1. PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University 1 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Supply And Demand: An Initial Look The free enterprise system is absolutely too important to be left to the voluntary action of the marketplace. FLORIDA CONGRESSMAN RICHARD KELLY, 1979

2. The Invisible Hand Invisible hand –Adam Smith Father of modern economic analysis –By pursuing their own self-interests, people in a market system are “led by an invisible hand” to promote the well-being of the community 2 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

3. Demand and Quantity Demanded Quantity demanded –Number of units of a good –That consumers are willing and can afford to buy –Over a specified period of time 3 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

4. Demand and Quantity Demanded Quantity demanded –Depends on price –“Other things being equal” Population size Consumer incomes Tastes Prices of other products 4 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

5. Demand and Quantity Demanded Demand schedule - Table –For a given period of time –How the quantity demanded changes As the price changes All other determinants – constant All other determinants constant –As price rises, quantity demanded falls –As price falls, quantity demanded rises 5 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

6. Table 1 Demand Schedule for Beef 6 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

7. Demand and Quantity Demanded Demand curve –Graphical depiction of demand schedule –How the quantity demanded changes as the price changes –During a specified period of time –All other determinants – constant 7 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

8. Figure 1 Demand Curve for Beef 8 D D 6.90 7.00 7.10 7.20 7.30 Price per Pound $7.50 7.40 45505506065 Quantity Demanded in Millions of Pounds per Year 70 75 G A B C E F H © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

9. Demand and Quantity Demanded Change in price –Movement along demand curve Change in other determinants –Shifts the entire demand curve –Consumers - buy more (any & all prices) Demand curve shifts right/outward –Consumers – buy less (any & all prices) Demand curve shifts left/inward 9 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

10. Figure 2 Movements along versus Shifts of a Demand Curve 10 D0D0 D0D0 7.10 $7.30 Price per Pound 0 Quantity Demanded in Millions of Pounds per Year C F D1D1 D1D1 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

11. Demand and Quantity Demanded Consumer income - increase –Demand increases Outward shift of the demand curve Population – increase –Demand increases Outward shift of the demand curve Consumer preferences – in favor –Demand increases Outward shift of the demand curve 11 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

12. Figure 3 Shifts of the Demand Curve 12 (a) Price Quantity demanded D0D0 D0D0 D1D1 D1D1 (b) Price Quantity D0D0 D0D0 D2D2 D2D2 S S E M © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

13. Demand and Quantity Demanded Prices & availability of related goods –Price of substitutes – increase Demand increases –Outward shift of the demand curve [to the right] –Price of complements – increase Demand decreases –Inward shift of the demand curve [to the left] 13 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

14. Supply and Quantity Supplied Quantity supplied –Number of units –That sellers want to sell –Over a specified period of time All other determinants constant –As price rises, quantity supplied rises –As price falls, quantity supplied falls 14 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

15. Supply and Quantity Supplied Supply schedule - Table –For a given period of time –How the quantity supplied changes As the price changes All other determinants – constant 15 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

16. Table 2 Supply Schedule for Beef 16 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

17. Supply and Quantity Supplied Supply curve –Graphical depiction of supply schedule –How the quantity supplied changes as the price changes –During a given period of time –All other determinants – constant 17 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

18. Figure 4 Supply Curve for Beef 18 S S 6.90 7.00 7.10 7.20 7.30 Price per Pound $7.50 7.40 30405006070 Quantity Supplied in Millions of Pounds per Year 80 90 a b e f h g c © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

19. Supply and Quantity Supplied Change in price –Movement along supply curve Change in other determinants –Shifts the entire supply curve Size of industry Technological progress Prices of inputs Prices of related outputs 19 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

20. Figure 5 Movements along versus Shifts of a Supply Curve 20 S0S0 S0S0 7.10 $7.30 Price per Pound 0 Quantity Supplied in Millions of Pounds per Year c f S1S1 S1S1 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

21. Supply and Quantity Supplied Size of industry –Increase New firms enter Existing firms expand –Supply increases Outward shift of the supply curve Technological progress –Reduces costs –Supply increases: outward shift 21 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

22. Figure 6 Shifts of the Supply Curve 22 (a) Price Quantity (b) Price Quantity D D S0S0 S0S0 S1S1 S1S1 S0S0 S0S0 S2S2 S2S2 V E U © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

23. Supply and Quantity Supplied Prices of inputs – increase –Supply decreases Inward shift of the supply curve [to the left] Prices of related outputs –Complements in production Increase in the price of one Increases the demand for the other 23 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

24. Supply and Demand Equilibrium Supply-demand diagram –Graphs the supply and demand curves –Determines Equilibrium price Equilibrium quantity Shortage –Excess quantity demanded over quantity supplied Buyers cannot purchase the quantities they desire at the current price 24 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

25. Supply and Demand Equilibrium Surplus –Excess quantity supplied over quantity demanded Sellers cannot sell the quantities they desire to supply at the current price Equilibrium –There are no inherent forces that produce change Equilibrium changes –“Outside events” 25 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

26. Table 3 Determination of the Equilibrium Price and Quantity of Beef 26 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

27. Figure 7 Supply-Demand Equilibrium 27 6.90 7.00 7.10 7.20 7.30 Price per Pound $7.50 7.40 30405006070 Quantity in Millions of Pounds per Year 80 90 S S a g D D G A E © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

28. Supply and Demand Equilibrium Law of Supply and Demand –In a free market –The forces of supply and demand Push the price toward equilibrium level –Quantity supplied = quantity demanded –May be disobeyed Long term –Shortages –Surpluses –Prices - fail to move toward equilibrium 28 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

29. Effects of Demand Shifts Demand curve - shift outward / right –With no change in the supply curve –Equilibrium price rises –Equilibrium quantity rises Demand curve - shift inward / left –With no change in the supply curve –Equilibrium price falls –Equilibrium quantity falls 29 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

30. Figure 8 The Effects of Shifts of the Demand Curve 30 (a) D0D0 D0D0 S S Quantity Price per pound 7.20 60 70 75 D1D1 D1D1 T $7.30 (b) D0D0 D0D0 S S Quantity Price per pound $7.20 60 50 45 E D2D2 D2D2 M 7.10 L R E © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

31. Effects of Supply Shifts Supply curve - shift outward / right –With no change in the demand curve –Equilibrium price falls –Equilibrium quantity rises Supply curve - shift inward / left –With no change in the demand curve –Equilibrium price rises –Equilibrium quantity falls 31 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

32. Figure 9 Effects of Shifts of the Supply Curve 32 (a) D D S0S0 S0S0 Quantity Price per pound $7.20 60 65 78 7.10 (b) S1S1 S1S1 J D D S0S0 S0S0 Quantity Price per pound 7.20 60 50 37.5 E $7.40 S2S2 S2S2 U V I E © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

33. Application Who really pays that tax? New tax on a product – imposed on the seller –Firms - decrease the supply Pay part of tax –Consumers Pay part of tax –Equilibrium price increases By less than the amount of the tax 33 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

34. Figure 10 Who Pays for a New Tax on Products? 34 D D S0S0 S0S0 Millions of gallons per year Price per gallon $2.64 2.60 2.54 S1S1 S1S1 50 Q1Q1 30 Q2Q2 E1E1 M E0E0 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

35. The Market Fights Back Battling the invisible hand Legally imposed constraints on prices –Price ceilings - legal maximum Price – below it –Price floors - legal minimum Price – above it 35 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

36. Price Ceilings Price ceiling –A maximum that the price charged for a commodity cannot legally exceed –Keeps the price below free-market level Consequences –Persistent shortage develops Queuing, direct rationing Inefficient and unpleasant –Illegal market to supply the commodity 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

37. Price Ceilings Consequences –Prices charged on the illegal market are higher Than those that would prevail in a free market –A substantial portion of the price In the hands of the illicit supplier –Investment - dries up 37 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

38. Case study Rent controls in New-York city Rent control - to protect consumers –Long run - worse off –Lower quantity supplied Other uses Inadequately maintained Abandoned buildings –Shortage –Black market – bribes –Only some benefit 38 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

39. Figure 11 Supply-Demand Diagram for Rental Housing 39 D D S S Rent per month 1,200 $2,000 3 2.5 Millions of dwellings rented per month 3.5 E Market rent Rent ceiling C B © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

40. Price Floors Price floor –A legal minimum below which the price charged for a commodity is not permitted to fall –Keep the price above free-market level Symptoms –Surplus – sellers cannot find enough buyers –For goods: problem of disposal 40 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

41. Price Floors Symptoms –Sellers offer discounts in disguised form Unwanted –Overinvestment in the industry Inefficient businesses can survive 41 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

42. Case study Farm price supports & the Case of Sugar prices Program of farm price supports –Introduced in 1933 - “temporary method of dealing with an emergency” Still with us today Consequences –Unsellable surpluses Shipped to poor foreign countries Purchased by government –Taxpayer pays twice: taxes and higher prices 42 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

43. Case study Farm price supports & the Case of Sugar prices Sugar producers –Receive low-interest loans from the federal government –Guarantee that the price of sugar will not fall below a certain level Price floor 43 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

44. Case study Farm price supports & the Case of Sugar prices Enforced price floor –Limit domestic production –Limit foreign imports –Supply curve – inward shift to the left –Higher price Sugar industry – benefits Consumers – pay 44 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

45. Figure 12 Supporting the Price of Sugar 45 Price Quantity D D S0S0 S0S0 S1S1 S1S1 25¢ 50¢ © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

46. A Can of Worms Other problems that may arise when prices are controlled –Favoritism and corruption Someone must decide who gets to buy or sell the limited quantity that is available –Unenforceability If too many suppliers –Auxiliary restrictions –Limitation of volume of transaction –Misallocation of resources 46 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.