Supply and Demand

Supply and Demand

Supply and Demand Table of Contents The Basics Cross Price Elasticity of Demand The Law of Demand Income Elasticity of Demand The Law of Supply Market Failures- externalities Equilibrium Price and Quantity Equilibrium and Disequilibrium (2 slides) Price Controls - Price Floors and Price Ceilings Consumer and Produce Surplus Impacts of Price Control on Consumer/Produce surplus and deadweight lose Shifts in Demand Shifts in Supply Double Shifts in Supply and Demand Price Elasticity of Demand Price Elasticity of Supply

Supply and Demand The Basics Y Price (P) Supply (S) Equilibrium (Qs= Qd) P e Demand (D) X Quantity (Q) Q e TC

Supply and Demand The Law of Demand Demand- Different Quantities of goods and services that people are willing and able to buy at different prices. The Law of Demand Price (P) Price: Quantity Demanded Price: Quantity Demanded P2 P1 Price and Quantity Demanded have an Inverse Relationship Q1 Q2 3 reasons why Quantity (Q) Substitution effect Income effect- loss of purchasing power. The more expensive the less you can buy Law of Diminishing maximum utility TC

Student Demand for a Slice of Pizza at a specific price P 5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 Qd 0 5 10 15 20 25 30

Supply and Demand The Law of Supply Supply- Different Quantities of goods and services that people are willing and able to produce at different prices. The Law of Demand Price (P) Price: Quantity Supplied Price: Quantity Supplied P2 P1 Price and Quantity Supplied have an Direct Relationship Q1 Q2 Trade off between Labor and Leisure. The more money that can be made the more likely you will trade of leisure for labor. Opportunity Cost. Quantity (Q) TC Online Lesson Articles

Supply and Demand Equilibrium Equilibrium- The quantity where price has adjusted so that quantity demanded is equal to quantity supplied. The amount that the buyers are willing and able to purchase matches the amount that producers are willing and able to sell. Price (P) In nature water seeks its own level. Price does the same thing. Both Quantity supplied and Quantity demand works towards each other. Supply (S) Equilibrium (Qs= Qd) P e Demand (D) Quantity (Q) Q e TC

Supply and Demand Equilibrium and Disequilibrium- Surplus Price (P) Surplus happens when Quantity supplied is greater than the quantity demanded Almost always result from price controls Surplus Supply (S) Price Floor $20 $5 P e Equilibrium (Qs= Qd) Demand (D) Quantity (Q) Qd Qs Q e TC

Supply and Demand Equilibrium and Disequilibrium- Shortages Price (P) Shortages happens when Quantity demanded is greater than the quantity supplied Almost always result from price controls. Supply (S) Price Ceilings $2 $5 P e Equilibrium (Qs= Qd) Shortage Demand (D) Quantity (Q) Qd Q s Q e TC Online Lesson

Supply and Demand Price Floors and Price Ceilings Surplus Price Floors are created to keep prices over equilibrium. Qd is less than Q s= surplus Example- Minimum wage Price (P) Price (P) Supply (S) Supply (S) Price Ceiling Price Floor $2 P $20 P Clip 2 Clip 1 $5 P e $5 P e Equilibrium (Qs= Qd) Equilibrium (Qs= Qd) Qs Qd Price Ceilings are created to keep prices under equilibrium. Qs is less than Qd= shortage Example- Rent Control Demand (D) Demand (D) Quantity (Q) Quantity (Q) Q e Q e Price Controls are inefficient Shortage Qs Qd TC Online Lesson Articles

Supply and Demand Consumer and Producer Surplus Consumer Surplus-= (Price that the consumer is willing to pay – The Equilibrium price) Producer Surplus-= (The Equilibrium price- Price that the producer is willing to sell) Price consumers are willing to pay. “I bought it for $5 but I would have paid $8.” Demand is value Price (P) Supply (S) $4 CS Products are consumed by the consumers who want them the most and would be willing to pay more if they had to. Products are produced by the producers at the lowest price because they are willing to sell it for less. $2 P e Equilibrium (Qs= Qd) PS Demand (D) $1 Quantity (Q) Q e Price producers are willing to sell. “I sold it for $5 but I would have sold it for $2.” Supply is production cost. TC Online Lesson

Supply and Demand Consumer and Producer Surplus with a Price Ceiling Consumer Surplus-= (Price that the consumer is willing to pay – The Equilibrium price) Producer Surplus-= (The Equilibrium price- Price that the producer is willing to sell) Price (P) Dead weight loss- represents product that was never produced. Ceilings result in shortages Supply (S) $4 Dead weight loss Price Ceiling $1.50 $2 P e Equilibrium (Qs= Qd) CS PS Demand (D) $1 Quantity (Q) Q s 50 Q e 100 Q d TC Online Lesson

Supply and Demand Shifts in Demand- besides current price changes what other factors shift demand? When there is an increase in Quantity demand Price increases (direct) When there is an decrease in Quantity demand Price decreases (direct) Price (P) Price (P) Supply (S) Supply (S) P 1 P 1 $5 P e $5 P e Equilibrium (Qs= Qd) Equilibrium (Qs= Qd) (D1) (D1) Q 1 Q 1 5 Demand Shifters 1. Change in Taste (Direct) (D) (D) 2. Change in income- normal products- direct, inferior products- inverse 3. Change in market size (number of consumers) - direct Quantity (Q) Quantity (Q) Q e Q e 4. Expectations of consumers (future price, future availability, future income) 5. Price of related goods (substitutes – direct, complements- inverse) TC Online Lesson Shifter PPT

Supply and Demand Shifts in Supply- besides current price changes what other factors shift supply? When there is an increase in Quantity supplied Price decreases When there is an decrease in Quantity supplied Price increase Price (P) Price (P) (S1) (S1) (S) Supply (S) P 1 P 1 $5 P e $5 P e Equilibrium (Qs= Qd) Equilibrium (Qs= Qd) Q 1 Q 1 7 Supply Shifters 1. Resource Cost (wages and raw materials)- inverse 2. Alternative output price change - inverse (D) (D) 3. Technological improvements Quantity (Q) Quantity (Q) 4. Number of Suppliers - direct Q e Q e 5. Producer expectations about future- inverse 6. Subsides – government gives money to produce - direct 7. Taxes- inverse TC Online Lesson Shifter PPT

Demand and Supply Shifters TC

Let's Take A Look At The Five Demand Shifters ["TIMER"] TC

Warning Concentration on these slides is guaranted to improve your economics grade. TC

1."Change in Taste" [Direct] A decrease in taste forvideos results in a decrease in demand. An increase in taste for DVDs results in an increase in demand. D2 D1 D3 P QD3 QD1 QD2 TC

Peanut Butter Salmonella Scare . D1 11 have died and 529 have gotten sick. [430 peanut products recalled] D2 P Wall Street has gotten so bad that stockholders try to kill themselves by eating peanuts. “Decrease in demand” after the salmonella scare. TC

Example 2 on "Change in Taste" for Dark Chocolate Increase in demand for dark chocolate after studies revealed that there werehealth benefitsfrom eating it. Scientists have discovered that smokers who ate dark chocolate had less hardening of the arteries and a lowered risk of blood clots. D2 D1 P TC

2. Change in Income [Normal-Direct; Inferior-Inverse] Used Cars New Cars D2 D1 Less income results in more demand for used cars; less demand for new cars. More income results in more demand for new cars; less demand for used cars. P QD1 QD2 TC

3. Change in Market Size [Direct] [Number of Consumers] This is what we told one billion Chinese, as new potential consumers, when we opened trade relations with them in 1972. D2 D1 P New Cars More demand for both normal & inferior goods QD1 QD2 Used Cars TC

4. Expectations [of consumers] [about future price, availibility, & income] If Steve Jobs responds to iRate customers who bought the iPhone at $599 and says, “iSorry, we will raise the price back to $599 in 3 weeks.” $399 D2 D1 Buy it now to save money. iPhone P QD1 QD2 TC

4. Expectations [of consumers] [about future availibility of toilet tissue] If there is expected to be a major shortage of toilet tissue, then consumers will stock up now or risk not getting any. D2 D1 P QD1 QD2 TC

4. Expectations [of consumers] [about future income] Let’s say that we are coming out of recession & consumers feel secure about their jobs. [Positive future income] D2 D1 P QD1 QD2 TC

4. Expectations [of consumers] [about future income] Let’s say that we are going into a recession and consumers don’t feel secure about their jobs. [Negative future income] D1 D2 P QD2 QD1 TC

5. Prices of Related Goods [Substitutes-Direct; Complements-Inverse] D1 D2 D D1 P1 D2 P P P2 QD2 Complement [Inverse] QD1 Substitute [Direct] Cereal Pop Tarts Milk TC

Now, Let's Take A Look At The Seven Supply Shifters ["RATNEST"] TC

1.ResourceCost[wages & raw materials][Inverse] Wages Raw Materials Intel Pentium Chip If resource cost increases supply Decreases [making less $] If resource cost decreases supply Increases [making more $] S S S P

2. Alternative Output Price Change [Inverse] I only have 200 acres “Substitutes in production” Corn S1 Broccoli S2 P1 S P2 P QS1 QS2 Producers want to produce more of the good where price is increasing, Corn Broccoli S1 S P1 S2 P P2 QS1 QS2 or at least, where the price is not going down.

3. Technological Improvement [Cow Waterbeds] Waterbedsforcows.com We love these cow waterbeds because we get better blood flow and can produce 30% more milk. Less skin abrasions so happier cows produce more milk. Because cows produce more milk,farmers don’t have to have as many cows.[saves$] Supply curve moves “udderly” to the right. S S P Mooooove over and give me that waterbed.

P S1 $50 Q 4. Number of Suppliers [Direct] NFL S2 XFL in 2001 8 new teams More games each year QS1 QS2 Supply of FB games each week XFL [Extreme Football League] Supply of FB games increased when the XFL was formed.

5. Producer Expectations about Future Price [“INVERSE”] S2 S1 S2 P If the Bubba Gump Shrimp Companyexpects shrimp prices to decrease more in the future, they will supply (more/less) shrimp to the market now. If the Bubba Gump Shrimp Companyexpects shrimp prices to increase more in the future, they will supply (more/less) shrimp to the market now. TC

6. Subsidies - free money from government [Direct] S3 S1 S2 P Free money from the government (subsidies) induces suppliers to supply more. If subsidies are taken away, then suppliers are losing money and will decrease supply. TC

7. Taxes Take Away Business Profits & Decrease Supply. [Inverse] S3 S1 S2 P I’m losing profits.” If business have their taxes decreased, it moves the supply curve to the right. If business have their taxes increased, it moves the supply curve to the left. TC

Market Failures Imperfect Information- (making irrational decisions) Principal Agent Problems- (Conflict of Interest) Non- Competitive Markets (imperfect competition) – Monopolies, Oligopolies, and cartels) Public Goods- when the private sector will not produce something Externalities- Spillover effect both positive and negative TC

Market Failure Positive Externalities (spillover benefit) (P) (S)- MSC D1- MSB P fm Q optimal MSC= MSB Problem: At Q free market, to little is being produced. MSB>MSC@ Q fm (D) MB (private) Solution: Because the demand has increased, the price may increase as well. Government give a subsidy to consumer to help pay for the extra cost. (Q) Q fm TC

Market Failure Positive Externalities S1- MSC (S)- private (P) P fm Q optimal MSC= MSB Problem: At Q free market, to little is being produced. MSB>MSC@ Q fm (D) MSB Solution: The Government can give the private supplier an incentive to increase the supply by paying them a subsidy to make up for the decrease in price due to the increase in supply (Q) Q fm TC

Market Failure Negative Externalities (spillover cost) S1- mscmsc= private cost + external cost (P) (S) private P fm Q MSC= MSB (D)= MSB Problem: At Q free market, to much is being produced. MSB<MSC @ Q fm Solution: Per unit tax on producers (Q) Q fm TC

http://www.washingtonpost.com/wp-dyn/articles/A42887-2005Jan27.htmlhttp://www.washingtonpost.com/wp-dyn/articles/A42887-2005Jan27.html http://articles.cnn.com/keyword/supply-and-demand http://www.nytimes.com/keyword/price-controls http://www.thefreemanonline.org/columns/price-floors-surpluses-and-the-minimum-wage/ http://economics.fundamentalfinance.com/price-ceiling.php http://economics.fundamentalfinance.com/micro_price-floor.php

Market Failures TC

Supply and Demand