1. Current Events
The production cost of an average milk chocolate bar has surged by 25 percent over the last year, due to growing demand in emerging markets and bad weather in cocoa-producing countries. As a result, US retail prices for chocolate are up 7 percent.

2. Putting Supply and Demand Together Krugman’s Module 7 Demand / Supply

3. Market Equilibrium
A market will determine the price at which the quantity of a product demanded is equal to the quantity supplied.
At this price, the market will be in equilibrium, meaning that the amount consumers wish to purchase at this price is matched exactly by the amount producers wish to sell. 3

4. TO DETERMINE EQUILIBRIUM NEED TO GRAPH SUPPLY AND DEMAND TOGETHER
Equilibrium occurs when quantity supplied exactly equals quantity demanded.
Price S D
Quantity 4

5. S&D together = E so What is E point on graph below?
Supply Schedule
Demand Schedule S $5 4 3 2 1 P Qd $5 10 $4 20 $3 30 $2 50 $1 80 P Qs $5 50 $4 40 $3 30 $2 20 $1 10 D o Q

6. Equilibrium Price = $3 (Qd=Qs) Equilibrium Quantity is 30
Supply Schedule
Demand Schedule S $5 4 3 2 1 P Qd $5 10 $4 20 $3 30 $2 50 $1 80 P Qs $5 50 $4 40 $3 30 $2 20 $1 10
Equilibrium Price = $3 (Qd=Qs) D o Q
Equilibrium Quantity is 30

7. What if the price increases to $4?
Supply Schedule
Demand Schedule S $5 4 3 2 1 P Qd $5 10 $4 20 $3 30 $2 50 $1 80 P Qs $5 50 $4 40 $3 30 $2 20 $1 10 D o Q 7

8. How much is the surplus at $4?
At $4, there is disequilibrium. The quantity demanded is less than quantity supplied. P
Supply Schedule
Demand Schedule S $5 4 3 2 1
Surplus
(Qd<Qs) P Qd $5 10 $4 20 $3 30 $2 50 $1 80 P Qs $5 50 $4 40 $3 30 $2 20 $1 10
How much is the surplus at $4?
Answer: 20 D o Q 8

9. What if the price decreases to $2?
Supply Schedule
Demand Schedule S $5 4 3 2 1 P Qd $5 10 $4 20 $3 30 $2 50 $1 80 P Qs $5 50 $4 40 $3 30 $2 20 $1 10
Answer: 40 D o Q 9

10. How much is the shortage at $2?
At $2, there is disequilibrium. The quantity demanded is greater than quantity supplied. P
Supply Schedule
Demand Schedule S $5 4 3 2 1 P Qd $5 10 $4 20 $3 30 $2 50 $1 80 P Qs $5 50 $4 40 $3 30 $2 20 $1 10
How much is the shortage at $2?
Answer: 30
Shortage
(Qd>Qs) D o Q 10

11. The FREE MARKET system automatically pushes the price toward equilibrium.
Supply Schedule
Demand Schedule S $5 4 3 2 1
When there is a surplus, producers lower prices P Qd $5 10 $4 20 $3 30 $2 50 $1 80 P Qs $5 50 $4 40 $3 30 $2 20 $1 10
When there is a shortage, producers raise prices D o Q 11

12. Learning to Diagram the Change is 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)

13. Review Supply
Changes in the Prices of Related Goods or Services A single producer often produces a mix of goods rather than a single product. For example, an oil refinery produces gasoline from crude oil, but it also produces heating oil and other products from the same raw material. When a producer sells several products, the quantity of any one good it is willing to supply at any given price depends on the prices of its other co-produced goods. This effect can run in either direction. An oil refinery will supply less gasoline at any given price when the price of heating oil rises, shifting the supply curve for gasoline to the left. But it will supply more gasoline at any given price when the price of heating oil falls, shifting the supply curve for gasoline to the right. This means that gasoline and other co-produced oil products are substitutes in production for refiners. In contrast, due to the nature of the production process, other goods can be complements in production. For example, producers of crude oil—oil-well drillers—often find that oil wells also produce natural gas as a byproduct of oil extraction. The higher the price at which drillers can sell natural gas, the more oil wells they will drill and the more oil they will supply at any given price for oil. As a result, natural gas is a complement in production for crude oil.

14. Supply Clarification
substitutes in production: co-produced products; goods for which producing more of one requires producing less of the other
Ex. Gasoline and heating oil
complements in production: pairs of goods that must be produced together
Ex. Crude oil and natural gas

15. Complements, in other words
One of two goods that are produced jointly using the same resource -- that is, the production of one good automatically triggers the production of the other.

16. Substitutes, in other words
In terms of supply (that is, substitute-in-production), one of two goods that replace each other in either producing using the same resources in an either/or fashion, such that an increase in the price of one good leads to a decrease in supply and a leftward shift in the supply curve for the other good. If the supply of good 1 decreases as the price of good 2 increases, the goods are substitutes-in-production.

17. Going back to equilibrium
Equilibrium= market clearing price
The market price will fall if it is above equilibrium and it will rise if it is below equilibrium

18. ANOTHER EXAMPLE USING COFFEE TO GO WITH YOUR BURGER18

19. A price above equilibrium creates a surplus19

20. A price below equilibrium creates a shortage20

21. Remember, when supply has increased, we did not say anything about the price!

22. Shortage and Surplus
Determine the amount
Shortage, price falls below equilibrium
Surplus, price falls above equilibrium

24. What happens when the demand curve shifts
Changing Equilibrium
What happens when the demand curve shifts
What happens when the supply curve shifts
Simultaneous shifts of supply and demand

25. Three things we have to know for AP:
What shifter is at work in the market?
What curve is shifting and in what direction?
What happens to equilibrium price and quantity?

26. Now, add in these three steps: Change in tastes
Malcolm X The cost of the concert ticket (label equilibrium price and quantity
Now, add in these three steps:
Change in tastes
Demand shifts to the right
P and Q both increase…but why?

27. So, the new equilibrium requires a rise in price and quantity
There is a shortage!!
So, the new equilibrium requires a rise in price and quantity

28. What happens when the demand shifts inward?
-surplus
Price must fall
Equilibrium quantity must fall

29. Jeans!!
Graph Malcolm X for jeans
An input price has increased (cotton)
Supply of jeans shifts to the left
Price increases and quantity decreases…why?
Now, draw a new Malcolm X for jeans and show technology improving cotton production

30. To summarize how a market responds to a change in demand: An increase in demand leads to a rise in both the equilibrium price and the equilibrium quantity. A decrease in demand leads to a fall in both the equilibrium price and the equilibrium quantity.

31. To summarize how a market responds to a change in supply: An increase in supply leads to a fall in the equilibrium price and a rise in the equilibrium quantity. A decrease in supply leads to a rise in the equilibrium price and a fall in the equilibrium quantity.

32. Increase in demand =‘s higher equilibrium price and a higher equilibrium quantity.
Decrease in demand =‘s lower equilibrium price and a lower equilibrium quantity.
Increase in supply =‘s lower equilibrium price and a higher equilibrium quantity.
Decrease in supply =‘s higher equilibrium price and a lower equilibrium quantity. 32

33. Demand and Supply move in the same direction
Two options:
Demand and Supply move in the same direction
Demand and Supply move in opposite directions

34. Opposite
When demand increases and supply decreases, the equilibrium price rises but the change in equilibrium quantity is ambiguous.
When demand decreases and supply increases, the equilibrium price falls but the change in equilibrium quantity is ambiguous.

37. Same
When both supply and demand increase, the equilibrium quantity increases but the change in equilibrium price in ambiguous.
When both supply and demand decrease, the equilibrium quantity decreases but the change in equilibrium price is ambiguous.

38. Summary: Opposite= quantity is ambiguous
Same= price is ambiguous

39. For example, when the Winter Olympics come out, the popularity of snow boarding increases. At the same time, more companies produce more snowboards. How will these effect the market?

40. Graph the Supply Shift and the price decreases and quantity increases
Graph the Demand Shift and the effects on price and quantity of snowboards (both increase)
Graph the Supply Shift and the price decreases and quantity increases
****There could be no change but there could be an increase or decrease as well for price***
Both shifts generate an increase in the quantity, so we can certainly predict a higher equilibrium quantity of snowboards. However the change in price depends on which of the two shifts is stronger.

41. For each of the following examples, explain how the indicated change affects supply or demand for the good in question and how the shift you describe affects equilibrium price and quantity.
a.  As the price of gasoline fell in the United States during the 1990s, more people bought large cars.
b.  As technological innovation has lowered the cost of recycling used paper, fresh paper made from recycled stock is used more frequently.
c.  When a local cable company offers cheaper pay-per-view films, local movie theaters have more unfilled seats.

42. The decrease in the price of gasoline caused a rightward shift in the demand for large cars. As a result of the shift, the equilibrium price of large cars rose and the equilibrium quantity of large cars bought and sold also rose
The technological innovation has caused a rightward shift in the supply of fresh paper made from recycled stock. As a result of this shift, the equilibrium price of fresh paper made from recycled stock has fallen and the equilibrium quantity bought and sold has risen.
The fall in the price of pay-per-view movies causes a leftward shift in the demand for movies at local movie theaters. As a result of this shift, the equilibrium price of movie tickets falls and the equilibrium number of people who go to the movies also falls.

43. For Example
An increase in the supply of grapes and a decrease in the demand for wine led to lower wine prices in 2001.
An increase in the price of jumbo tires used on mining equipment led to higher prices for copper, coal, and zinc in 2006. 43

44. The equilibrium price aka the market-clearing price.
When supply and demand change, equilibrium price and output change.
When only one curve shifts, the resulting changes in equilibrium price and quantity can be predicted.
But when both curves shift, we can only predict the change in equilibrium price in some cases, and the change in equilibrium quantity in others, but never both. 44

45. Use a S&D graph to explain this double shift

46. Answer the following Question
The price of cameras decreases and people buy more cameras, this can be explained by:
A) an increase in demand for cameras.
B) an increase in the supply of cameras.
C) a decrease in demand for cameras.
D) A decrease in the supply of cameras. 46

47. A) an increase in demand for cameras.
The price of cameras decreases and people buy more cameras, this can be explained by:
A) an increase in demand for cameras.
B) an increase in the supply of cameras. Correct!
C) a decrease in demand for cameras.
D) A decrease in the supply of cameras. 47

48. http://angel. bfwpub. com/section/default. asp

49. 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 49

50. Before Change (Draw equilibrium) The Change (S or D, Identify Shifter)
After Change (Price and Quantity After)
Analyze Sale of Hamburgers Again (getting hungry yet?)
WHAT IS THE RESULT FROM CHANGES BELOW
Price of sushi (a substitute) increases
New technology cuts production time 1/2
Price of burgers falls from $3 to $1.
Price for ground beef triples
Fingers found in multiple burger restaurants.

51. Price of sushi (a substitute) increases D increases
New technology cuts production time ½ S increases
Price of burgers falls from $3 to $1. no shift
Price for ground beef triples s decreases
Fingers found in multiple burger restaurants.
D decreases