1. Supply Demand Quantity Price PePe QeQe W.A. Franke College of Business - Dr. D. Foster Supply & Demand: the basics

2. Supply Demand Quantity Price PePe QeQe Demand = Consumers Law of Demand: All else equal, the quantity demanded of a good, that consumers are willing to buy and able to pay for, varies inversely with its price. Supply = Producers Supply Relationship: All else equal, the quantity supplied of a good, that producers are willing to sell and able to produce, varies directly with its price.

3. Supply Demand Quantity Price PePe QeQe Demand the price movement along A change in the price of the good will cause a movement along the curve: Change in Quantity Demanded (ΔQ D ) Price Quantity

4. Supply Demand Quantity Price PePe QeQe Demand some other relevant factor of demand shift A change in some other relevant factor of demand for the good will cause a shift in the curve: Change in Demand (ΔD) Price Quantity D3D3 D1D1 D2D2 Increase in Demand Decrease in Demand

5. Supply Demand Quantity Price PePe QeQe Supply the price movement along A change in the price of the good will cause a movement along the curve: Change in Quantity Supplied (ΔQ S ) Price Quantity

6. Supply Demand Quantity Price PePe QeQe Supply Price Quantity some other relevant factor of supply shift A change in some other relevant factor of supply for the good will cause a shift in the curve: Change in Supply (ΔS) Increase in Supply Decrease in Supply S1S1 S2S2 S3S3

7. Supply Demand Quantity Price PePe QeQe Factors that affect Demand IncomeIncome Tastes and PreferencesTastes and Preferences ExpectationsExpectations Others (price of substitute/complement goods; size of market)Others (price of substitute/complement goods; size of market) Factors that affect Supply A change in the costs of productionA change in the costs of production A change in technologyA change in technology A changes in taxes/subsidies/restrictionsA changes in taxes/subsidies/restrictions Others (price of other goods; expectations; size of market ).Others (price of other goods; expectations; size of market ).

8. Supply Demand Quantity Price PePe QeQe Putting Demand & Supply Together At P 1 a surplus will drive down prices. Price Quantity Supply Demand P1P1 P2P2 P3P3 Q 1 Q 2 Q 3 At P 3 a shortage will drive up prices. At P 2 the market is in equilibrium.

9. Supply Demand Quantity Price PePe QeQe Supply Demand Price Quantity PePe QeQe New Price New Quantity Costs fall  supply increases Supply & Demand Problems #1. In the market for oranges, what will happen if there is great weather in Florida and California? New Supply Surplus  lower price Higher output  surplus Net effect: higher Q e lower P e

10. Supply Demand Quantity Price PePe QeQe W.A. Franke College of Business - Dr. D. Foster Supply & Demand: the basics

11. Supply Demand Quantity Price PePe QeQe Appendix: Price Controls - Ceilings A price ceiling is a maximum (legal) price. To be “effective” it must be set below P e What problem does this cause? How is it resolved? Quantity Price PePe QeQe Supply Demand P* QDQD QSQS

12. Supply Demand Quantity Price PePe QeQe A price floor is a minimum (legal) price. To be “effective” it must be set above P e What problem does this cause? How is it resolved? Quantity Price PePe QeQe Supply Demand Appendix: Price Controls - Floors P* QDQD QSQS