Supply and Demand P Q S D

Review Demand Law of Demand? Changes in demand $3 15 $5 12 Inverse relationship between price and quantities demanded Indicating a change In the quantities demanded P Q So, when prices increase, smaller quantities are demanded But when prices fall… $5 12 Other factors intervene to cause demand to shift as consumers want more or less of the product at all the various prices in the market … greater quantities are demanded Causing the demand curve itself to shift 17 So that … An increase in the price of a substitute causes demand to shift … A fall in average household incomes …Huge annual sale announced for next week Using the product becomes the “in thing” The price of a complement decreases The population swells third consecutive month

Supply Review Law of Supply Change in Supply Is reflected in a supply curve indicating a change in the quantities supplied P Q S $5 8 $9 15 QS and P = direct relationship P Q $5 15 When whole supply curve shifts due to factors other than price When taxes decrease … 23 When price of production materials rise Prices expected to decrease next year A new company selling the product enters the market New regulatory procedures are required of the industry New computerized assembly line Absentee and punctuality problems ariseNew subsidies bill passed

Supply and Demand are powerful tools for helping us understand the economy, how it works and why prices are as they are. So, let’s begin!

P Q S D Market equilibrium S = D Clearing of the market No surpluses/No shortages Relatively stable prices Price at equilibrium EP QS = QD at equilibrium EQ

P Q S D EP EQ What does the Law of Demand Say will happen? What does the Law of Supply predict? What exists when supply Is greater than demand? Surplus How do you get rid of a surplus? Lower prices Until price finds equilibrium

P Q S D EP EQ Law of Supply?Law of Demand? What happens when demand Is greater than Supply? Shortage

$5 $ P Q S D Surplus or shortage? More supplied Than demanded Surplus of 10 products of how many products?

S D What happens if government intervenes and by law, fixes prices above equilibrium? Surplus Price floor Why? Because the market is always pushing towards its equilibrium How? By creating surpluses and shortages But when govt. sets price floors Prices are prevented from dropping below the “floor” to the lower market price

When govt. prevents prices from rising to equilibrium Price ceiling Why? Because govt. economic policy prevents the market from rising above the “ceiling” to its equilibrium S D P Q

3 story building Price Family Equilibrium Floor Ceiling Floor

P Q S D EP EQ Price Floor Price Ceiling Equilibrium “Floor”

Questions 1.What do price ceilings always create?  Shortages 2.To where do prices in the market try to move?  Equilibrium 3.What prevents prices from falling to equilibrium?  Price floor 4.What do price floors create?  Surpluses 5. Who sets price floors and ceilings?  The government

S D S & D curve for Shoes Price of leather drops S2S2 What happens if price does not rise to its new EQ? Surplus How are surpluses reduced? A sale, causing price to reach to its equilibrium When supply increases, prices fall

S1S1 D Q P Shoes Shoe workers go on strike S2S2 Shortage How do you get rid of a shortage? Raise prices When supply decreases, prices tend to increase

P Q S D EP EQ Shoes The recession turns depressionary, and wages fall another 18% D2D2 If price does not fall to its new equilibrium … More will be supplied Than demanded Creating a surplus of shoes To get rid of excess shoes?Lower prices! New adjusted EP When demanddecreases, prices fall

S D P Q EP EQ Shoes Donuts when 5,000 new cops are hired D2D2 Creating a shortage Pushing price Up to its new equilibrium

P Q S D What happens to market price for building new houses during a long stretch of good weather? S2S2

What happens to the equilibrium price of toilet paper when the popularity of self-washing-and-drying toilets increases P Q S DD2D2

P Q AS 1 AD 1 What happens to the market price of jelly beans when the price of sugar doubles? AS 2

Got it so far? Ready for a twist?

P Q S D EP EQ Market price for diapers during a population boom and a significant increase in corporate tax rates P2P2 D2D2 S2S2 P3P3

P Q S D $5 25 Supply and demand for roses when a drought continues through to Valentine’s Day Drought? Valentine’s Day? $8 D2D2 $10 20 S2S2 Either a decrease in supply or increase in demand will Increase prices But both a decreased supply and an increase in demand will raise prices most significantly

Last one …

P Q S D Changes in the S&D curve for small cars when gas prices triple and new advances in productivity save 15% in manufacturing costs Gas? D2D2 Productivity? S2S2 Market prices fall either when there is a decrease in demand or an increased supply of a product. Prices fall most dramatically when both occur

Questions