Unit 1-8: Basic Economic Concepts

Supply and Demand Analysis Easy as 1, 2, 3 Before the change: Draw supply and demand Label original equilibrium price and quantity The change: Did it affect supply or demand first? Which determinant caused the shift? Draw increase or decrease After change: Label new equilibrium? What happens to Price? (increase or decrease) What happens to Quantity? (increase or decrease) Let’s Practice!

S&D Analysis Practice Analyze Hamburgers Before Change (Draw equilibrium) The Change (S or D, Identify Shifter) After Change (Price and Quantity After) Analyze Hamburgers New grilling technology cuts production time in half Price of chicken sandwiches (a substitute) increases Price of hamburgers falls from $3 to $1. Price for ground beef triples Human fingers found in multiple burger restaurants 1. Supply Increases 2. Demand Increases 3. No Shift. Shortage 4. Supply Decreases 5. Demand Decreases

Qe Q1 New grilling technology cuts production time in half Price S S1 Pe P decrease Q increase P1 D Qe Q1 Quantity 4

Qe Q1 2. Price of chicken sandwiches (a substitute) increases Price S P increase Q increase P1 Pe D1 D Qe Q1 Quantity

Qs Qe Qd 3. Price of hamburgers falls from $3 to $1. Price S Shortage Qd increase Qs decrease Pe P1 D Qs Qe Qd Quantity

Q1 Qe 4. Price for ground beef triples Price S1 S P1 Pe D Quantity P increase Q decrease D Q1 Qe Quantity

Q1 Qe 5. Human fingers found in multiple burger restaurants Price S Pe P decrease Q decrease Pe P1 D1 D Q1 Qe Quantity

Double Shifts Double Shift Rule: Suppose the demand for milk increased at the same time as production technology improved. Use S&D Analysis to show what will happen to PRICE and QUANTITY. Double Shift Rule: If TWO curves shift at the same time, EITHER price or quantity will be indeterminate (ambiguous).

Qe Q1 Demand increases AND supply increases Price S S1 P1 Pe D1 D P indeterminate Q increase Qe Q1 Quantity

Trick: Draw it out separately and combine the results P indeterminate Q increase

What if supply increases and demand falls? P decrease Q indeterminate

What if supply decreases and demand falls? P indeterminate Q decrease

Supply and Demand Practice Worksheet 14

Example of Voluntary Exchange Ex: You want to buy a truck so you go to the local dealership. You are willing to spend up to $20,000 for a new 4x4. The seller is willing to sell this truck for no less than $15,000. After some negotiation you buy the truck for $18,000. Analysis: Buyer’ Maximum- Sellers Minimum- Price- Consumer’s Surplus- Producer’s Surplus- $20,000 $15,000 $18,000 $2,000 $3,000

Voluntary Exchange Terms Consumer Surplus is the difference between what you are willing to pay and what you actually pay. CS = Buyer’s Maximum – Price Producer’s Surplus is the difference between the price the seller received and how much they were willing to sell it for. PS = Price – Seller’s Minimum