Transcript 2-5 Supply and Demand

ECONOMICS
What does it mean to me?
Part IV:
•Supply & Demand
•Shifts in Supply & Demand
•Linked Markets
•Complementary Goods
•Substitute Goods
•Change in Quantity Demanded
•Change in Quantity Supplied
READ Krugman Section 2, Module 5, 6, 7, 8, 9
Mankiw Ch 4, 5, 6
DO Morton Unit 2
LAW of SUPPLY
LAW of DEMAND
The LAW of DEMAND states that consumers
are willing and able to consume less of a good
as its price rises. …..or consume more of a
good as its price
$80
decreases.
P $70
R
I
C
E
$60
$50
$40
$30
$20
D (demand)
$10
0
100 200 300 400 500 600
QUANTITY
Module 5
(Food, sleep, date,
study, etc.)
The Ps and Qs have an inverse relationship.
Math:
$80
P
R
I
C
E
Economics: P = -mQ + b
$70
$60
$50
$40
$30
$20
D (demand)
$10
0
100 200 300 400 500 600
QUANTITY
Module 5
Y = -mX + b
(Food, sleep, date,
study, etc.)
Demand Schedule and Demand
Curve
Price
Module 5
Price
Quantity
$8
3
$7
5
$6
7
$5
10
$4
12
$3
16
$2
22
Quantity
Krugman, Economics for AP
Understanding Shifts of the
Demand Curve
• Increase = right, Decrease = left
• M.E.R.I.T. shifts demand
• market size (number of consumers)
• expectations
• related prices (complements, substitutes)
• income (normal, inferior)
Module 5
• tastes
Krugman, Economics for AP
Table A-1 Novels Purchased by Emma
*Mankiw
Figure A-3 Demand Curve
*Mankiw
Figure A-4 Shifting Demand Curves
*Mankiw
Figure A-5 Calculating the Slope of a
Line
*Mankiw
The LAW of SUPPLY states that producers are
willing and able to produce more of a good as
its price rises.
S (supply)
$80
P
R
I
C
E
$70
$60
$50
$40
$30
$20
….or produce less
of a good as its
price decreases.
$10
0
100 200 300 400 500 600
QUANTITY
Module 6
(Food, sleep, date,
study, etc.)
The Ps and Qs have an direct relationship.
Math:
Y = mX + b
Economics: P = mQ + b
S (supply)
$80
P
R
I
C
E
$70
$60
$50
$40
$30
$20
$10
0
Module 6
100 200 300 400 500 600
QUANTITY
(Food, sleep, date,
study, etc.)
Supply Schedule and Supply Curve
Price
Module 6
Quantity
Price
Quantity
$8
22
$7
14
$6
8
$5
6
$4
5
$3
4
$2
3
Understanding Shifts of the
Supply Curve
• Increase = right, decrease = left
• T.R.I.C.E. shifts supply
• Technology
• Related prices (complements in production,
substitutes in production)
• Input prices
• Competition (number of producers)
Module 6
• Expectations
Putting these two curves together gives us the point of
EQUILIBRIUM…equilibrium gives us the optimum point
of production at the price people are willing to pay.
$80
P
R
I
C
E
$70
$60
$50
E (equilibrium)
$40
$30
$20
D (demand)
$10
0
Module 6
S (supply)
100 200 300 400 500 600
QUANTITY
(Food, sleep, date,
study, etc.)
Supply, Demand, and
Equilibrium
 Equilibrium
 Equilibrium
price
 Equilibrium quantity
 Market-clearing price
Module 6
Finding the Equilibrium Price
and Quantity
equilibrium
price
Module 6
E
equilibrium
quantity
equilibrium
Why Does the Market Price Fall If It
Is Above the Equilibrium Price?
• Surplus
• Producer's Incentive
Module 6
Why Does the Market Price Rise If It
is Below the Equilibrium Price?
• Shortage
• Consumer's Incentive
• The tendency towards
equilibrium
Module 6
In a market economy,
the price of a good
signals to consumers
the cost of producing
a good. MARKET
PRICE also signals to
producers the value
that consumers place
on a good. Market
price coordinates the
actions of consumers
(demand) and
producers (supply).
What happens when
changes occur in the
economy?
How do these
changes affect
supply and demand?
The Chicago
Cubs have a
winning season.
What happens to
the price of
World Series
tickets?
Does this affect the supply or
demand curve?
Chart I: Demand increase (P ; Q )
The Chicago Cubs have a winning season. What
happens to the price of World Series tickets?
S
Price
goes
up
E1
P P1
R
P0
I
E0
C
E
D1
D0
Q0 Q1
QUANTITY
Quantity
goes up
What Happens When the
Demand Curve Shifts?
Module 6
• When demand increases, the equilibrium price and
quantity both increase
Gas prices
increase
dramatically.
What happens
to the market
for big
automobiles?
Does this affect the supply or
demand curve?
Chart II: Demand decrease (P ; Q )
Gas prices increase dramatically. What happens to the
market for big automobiles?
S
Price
goes
down
P
R
P0
I
P1
C
E
E0
E1
D1
Q1 Q0
QUANTITY
D0
Quantity
goes
down
What Happens When the
Demand Curve Shifts?
• When demand decreases, the equilibrium price and
Module 6 quantity both decrease
Plentiful oil fields are
discovered in Nevada.
What happens to the
market for oil?
Does this affect the supply or
demand curve?
Chart III: Supply Increase (P ; Q )
Plentiful oil fields are discovered in Nevada. What happens to
the market for oil?
S0
Price
goes
down
S1
P
R
P0
I
P1
C
E
E0
E1
D
Q0 Q1
QUANTITY
Quantity
goes up
What Happens When the
Supply Curve Shifts?
Module 6
• When supply increases, the equilibrium price
decreases and the equilibrium quantity increases
A drought has depleted
the corn crop. What
happens to the market
for corn?
Does this affect the supply or
demand curve?
Chart IV: Supply Decrease (P ; Q )
A drought has depleted the corn crop. What happens
to the market for corn?
S1 S0
Price
goes
up
P
P1
R
P0
I
E1
E0
C
E
D
Q1 Q0
QUANTITY
Quantity
goes
down
What Happens When the
Supply Curve Shifts?
• When supply decreases, the equilibrium price
Module 6
increases and the equilibrium quantity decreases
http://www.yadayadayadaecon.com/clip/18/
Let’s look at a shift using numbers:
The government adds a
$1 tax to cigarettes.
Does this affect supply or
demand?
Chart IV: Supply Decrease (P ; Q )
Congress adds $1 tax to cigarettes.
S1 S0
$6
Price
goes
up
P
R
I
C
E
$5
$4
$3
This area
represents
the $1 tax.
E1
E0
$2
D
$1
0
1K 2K 3K 4K 5K
QUANTITY
Quantity
goes
down
Demand and
Supply:
Single Markets
where both curves
shift.
Now let’s see what
happens when an
event occurs and
impacts both the
supply and the
demand….
What is the short term
impact of the
government legalizing
marijuana?
Will this affect the supply
curve or the demand curve?
Or both?
Chart V: (D ; S )
What is the short term impact of the government legalizing
marijuana?
S
The demand
curve moves
right
P
indicating
an increase. R P
0
The supply C
curve moves E
right
indicating
an increase.
E1
E0
I
S1
D1
D0
Q0
QUANTITY
Q1
Chart V: (D ; S )
This chart shows and increase in both supply and demand.
As a result:
S
PRICE
P0
S1
E1
E0
D1
D0
Q0
Q1
QUANTITY
Quantity
will
increase
Simultaneous Shifts of Supply
and Demand
• When demand and supply increase, the change in
Module 7 equilibrium price is ambiguous, but equilibrium
quantity definitely increases
Frost hits coffee growing
areas, while coffee is
“cleared” as a cause of
cancer.
Will this affect the supply
curve or the demand curve?
Or both?
Chart VI: (D ; S )
Frost hits coffee growing areas, while coffee is “cleared” as a
cause of cancer.
S
The demand
curve moves
P1
right
P
indicating
an increase. R P
0
E1
S0
E0
I
The supply C
curve moves E
left
indicating
an decrease.
1
D1
D0
Q0
QUANTITY
Chart VI: (D ; S )
In this chart, demand will increase while supply decreases.
This will result in:
S
1
E1
P
S0
P1
Price will R
P0
increase.
E0
I
C
E
D1
D0
Q0
QUANTITY
Quantity will be
indeterminate.
Simultaneous Shifts of Supply
and Demand
• When demand increases and supply decreases the
Module 7 equilibrium price definitely increases, but quantity is
ambiguous
A sturdy, shippable
tomato that tastes
like cardboard is
introduced into the
market.
Will this affect the supply
curve or the demand curve?
Or both?
Chart VII: (D ; S
)
A sturdy, shippable tomato that tastes like cardboard is
introduced into the market.
S0
The demand
S1
curve moves
left
P
indicating
an decrease. R P
E
I
0
The supply C P
1
curve moves E
right
indicating
an increase.
0
E1
D1
Q0
QUANTITY
D0
Chart VII: (D ; S
)
When demand is decreased and supply is increased, this
results in:
S0
PRICE
Price will
decrease.
P0
E0
P1
E1
D1
Q0
S1
D0
Quantity will be
QUANTITY indeterminate.
Simultaneous Shifts of Supply
and Demand
• When demand decreases and supply increases the
Module 7 equilibrium price definitely decreases, but quantity is
ambiguous
Newspapers report
high levels of
salmonella in
chickens, many
must be destroyed.
Will this affect the supply
curve or the demand curve?
Or both?
Chart VIII: (D ; S )
Newspapers report high levels of salmonella in chickens, many
must be destroyed.
S1 S0
The demand
curve moves
left
P
indicating
E1
an decrease. R P
E
I
The supply C
curve moves E
left
indicating
an decrease.
0
0
D1
Q1
Q0
QUANTITY
D0
Chart VIII: (D ; S )
This chart shows what happens when demand and supply are
both decreased.
S1 S0
PRICE
E1
P0
E0
D1
Q1
Q0
D0
QUANTITY
Quantity
will
decrease
Simultaneous Shifts of Supply
and Demand
• When demand and supply decrease, the change in
Module 7 equilibrium price is ambiguous, but equilibrium quantity
definitely decreases
LINKED
MARKETS
LINKED MARKETS pertain to
those goods which affect other
goods.
For instance:
Coffee => Cream
Peaches => Blueberries
Vegetarianism => Leather Coats
Coffee beans are
hit by an unusual
frost. What
happens to the
price and quantity
of cream?
Which of the charts (I, II, III, or
IV) will pertain to these
markets?
Chart IV represents the
depleted coffee crop.
Price
goes
up
Quantity
goes
down
The demand for cream decreases
as graphed in Chart II.
Price
goes
down
Quantity
goes
down
So, a decrease in the supply of
coffee causes the price of coffee
to rise. People who do not want
to pay the high price for coffee
will have a reduced demand for
cream to go into the coffee.
Coffee and cream are considered
complementary goods.
A complementary good is defined as a
good who, when its price rises causes
a decrease in the demand of another
good (or visa versa).
Complementary goods have an
inverse relationship between price of
one good and demand for another.
Pa
Db
Pa
Db
A virus attacks
broccoli. What
happens to the price
and quantity of
brussels sprouts?
Which of the charts (I, II, III, or
IV) will pertain to these markets?
Chart IV represents the
depleted broccoli crop.
Price
goes
up
Quantity
goes
down
Chart I represents the increase
in demand of brussels sprouts.
Price
goes
up
Quantity
goes up
So, the virus creates a
diminished supply of
broccoli which drives up the
price. Consumers who don’t
wish to pay the higher price
will look for a substitute
good such as brussels
sprouts.
A substitute good is defined as a
good who, when its price rises
causes a increase in the demand
of another good (or visa versa).
Substitute goods have a direct
relationship between price of one
good and demand for another.
Pa
Db
Pa
Db
Which of the charts (I, II,
III, or IV) will pertain to
these markets?
The demand for the new cloth
increases as graphed in Chart I.
Price
goes
up
Quantity
goes up
The demand for cotton decreases as
graphed in Chart II.
Price
goes
down
Quantity
goes
down
So…..people
using, or
demanding, less
cotton will cause
the price to go
down and less of
the fabric to be
made.
Are these goods
substitute or
complementary?
Vegetarianism expands
greatly, what happens to the
P & Q of leather coats?
Which of the charts (I, II, III,
or IV) will pertain to these
markets?
Chart I shows what happens to
the P & Q of vegetables.
Price
goes
up
Quantity
goes up
The demand for beef decreases as
graphed in Chart II.
Price
goes
down
Quantity
goes
down
Chart IV shows what happens to
the P & Q of leather coats.
Price
goes
up
Quantity
goes
down
So…..the increase in the purchase of
vegetables will create a lack of demand
for beef. This will cause fewer cows to be
slaughtered, creating less leather to be
available, or a decrease in supply, which
will cause the price to go up on leather
coats.
http://www.yadayadayadaecon.com/clip/86/
http://www.yadayadayadaecon.com/clip/60/
Economics is
mostly about
changes--not
levels.
Several years ago, Baby M was born
to a surrogate mother who had been
paid $10,000 to give birth to the baby.
The birth mother changed her mind
and sued in court to have the child
returned to her. The judge agreed.
What impact did this have on the
supply of surrogate mothers?
What impact did this have on the
demand for babies born to surrogate
mothers?
Exercise One:
Using supply and demand
analysis, explain why the price
of roses always seems to rise just
before Valentine’s Day.
Using supply and demand
analysis, determine how a freeze
that kills half the rose crop
would affect the price of roses.
Using supply and
demand analysis,
determine how a
freeze that kills half
the rose crop would
affect the price of fine
chocolates.
Exercise Two:
Some time ago,the city
of Ft.Lauderdale had
an initiative on the
general election ballot
that asked voters to
raise the minimum
wage in that city to a
level 40 percent above
the national minimum
wage.
This year the initiative
would make the
minimum wage be $7.35
in Ft. Lauderdale and
$5.25 elsewhere.
•How would things in Ft. Lauderdale
have changed if the initiative had
passed?
•What would be the same?
•What would change?
•Predict the
effect of the
legislation on
the markets for
labor in Ft.
Lauderdale and
in the suburbs
outside the city.
•Would you
rather work in Ft.
Lauderdale or
outside the city
•Would you be
more likely to find
a job in Ft.
Lauderdale or
outside the city?
There is a small business
person who is planning to
re-locate to the Ft.
Lauderdale area.
*Would you advise the business person to set up business in Ft.
Lauderdale or in a suburb of Ft. Lauderdale? What is your
reasoning?
Exercise Three:
Suppose you run a lawn mower business. You charge $15 per standard size lawn
and can mow five lawns in an eight hour day. You currently have more people
asking you to mow their lawns than you can satisfy and estimate that you could
sign up as many as 25 additional customers. You have two strategies that will
permit you to expand your business.
Strategy One…….is to hire your
friend Jim to work for you. Jim
is a good worker who will work
for $8 an hour.
Strategy Two….is to rent a riding
lawn mower that will permit you
to mow seven lawns per day. Rent
for the riding mower is $100 per
week. Gas and oil for the mower
cost $25 per week.
OPTION 0:
Actually, there are 3 options--the first
being “status quo.”
($15 per lawn) X (25 lawns per week)
= $375 per week
OPTION 1:
Hire Jim to work by the hour.
It takes him 8 / 5 = 1.6 hours to mow a
lawn
Marginal Revenue per lawn = $15
Marginal loss per lawn = ($8 per hour)
X (1.6 hours to mow) = $12.80
$15 - 12.80 = $2.20 extra profit per
lawn
If Jim mows 25 lawns per week:
25 X $2.20 = $55 profit per week
YOUR NET REVENUE IS:
$375 + 55 = $430
OPTION 2:
Rent Lawn Mower
MARGINAL REVENUE
(7 lawns per day) X (5 days) = 35 lawns
per week
35 lawns X $15 per lawn = $525
MARGINAL LOSS = $125
YOUR NET REVENUE IS:
$525 -125 = $400
•Should you expand
your business? Why or
why not?
•Which strategy, if
any, should you use?
Why?
•If the riding lawn
mower permitted you to
mow 8 lawns per day,
would your strategy
change? Why or why
not?
OPTION 4:
Rent Lawn Mower (8 lawns per day)
MARGINAL REVENUE
(8 lawns per day) X (5 days) = 40 lawns
per week
40 lawns X $15 per lawn = $600
MARGINAL LOSS = $125
YOUR NET REVENUE IS:
$600 -125 = $475
THE END
Compiled by Virginia Meachum, Economics Teacher,
Coral Springs High School, Broward County, FL