1. Supply and Demand together at last!

2. Law of Demand: Buyer Behavior High prices mean low demand

3. Law of supply: Seller/Producer Behavior High price means high supply

4. SUPPLY and DEMAND Together, S & D graphically explain market conditions These two laws directly oppose one another…how will anything be bought or sold?! – EQUILIBRIUM! The point where supply = demand

5. Supply and demand Equilibrium or market clearing price – The point at which sellers are willing to sell as much as buyers are willing to buy – Qd=Qs

6. Equilibrium/Market Clearing Price Found through trial and error! Buyers and sellers interact until quantity demanded equals quantity supplied – Example: Encryption (pictured) tries to sell concert tickets for $10 but no one buys them, so the price must be lowered until it reaches the demand (turns out it’s -$2)

7. P Q D S Surplus (a.k.a. excess supply): When quantity supplied is greater than quantity demanded Surplus Example: If P = $5, then Q D = 9 lattes and Q S = 25 lattes resulting in a surplus of 16 lattes

8. P Q D S Surplus (a.k.a. excess supply): When quantity supplied is greater than quantity demanded Facing a surplus, sellers try to increase sales by cutting price. This causes Q D to rise Surplus …which reduces the surplus. and Q S to fall…

9. P Q D S Surplus (a.k.a. excess supply): When quantity supplied is greater than quantity demanded Facing a surplus, sellers try to increase sales by cutting price and output. This causes Q D to rise and Q S to fall. Surplus Prices continue to fall until market reaches equilibrium.

10. P Q D S Shortage (a.k.a. excess demand): When quantity demanded is greater than quantity supplied Example: If P = $1, then Q D = 21 lattes and Q S = 5 lattes resulting in a shortage of 16 lattes Shortage

11. P Q D S Shortage (a.k.a. excess demand): When quantity demanded is greater than quantity supplied Facing a shortage, sellers raise the price, causing Q D to fall …which reduces the shortage. and Q S to rise, Shortage

12. P Q D S Shortage (a.k.a. excess demand): When quantity demanded is greater than quantity supplied Facing a shortage, sellers raise the price, causing Q D to fall and Q S to rise. Shortage Prices continue to rise until market reaches equilibrium.

13. Law of Demand: Buyer Behavior H igh prices means low demand Determinants of Demand –I–Income: normal good, inferior good or neutral good –P–Preferences and tastes –P–Price of related goods: substitute or complement –N–Number of buyers –F–Future expectations

14. Law of supply: Seller/Producer Behavior H igh price means high supply Determinants of supply –C–Changes in resource/input costs –G–Government influences: taxes, subsidies and quotas –F–Future expectations of prices –W–Weather –N–Number of suppliers –T–Technological advances

15. Bell Ringer! List each of the factors that shift the SUPPLY curve. What is equilibrium and how is it determined?

16. Three Steps to Analyzing Changes in Equilibrium To determine the effects of any event, 1. Decide whether event shifts S curve, D curve, or both. 2. Decide in which direction curve shifts. 3. Use supply-demand diagram to see how the shift changes equilibrium P and Q. To determine the effects of any event, 1. Decide whether event shifts S curve, D curve, or both. 2. Decide in which direction curve shifts. 3. Use supply-demand diagram to see how the shift changes equilibrium P and Q.

17. EXAMPLE: The Market for Hybrid Cars P Q D1D1 S1S1 P1P1 Q1Q1 price of hybrid cars quantity of hybrid cars

18. STEP 1: D curve shifts because price of gas affects demand for hybrids. S curve does not shift, because price of gas does not affect cost of producing hybrids. STEP 2: D shifts right because high gas price makes hybrids more attractive relative to other cars. EXAMPLE 1: A Shift in Supply or Demand? EVENT TO BE ANALYZED: Increase in price of gas. P Q D1D1 S1S1 P1P1 Q1Q1 D2D2 P2P2 Q2Q2 STEP 3: The shift causes an increase in price and quantity of hybrid cars.

19. EXAMPLE 1: A Shift in Supply or Demand? P Q D1D1 S1S1 P1P1 Q1Q1 D2D2 P2P2 Q2Q2 Notice: When P rises, producers supply a larger quantity of hybrids, even though the S curve has not shifted. Always be careful to distinguish b/w a shift in a curve and a movement along the curve.

20. STEP 1: S curve shifts because event affects cost of production. D curve does not shift, because production technology is not one of the factors that affect demand. STEP 2: S shifts right because event reduces cost, makes production more profitable at any given price. EXAMPLE 2: A Shift in Supply or Demand EVENT: New technology reduces cost of producing hybrid cars. P Q D1D1 S1S1 P1P1 Q1Q1 S2S2 P2P2 Q2Q2 STEP 3: The shift causes price to fall and quantity to rise.

21. Answer the questions on your notes using the following graph!

22. Terms for Shift vs. Movement Along Curve Change in supply: a shift in the S curve occurs when a non-price determinant of supply changes (like technology or costs) Change in the quantity supplied: a movement along a fixed S curve occurs when P changes Change in demand: a shift in the D curve occurs when a non-price determinant of demand changes (like income or # of buyers) Change in the quantity demanded: a movement along a fixed D curve occurs when P changes 22

23. Bell Ringer!!! 1. Which graph (top or bottom) shows a change in demand? Which shows a change in quantity demanded? 2. Which graph (left or right) shows a change in supply? Which shows a change in quantity supplied?

24. Bell Ringer!!! 3. Draw and describe a price floor! 4. Draw and describe a price ceiling!

25. Price Controls Price Floor: A legislated (government-created) price for a good or service that is set above equilibrium. In other words—an artificially-set price that prevents the market from reaching the equilibrium price. Example: Minimum wage. The government has imposed the lowest price that can be paid for labor at $7.25/hour. The result is a surplus of workers (that’s part of the reason we have an unemployment rate!)

26. Price Controls Price Ceiling: A legislated (government-created) price for a good or service that is set below equilibrium. In other words, an artificially-set price that prevents the market from reaching the equilibrium price. Example: Rent control. In order to try to maintain affordable housing, local governments may set a price above which landlords may not charge for rent. This results in a shortage of apartments.

27. Unit Two Packet 1.Demand Guided Notes 2.Elasticity WS 3.Supply Guided Notes 4.Supply and Demand Together Notes 5.Unit Two Study Guide 6.Bell Ringers!