Supply and Demand together at last Law of

Supply and Demand together at last!

Law of Demand: Buyer Behavior • High prices mean low demand

Law of supply: Seller/Producer Behavior • High price means high supply

SUPPLY and DEMAND • Together, S & D graphically explain market conditions • These two laws directly oppose one another…how will anything be bought or sold? ! – EQUILIBRIUM! The point where supply = demand

Supply and demand • Equilibrium or market clearing price – The point at which sellers are willing to sell as much as buyers are willing to buy – Qd=Qs

Equilibrium/Market Clearing Price • Found through trial and error! • Buyers and sellers interact until quantity demanded equals quantity supplied – Example: Encryption (pictured) tries to sell concert tickets for $10 but no one buys them, so the price must be lowered until it reaches the demand (turns out it’s $2)

Surplus (a. k. a. excess supply): When quantity supplied is greater than quantity demanded P D Surplus S Example: If P = $5, then QD = 9 lattes and QS = 25 lattes resulting in a surplus of 16 lattes Q

Surplus (a. k. a. excess supply): When quantity supplied is greater than quantity demanded P D Surplus S Facing a surplus, sellers try to increase sales by cutting price. This causes QD to rise and QS to fall… …which reduces the surplus. Q

Surplus (a. k. a. excess supply): When quantity supplied is greater than quantity demanded P D Surplus S Facing a surplus, sellers try to increase sales by cutting price and output. This causes QD to rise and QS to fall. Prices continue to fall until market reaches equilibrium. Q

Shortage (a. k. a. excess demand): When quantity demanded is greater than quantity supplied P D S Example: If P = $1, then QD = 21 lattes and QS = 5 lattes resulting in a shortage of 16 lattes Shortage Q

Shortage (a. k. a. excess demand): When quantity demanded is greater than quantity supplied P D S Facing a shortage, sellers raise the price, causing QD to fall and QS to rise, …which reduces the shortage. Shortage Q

Shortage (a. k. a. excess demand): When quantity demanded is greater than quantity supplied P D S Facing a shortage, sellers raise the price, causing QD to fall and QS to rise. Prices continue to rise until market reaches equilibrium. Shortage Q

Law of Demand: Buyer Behavior • High prices means low demand • Determinants of Demand – Income: normal good, inferior good or neutral good – Preferences and tastes – Price of related goods: substitute or complement – Number of buyers – Future expectations

Law of supply: Seller/Producer Behavior • High price means high supply • Determinants of supply – Changes in resource/input costs – Government influences: taxes, subsidies and quotas – Future expectations of prices – Government Regulations/ Rules – Number of suppliers – Technological advances

Bell Ringer! • List each of the factors that shift the SUPPLY curve. • What is equilibrium and how is it determined?

Three Steps to Analyzing Changes in Equilibrium To determine the effects of any event, 1. Decide whether event shifts S curve, D curve, or both. 2. Decide in which direction curve shifts. 3. Use supply-demand diagram to see how the shift changes equilibrium P and Q.

EXAMPLE: The Market for Hybrid Cars P price of hybrid cars S 1 P 1 D 1 Q quantity of hybrid cars

EXAMPLE 1: A Shift in Supply or Demand? EVENT TO BE ANALYZED: P S 1 Increase in price of gas. STEP 1: P 2 D curve shifts because STEP 2: price of gas P 1 affects demand for D shifts right hybrids. because high gas STEP 3: S curve doeshybrids not price makes The shift causes an shift, because price more attractive increase in price of gas does not affect relative to other cars. and quantity of cost of producing hybrid cars. hybrids. D 1 Q 2 D 2 Q

EXAMPLE 1: A Shift in Supply or Demand? Notice: When P rises, producers supply a larger quantity of hybrids, even though the S curve has not shifted. Always be careful to distinguish b/w a shift in a curve and a movement along the curve. P S 1 P 2 P 1 D 1 Q 2 D 2 Q

EXAMPLE 2: A Shift in Supply or Demand EVENT: New technology P reduces cost of S 1 S 2 producing hybrid cars. STEP 1: S curve shifts because STEP 2: event affects P 1 cost of production. P 2 S shifts right D curve does not because event STEPbecause 3: shift, reduces cost, The shift causes production technology makes production price to fallof the is not one more profitable at and quantity to rise. factors that affect any given price. demand. D 1 Q 2 Q

Answer the questions on your notes using the following graph!

Terms for Shift vs. Movement Along Curve • Change in supply: a shift in the S curve occurs when a non-price determinant of supply changes (like technology or costs) • Change in the quantity supplied: a movement along a fixed S curve occurs when P changes • Change in demand: a shift in the D curve occurs when a non-price determinant of demand changes (like income or # of buyers) • Change in the quantity demanded: a movement along a fixed D curve occurs when P changes 22

Bell Ringer!!! 1. Which graph (top or bottom) shows a change in demand? Which shows a change in quantity demanded? 2. Which graph (left or right) shows a change in supply? Which shows a change in quantity supplied?

Price Controls Price Floor: A legislated (government-created) price for a good or service that is set above equilibrium. In other words—an artificially-set price that prevents the market from reaching the equilibrium price. • Example: Minimum wage. The government has imposed the lowest price that can be paid for labor at $7. 25/hour. The result is a surplus of workers (that’s part of the reason we have an unemployment rate!)

Price Controls Price Ceiling: A legislated (government-created) price for a good or service that is set below equilibrium. In other words, an artificially-set price that prevents the market from reaching the equilibrium price. • Example: Rent control. In order to try to maintain affordable housing, local governments may set a price above which landlords may not charge for rent. This results in a shortage of apartments.

Unit Two Packet 1. 2. 3. 4. 5. 6. Demand Guided Notes Demand Practice Elasticity Notes Supply Guided Notes Supply Practice Supply and Demand Together Notes 7. Unit Two Study Guide