Price Supply Pe Supply Demand the basics Demand

Price Supply Pe Supply & Demand: the basics Demand Quantity Qe - Dr. D. Foster W. A. Franke College of Business

Price Demand = Consumers Law of Demand : Supply 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. Pe Supply = Producers Supply Relationship: All else equal, Demand the quantity supplied of a good, that producers are willing to sell and able to produce, Quantity varies directly with its price. Qe

Demand Price Pe Supply A change in the price of the good will cause a movement along the curve: Change in Quantity Demanded (ΔQD) Demand Qe Quantity

Demand Price A change in some other relevant factor of demand for the good Supply will cause a shift in the curve: Change in Demand (ΔD) Increase in Demand Pe Decrease in Demand D 2 Qe D 1 Demand D 3 Quantity

Supply Price Supply A change in the price of the good will cause a movement along the curve: Pe Change in Quantity Supplied (ΔQS) Demand Qe Quantity

Supply Price A change in some other relevant factor of supply Supply for the good will cause a shift in the curve: Decrease in Supply Change in Supply (ΔS) Pe Increase in Supply S 3 S 1 Demand S 2 Qe Quantity

Price Factors that affect Demand • Income Supply • Tastes and Preferences • Expectations • Others (price of substitute/complement goods; size of market) Pe Factors that affect Supply • A change in the costs of production • A change in technology Demand • A changes in taxes /subsidies/restrictions • Others (price of other goods; expectations; Quantity size of market ). Qe

Price Putting Demand & Supply Together Price Supply At P 3 a shortage will drive up prices. P 1 Pe Supply At P 1 a surplus will drive down prices. P 2 P 3 Q 1 Q 2 Q Q 3 e At P 2 the market is in Demand equilibrium. Quantity

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

Price Supply Pe Supply & Demand: the basics Demand Quantity Qe - Dr. D. Foster W. A. Franke College of Business

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

Price Appendix: Price Controls - Floors Supply Price Supply A price floor is a minimum (legal) price. P* Pe To Pebe “effective” it must be set above Pe Demand What problem does this cause? How is it resolved? Demand Quantity QD Qe Qe QS Quantity