus – other things being equal - only consider price changes

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 Incomes Price of Other Goods Consumer Tastes Number of Consumers Consumer Expectations

1 Consumer 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!!! Or why the curve shifts

-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

2 Consumer Tastes - beanie hats make a comeback Demand increases -Hula Hoops go out of style Demand decreases

3 Number of Consumers (also Demographics) -Hurricanes around Labor Day Fewer tourists touring Florida and the Gulf Coast, demand decreases More tourists touring, NC and SC, demand increases

4 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)

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

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

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 3 Changes in Natural Conditions Taxes and Subsidies 6 4 Number of Producers Producer Expectations 5

1 Changes is Natural Conditions Shift resources away from high production cost goods. Caused by natural disasters or market price of other goods Or why the curve shifts

2 Resource Prices - gas is discovered under CVCC Supply increases -Minimum wage goes up Supply decreases

3 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)

+ 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

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

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

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

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

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

Government Intervention in the Market: Price Controls

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. 1. Price Floors

A price floor like P 1 sets a price above market equilibrium causing quantity supplied Q D … Non-price factors will become more important than prices in determining where scarce goods go. to exceed quantity demanded Q S … resulting in a surplus. The Impact of a Price Floor Price Quantity Price floor D QDQD QSQS P0P0 S P1P1 Surplus

Direct effect: –Reduces employment of low-skilled labor. Indirect effects: Reduction in non-wage component of compensation. Less on-the-job training. May encourage students to drop out of school A higher minimum wage does little to help the poor. Minimum Wage Effects

Employment and the Minimum Wage Price (wage) Quantity (employment) Minimum wage level D E1E1 E0E0 S $ 5.15 Excess supply $ 4.00 If a price (wage) of $4.00 could bring equilibrium. A minimum wage (price floor) of $5.15 would increase the earnings of those who stayed employed (E 1 ), but would reduce the employment of others. Those who lose their job (E 0 to E 1 ) would be pushed into either unemployment or some other less preferred form of employment.

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. 2. 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

The future supply of housing will decline. The quality of housing will deteriorate. Non-price methods of rationing will increase in importance. Effects of Rent Control Long-term renters will benefit at the expense of newcomers.