1.  Supply & Demand Unit 7 Decision, Decisions

2. The Law of Demand  When all other things equal, as the price of a good or service increases, the quantity demanded will decrease.  The opposite is also true. As the price of a good or service decreases, the quantity demanded will increase  TRANSLATION:  THE MORE EXPENSIVE SOMETHING IS, THE LESS PEOPLE WILL WANT TO BUY IT…DUH!!!!!!  CONSUMERS HAVE A “PRICE MOTIVE”

3. Demand Curve: Down The demand curve has a negative slope, consistent with the law of demand.

4. The Law of Supply  When all other things equal, as the price of a good or service increases, the quantity supplied will increase & vice versa.  TRANSLATION:  IF PEOPLE ARE WILLING TO PAY A HIGH PRICE FOR AN ITEM, PRODUCERS ARE GOING TO MAKE MORE OF THAT ITEM TO INCREASE PROFIT.  SUPPLIERS HAVE A “PROFIT MOTIVE”

5. SUPply Curve: UP The supply curve has a positive slope, consistent with the law of supply.

6. Shift in the Demand Curve  A change in any variable other than price that influences quantity demanded produces a shift in the demand curve or a change in demand.  Factors that shift the demand curve include:  Change in consumer incomes  Population change  Consumer preferences  Prices of related goods:  Substitutes: goods consumed in place of one another  Complements: goods consumed jointly

7. Shift in the Demand Curve This demand curve has shifted to the right. Quantity demanded is now higher at any given price.

8. Shift in the Supply Curve  Things other than price that influence quantity supplied produces a shift in the supply curve or a change in supply.  Factors that shift the supply curve include:  Change in input costs (fop)  Increase/decrease in technology  Assembly line, Innovations, Inventions  Change in size of the industry  More/less people that are actually making the product

9. Shift in the Supply Curve For an given rental price, quantity supplied is now lower than before.

10. Equilibrium a.k.a Equal-ibrium  In economics, an equilibrium is a situation in which:  No change  Quantity Demanded (QD) equals Quantity Supplied (QS)  It is where the supply curve intersects the demand curve  Market clearing price: where the price of the item is set

11. Equilibrium Equilibrium occurs at a price of $3 & a quantity of 30 units.

12. Shortages & Surpluses  A shortage occurs when quantity demanded exceeds quantity supplied.  A shortage implies the market price is too low.  A surplus occurs when quantity supplied exceeds quantity demanded.  A surplus implies the market price is too high.

13. Market adjustment to shortage S D Shortage QdQsQs

14. Market adjustment to surplus S D Surplus QdQsQs

15. Equilibrium After a Supply Shift The shift in the supply curve moves the market equilibrium from point A to point B, resulting in a higher price & lower quantity.

16. Price Ceilings & Floors  A price ceiling is a legal maximum that can be charged for a good. Price cannot go above the ceiling.  Results in a shortage of a product  Common examples include apartment rentals & credit cards interest rates.  A price floor is a legal minimum that can be charged for a good. Price cannot go below the floor.  Results in a surplus of a product  Common examples include soybeans, milk, minimum wage  **you can not go above the ceiling or below the floor**

17. Price Ceiling A price ceiling is set at $2 resulting in a shortage of 20 units. Always creates a shortage

18. Price Floor A price floor is set at $4 resulting in a surplus of 20 units. Always creates a surplus