Lecture 13 Supply Demand Todays Objective o Students

Lecture #13: Supply & Demand

Today’s Objective o Students will learn how supply and demand interacts together and how to manipulate this information on graphs. o Essential Learning: How do changes in supply and demand affect the equilibrium point and the setting of prices?

Now it is time to watch a video clip on Supply & Demand!!! o Click on the link below: n http: //www. brainpop. com/socialstudies/econ omics/supplyanddemand/

Moving to Equilibrium Supply & Demand Remember when taking Cornell Notes you need to come up with at least 3 questions per page! • Work together to determine price. • A market is considered to be in equilibrium when the quantity of a good that buyers are willing & able to buy is EQUAL to the quantity that sellers are willing & able to produce & offer for sale.

Moving to Equilibrium • Equilibrium quantity—the quantity of a good that is bought and sold in a market that is in equilibrium. • Equilibrium price—the price at which a good is bought and sold in a market that is in equilibrium.

The point at which quantity demanded and quantity supplied come together is known as equilibrium. Finding Equilibrium Point Combined Supply and Demand Schedule $3. 50 $2. 00 Equilibrium Price $1. 50 $1. 00 $. 50 Supply 0 50 a Equilibrium Quantity Price per slice $3. 00 Demand 100 150 200 250 300 Slices of pizza per day Price of a slice of pizza Quantity demanded Quantity supplied $. 50 300 100 $1. 00 250 150 $1. 50 200 $2. 00 150 250 $2. 50 100 300 $3. 00 50 350 Result Shortage from excess demand Equilibrium Surplus from excess supply

Moving to Equilibrium Surplus • Surplus— the condition in which the quantity supplied of a good is greater than the quantity demanded. • Surpluses occur only at prices above the equilibrium price. • Prices fall when a surplus occurs, b/c suppliers hope to sell their inventory, or the excess stock of goods that they have on hand.

Moving to Equilibrium Shortage • Shortage—the condition in which the quantity demanded of a good is greater than the quantity supplied. • Shortages occur only at prices below the equilibrium price. • Prices rise when there is shortage. Buyers will offer to pay a higher price to get sellers to sell to them rather than other buyers.

Shortage vs Surplus

Moving to Equilibrium—Copy this in your notes!!! At $15, a surplus occurs. Quantity supplied (150) is greater than quantity demanded (50). Price Falls! At $10, results is neither a surplus nor a shortage. Quantity supplied (100) is = to quantity demanded (100). Equilibrium occurs! At $5, a shortage happens. Quantity demanded (150) is greater than quantity supplied (50). Price Rises! Price Supply $15 $10 $5 0 Demand 50 100 Quantity 150

Moving to Equilibrium • When price is at equilibrium level, there are no shortages or surpluses of any goods or services. • All buyers and sellers are happy with the market!

Analyzing Shifts in Supply and Demand Graph A: A Change in Supply Graph B: A Change in Demand $800 $60 a b $40 c Price $600 Original supply $400 New supply Demand a b 1 2 3 Output (in millions) 4 New demand Original demand $10 0 o c $30 $200 o Supply $50 5 0 100 200 300 400 500 600 700 800 Output (in thousands) Graph A shows how the market finds a new equilibrium when there is an increase in supply. Graph B shows how the market finds a new equilibrium when there is an increase in demand. 900

Price Controls o o Sometimes the government prevents markets from reaching equilibrium price. It may do so by setting a Price Ceiling or a Price Floor

Price Controls Price Ceiling o A price ceiling is a maximum price that can be legally charged for a good. Pe = Price equilibrium Pc= Price Ceiling o Ex: rent control n where a gov’t sets a maximum amount that can be charged for rent in an area.

Price Controls Price Floor • A price floor is a minimum price, set by the government, that must be paid for a good or service. Pf= Price Floor Pe = Price equilibrium o Ex: minimum wage n which sets a minimum price that an employer can pay a worker for an hour of labor.

Price Controls o Price ceilings & Price floors have the unintended result of reducing the amount of trade in the economy.

Supply & Demand in Everyday life! Goods • Price of consumer goods (candy bars, bread, etc) is consistent throughout the U. S. • A candy bar in CA costs pretty much the same as it does in Wisconsin. Yes this is for real $79. 99 @ Amazon!

Supply & Demand in Everyday life! Goods • Real Estate demonstrates the impact of supply & demand. • • A house in S. F. will sell for 4 times the amount of a similar house in Louisville, Kentucky. (A $1, 000 house in S. F. will cost $250, 000 in Louisville) Housing in 2 states can’t move to equilibrium b/c the land can’t be moved. $990, 000 in Louisville, Kentucky $1, 050, 000 in San Francisco, California 4. 26 acres . 125 acres 5 bedrooms & 7 bathrooms 5148 sq feet 3 bedrooms & 2 bathrooms 1494 sq feet

Supply & Demand in Everyday life! Movies • • • Ticket prices to see a movie on Friday night cost more than a ticket on a Monday afternoon. A theater has a fixed number of seats. In response to higher demand on a Friday night, theater can charge more!

Supply & Demand in Everyday life! Freeway • • During rush hour, the demand for freeway space increases • This results in shortage of space = slow traffic Solutions • Build more freeways • Carpool • Charge a toll

Supply & Demand in Everyday life! Sports • • • There a limited number of spots on sport teams Individuals compete for a spot Athletes have to train harder & impress the coaches to get a spot!

Supply & Demand in Everyday life! Colleges • • Some college require higher GPA’s & test scores to gain admission A college that is in high demand will have higher entrance requirements.

Review 1. Equilibrium in a market means which of the following? (a) the point at which quantity supplied and quantity demanded are the same (b) the point at which unsold goods begin to pile up (c) the point at which suppliers begin to reduce prices (d) the point at which prices fall below the cost of production 2. The government’s price floor on low wages is called the (a) market equilibrium (b) base wage rate (c) minimum wage (d) employment guarantee

Review 1. When a new equilibrium is reached after a fall in demand, the new equilibrium has a (a) lower market price and a higher quantity sold. (b) higher market price and a higher quantity sold. (c) lower market price and a lower quantity sold. (d) higher market price and a lower quantity sold. 2. What happens when any market is in disequilibrium and prices are flexible? (a) market forces push toward equilibrium (b) sellers waste their resources (c) excess demand is created (d) unsold perishable goods are thrown out

Review—True or False 1. When quantity supplied is greater than quantity demanded, a surplus exists. 2. A shortage occurs when quantity demanded is greater than quantity supplied. 3. The price at which a good is bought and sold in a market that is in equilibrium is called an equilibrium price. 4. The stock of goods on hand is called the inventory. 5. If the price is too high, there is a surplus; if the price is too low, there is a shortage.

Review—True or False 1. When quantity supplied is greater than quantity demanded, a surplus exists. o 2. A shortage occurs when quantity demanded is greater than quantity supplied. o 3. TRUE The stock of goods on hand is called the inventory. o 5. TRUE The price at which a good is bought and sold in a market that is in equilibrium is called an equilibrium price. o 4. TRUE If the price is too high, there is a surplus; if the price is too low, there is a shortage. o TRUE

Review—True or False 1. If there is a shortage in the market, price will fall to the equilibrium price. 2. Real estate prices vary because of fixed demand. 3. Tolls alleviate traffic congestion by reducing demand. 4. Movie tickets cost different prices at different times because the supply changes. 5. The demand to drive on freeways is not always the same.

Review—True or False 1. If there is a shortage in the market, price will fall to the equilibrium price. o 2. Real estate prices vary because of fixed demand. o 3. TRUE Movie tickets cost different prices at different times because the supply changes. o 5. FALSE Tolls alleviate traffic congestion by reducing demand. o 4. FALSE The demand to drive on freeways is not always the same. o TRUE

Summary o When completing your notes you need to write a 3 -5 sentence summary of the lecture. This is a part of your notes grade!