Transcript Supply and demand together!

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
$6.00
D
Surplus
S
$5.00
Example:
If P = $5,
then
QD = 9 lattes
$4.00
and
QS = 25 lattes
$3.00
$2.00
resulting in a
surplus of 16 lattes
$1.00
$0.00
Q
0
5
10 15 20 25 30 35
Surplus (a.k.a. excess supply):
When quantity supplied is greater than quantity demanded
P
$6.00
D
$5.00
$4.00
Surplus
S
Facing a surplus,
sellers try to increase sales
by cutting price.
This causes
QD to rise and QS to fall…
$3.00
$2.00
…which reduces the
surplus.
$1.00
$0.00
Q
0
5
10 15 20 25 30 35
Surplus (a.k.a. excess supply):
When quantity supplied is greater than quantity demanded
P
$6.00
D
$5.00
$4.00
Surplus
S
Facing a surplus,
sellers try to increase sales
by cutting price and output.
This causes
QD to rise and QS to fall.
$3.00
Prices continue to fall until
market reaches
equilibrium.
$2.00
$1.00
$0.00
Q
0
5
10 15 20 25 30 35
Shortage (a.k.a. excess demand):
When quantity demanded is greater than quantity supplied
P
$6.00
S
D
$5.00
Example:
If P = $1,
then
QD = 21 lattes
$4.00
and
QS = 5 lattes
$3.00
$2.00
resulting in a
shortage of 16 lattes
$1.00
$0.00
Shortage
0
5
10 15 20 25 30 35
Q
Shortage (a.k.a. excess demand):
When quantity demanded is greater than quantity supplied
P
$6.00
S
D
$5.00
Facing a shortage,
sellers raise the price,
causing QD to fall
and QS to rise,
$4.00
…which reduces the
shortage.
$3.00
$2.00
$1.00
Shortage
$0.00
Q
0
5
10 15 20 25 30 35
Shortage (a.k.a. excess demand):
When quantity demanded is greater than quantity supplied
P
$6.00
S
D
$5.00
Facing a shortage,
sellers raise the price,
causing QD to fall
and QS to rise.
$4.00
$3.00
Prices continue to rise
until market reaches
equilibrium.
$2.00
$1.00
Shortage
$0.00
Q
0
5
10 15 20 25 30 35
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
– Weather
– 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
S1
P1
D1
Q1
Q
quantity of
hybrid cars
EXAMPLE 1: A Shift in Supply or Demand?
EVENT TO BE
ANALYZED:
P
S1
Increase in price of gas.
STEP 1:
D curve shifts
because
STEP 2: price of gas
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 cars.
relative to other
and quantity
affect
cost of of
hybrid cars.
producing
hybrids.
P2
P1
D1
Q1 Q2
D2
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
S1
P2
P1
D1
Q1 Q2
D2
Q
EXAMPLE 2: A Shift in Supply or Demand
EVENT: New technology
P
reduces cost of
S1 S2
producing hybrid cars.
STEP 1:
S curve shifts
because
STEP 2: event affects P1
cost of production.
P2
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.
D1
Q1 Q2
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?
Bell Ringer!!!
3. Draw and describe a
price floor!
4. Draw and describe a
price ceiling!
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.
Demand Guided Notes
Elasticity WS
Supply Guided Notes
Supply and Demand Together
Notes
5. Unit Two Study Guide
6. Bell Ringers!