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Supply and DemandThe Basics Demand (D)Quantity (Q)Price (P)Supply (S)Equilibrium (Qs= Qd)P eQ eTCYXSupply and DemandThe Law of DemandDemand- Different Quantities of goods and services that people are willing and able to buy at different prices.

Quantity (Q)Price (P)The Law of Demand

Price:Quantity Demanded

Price:Quantity Demanded

Price and Quantity Demanded have an Inverse RelationshipQ1P1P2Q23 reasons whySubstitution effectIncome effect- loss of purchasing power. The more expensive the less you can buyLaw of Diminishing maximum utility TCSupply and DemandThe Law of SupplySupply- Different Quantities of goods and services that people are willing and able to produce at different prices.

Quantity (Q)Price (P)The Law of Demand

Price:Quantity Supplied

Price:Quantity Supplied

Price and Quantity Supplied have an Direct RelationshipQ1P1P2Q2Trade off between Labor and Leisure.

The more money that can be made the more likely you will trade of leisure for labor.

Opportunity Cost.TCOnline LessonArticlesSupply and DemandEquilibriumEquilibrium- The quantity where price has adjusted so that quantity demanded is equal to quantity supplied. The amount that the buyers are willing and able to purchase matches the amount that producers are willing and able to sell.

TCDemand (D)Quantity (Q)Price (P)Supply (S)Equilibrium (Qs= Qd)P eQ eIn nature water seeks its own level. Price does the same thing. Both Quantity supplied and Quantity demand works towards each other.Supply and DemandEquilibrium and Disequilibrium- SurplusTCDemand (D)Quantity (Q)Price (P)Supply (S)Equilibrium (Qs= Qd)$5 P eQ e$20 Price FloorQdQsSurplusSurplus happens when Quantity supplied is greater than the quantity demanded

Almost always result from price controlsSupply and DemandShifts in Demand- besides current price changes what other factors shift demand?TCOnline Lesson (D)Quantity (Q)Price (P)Supply (S)Equilibrium (Qs= Qd)$5 P eQ eWhen there is an increase in Quantity demandPrice increases (direct) (D1)Q 1P 1When there is an decrease in Quantity demandPrice decreases (direct) (D)Quantity (Q)Price (P)Supply (S)Equilibrium (Qs= Qd)$5 P eQ eQ 1P 1 (D1)5 Demand Shifters1. Change in Taste (Direct)2. Change in income- normal products- direct, inferior products- inverse3. Change in market size (number of consumers) - direct4. Expectations of consumers (future price, future availability, future income) 5. Price of related goods (substitutes direct, complements- inverse)Shifter PPTSupply and DemandShifts in Supply- besides current price changes what other factors shift supply?

TCOnline Lesson (D)Quantity (Q)Price (P)(S)Equilibrium (Qs= Qd)$5 P eQ eWhen there is an increase in Quantity suppliedPrice decreasesQ 1P 1When there is an decrease in Quantity suppliedPrice increase (D)Quantity (Q)Price (P)Supply (S)Equilibrium (Qs= Qd)$5 P eQ eQ 1P 1Shifter PPT(S1)(S1)7 Supply Shifters1. Resource Cost (wages and raw materials)- inverse2. Alternative output price change - inverse3. Technological improvements4. Number of Suppliers - direct5. Producer expectations about future- inverse6. Subsides government gives money to produce - direct7. Taxes- inverseDemand (D)Quantity (Q)Price (P)Supply (S)Equilibrium (Qs= Qd)$5 P eQ eSupply and DemandPrice Floors and Price Ceilings$20 P Price FloorDemand (D)Quantity (Q)Price (P)Supply (S)Equilibrium (Qs= Qd)$5 P eQ e$2 P Price CeilingSurplusShortageQdQsQsQdPrice Floors are created to keep prices over equilibrium.

Qd is less than Q s= surplus

Example- Minimum wage Price Ceilings are created to keep prices under equilibrium.

Qs is less than Qd= shortage

Example- Rent Control TCOnline LessonPrice Controls are inefficient ArticlesClip 2Clip 1CSSupply and DemandConsumer and Producer SurplusTCQ eDemand (D)Quantity (Q)Price (P)Supply (S)Equilibrium (Qs= Qd)$2 P eConsumer Surplus-= (Price that the consumer is willing to pay The Equilibrium price) Price consumers are willing to pay. I bought it for $5 but I would have paid $8. Demand is valueProducer Surplus-= (The Equilibrium price- Price that the producer is willing to sell) $4 $1 PSPrice producers are willing to sell. I sold it for $5 but I would have sold it for $2. Supply is production cost.Online LessonProducts are consumed by the consumers who want them the most and would be willing to pay more if they had to.

Products are produced by the producers at the lowest price because they are willing to sell it for less.Supply and DemandConsumer and Producer Surplus with a Price Ceiling TCQ e100Demand (D)Quantity (Q)Price (P)Supply (S)Equilibrium (Qs= Qd)$2 P eConsumer Surplus-= (Price that the consumer is willing to pay The Equilibrium price) Producer Surplus-= (The Equilibrium price- Price that the producer is willing to sell) $4 $1 Online Lesson$1.50 Price CeilingQ s50Q d

CSPSDead weight lossDead weight loss- represents product that was never produced.

Ceilings result in shortagesMarket FailuresImperfect Information- (making irrational decisions)Principal Agent Problems- (Conflict of Interest)Non- Competitive Markets (imperfect competition) Monopolies, Oligopolies, and cartels) Public Goods- when the private sector will not produce somethingExternalities- Spillover effect both positive and negativeTCLet's Take A Look At The Five Demand Shifters["TIMER"]

TC16Concentration on these slides is guaranted to improve your economics grade.

WarningTC17

D1D2P

QD1QD21."Change in Taste"[Direct]

An increase in tastefor DVDs results in anincrease in demand.A decrease in tastefor videos results in adecrease in demand.

D3QD3

TC18.Decrease in demandafter the salmonella scare.D1D2P

11 have died and529 have gotten sick.[430 peanut products recalled]

Peanut Butter Salmonella ScareWall Street has gottenso bad that stockholderstry to kill themselvesby eating peanuts.TCIncrease in demand for dark chocolate after studiesrevealed that there were health benefits from eating it.Scientists have discovered that smokers who ate dark chocolate had less hardening of the arteries and a lowered risk of blood clots.

D1D2PExample 2 on "Change in Taste" for Dark Chocolate

TC20

D1 D2P

QD1QD2

2. Change in Income[Normal-Direct; Inferior-Inverse]

More incomeresults inmore demandfor new cars;less demandfor used cars.

New Cars

Used CarsLess incomeresults inmore demandfor used cars;less demandfor new cars.

TC21

D1 D2P

QD1QD23. Change in Market Size [Direct][Number of Consumers]

More demandfor both normal& inferior goods

New CarsUsed Cars

This is what we told one billion Chinese, as new potential consumers, when we opened trade relations with them in 1972.

TC22

D1 D2P

QD1QD24. Expectations [of consumers][about future price, availibility, & income]

If Steve Jobs responds to iRate customers whobought the iPhone at $599 and says, iSorry,we will raise the price back to $599 in 3 weeks.iPhone

$399Buy it now to save money.

TC23

D1 D2P

QD1QD24. Expectations [of consumers][about future availibility of toilet tissue]

If there is expected to be a major shortage of toilet tissue,then consumers will stock up now or risk not getting any.

TC24

D1 D2P

QD1QD24. Expectations [of consumers][about future income]

Lets say that we are coming out of recession & consumersfeel secure about their jobs. [Positive future income]

TC25

D1D2P

QD1QD24. Expectations [of consumers][about future income]

Lets say that we are going into a recession and consumersdont feel secure about their jobs. [Negative future income]

TC26

Complement[Inverse]Substitute[Direct]MilkCerealPop TartsD1D2PP1QD1P2D1D2

DP

5. Prices of Related Goods[Substitutes-Direct; Complements-Inverse]

QD2

TC27Now, Let's Take A Look At The Seven Supply Shifters["RATNEST"]

TC281.Resource Cost [wages & raw materials] [Inverse]WagesRaw MaterialsIntel Pentium ChipSIf resource cost decreases supply Increases[making more $]If resource cost increases supply Decreases[making less $]SSP

29P1

P1QS1

BroccoliSubstitutes in production

I only have 200 acresSCornS1PS2

QS1S1PS2

SCornProducers want to produce more of the good where price is increasing,or at least, where the price is not going down.

Broccoli

2. Alternative Output Price Change [Inverse]P2QS2

P2QS2

30SBecause cows produce moremilk, farmersdont have to have as manycows.[saves $]SP3. Technological Improvement[Cow Waterbeds]

We love these cow waterbeds because we get better blood flow and can produce 30% more milk.

Supply curvemoves udderlyto the right.

Less skin abrasionsso happier cowsproduce more milk.Mooooove over and give me that waterbed.Waterbedsforcows.com

31

NFL

S1PQ $50

Supply of FB games increased when the XFL was formed. S2

QS1QS2

XFL in 2001

4. Number of Suppliers [Direct]

Supply of FB games each weekXFL [Extreme Football League]8 new teamsMore gameseach year

32If the Bubba Gump Shrimp Company expects shrimp prices to increase more in the future, they will supply (more/less) shrimp to the market now. If the Bubba Gump Shrimp Company expects shrimp prices to decrease more in the future, they will supply (more/less) shrimp to the market now. S1

5. Producer Expectations about Future Price[INVERSE]PS2S2

TC33S3

[Direct]P6. Subsidies - free money from governmentFree money from the government (subsidies) induces suppliers to supply more.

S1S2If subsidies are taken away, then suppliers are losingmoney and will decrease supply.

TC34S3

[Inverse]P7. Taxes Take Away Business Profits & Decrease Supply.If business have their taxes decreased,it moves the supply curve to the right.S1S2If business have their taxes increased, it moves the supply curve to the left.

Im losingprofits.

TC35Market FailurePositive Externalities (spillover benefit) (D) MB (private)(Q)(P)(S)- MSCP fmQ fm TCD1- MSBQ optimal MSC= MSB Problem: At Q free market, to little is being produced. MSB>MSC @ Q fmSolution: Because the demand has increased, the price may increase as well. Government give a subsidy to consumer to help pay for the extra cost.Market FailurePositive Externalities (D) MSB(Q)(P)(S)- privateP fmQ fm TCS1- MSCQ optimal MSC= MSB Problem: At Q free market, to little is being produced. MSB>MSC @ Q fmSolution: The Government can give the private supplier an incentive to increase the supply by paying them a subsidy to make up for the decrease in price due to the increase in supplyMarket FailureNegative Externalities (spillover cost) (D)= MSB(Q)(P)(S) privateP fmQ fmTCS1- msc msc= private cost + external costQ MSC=MSBProblem: At Q free market, to much is being produced. MSB