AP Microeconomics

1. AP Microeconomics X Marks the Spot

2. Market Equilibrium Our economy depends on the interdependence of suppliers and demanders. Suppliers will enter the market knowing that prices of g&s must cover production costs and also yield profits. Demanders enter the market wanting to buy g&s with a price that is practical and possible. A market is a place where firms and households come together to exchange goods.

3. They both hold power: therefore they together set the perfect [market] price. • What price producers are willing to offer outputs at? vs. What price consumers are willing to pay for that output? • What price are households willing to offer inputs at? vs. What price are firms wiling to buy? Remember the Circular Flow? Power Goes Both Ways!!

4. When these two meet at the market, one of three things happen: • The quantity demanded exceeds the quantity supplied; resulting in a shortage • The quantity supplied exceeds the quantity demanded; resulting in a surplus • The quantity supplied equals the quantity demanded, the equilibrium.

5. Equilibrium • the condition that exists when quantity supplied and quantity demanded are equal, it will “clear the market” because the price is perfect.

6. Let’s Do Some Graphing • Label Price by $.50s • Label Quantity by 3s • Label your S, D, Price and Quantity

7. Bushels of Oranges 4.00 S Price in Dollars Equilibrium Price? Equilibrium Quantity? 3.50 3.00 2.50 2.00 1.50 1.00 D .50 0 8 3 6 9 12 15 18 Quantity

8. What would happen if price was set at $3? • Excess Supply (surplus): QS > QD. Results of Surplus: • *Price Tends to Fall to clear the market…meaning: • Law of Demand: Price ↓ QD ↑ • Law of Supply: Price ↓ QS ↓ This will happen until QS = QD!

9. Bushels of Oranges 4.00 S Price in Dollars Equilibrium Price? Equilibrium Quantity? QS>QD 3.50 3.00 2.50 2.00 1.50 1.00 D .50 0 3 6 9 12 15 18 Quantity

10. What would happen if price was set at $1.50? • Excess Demand (shortage): QD > QS • Results of Shortage: • *Price tends to Rise until the market is cleared…meaning: • Law of Demand: Price ↑QD ↓ • Law of Supply: Price ↑ QS ↑ This will happen until QS = QD!

11. Bushels of Oranges 4.00 S Price in Dollars Equilibrium Price? Equilibrium Quantity? 3.50 3.00 2.50 2.00 1.50 1.00 QD>QS D .50 0 3 6 9 12 15 18 Quantity

12. Keep in mind that changes in price result in changes of quantity supplied and quantity demanded (movements along the same curve RULE: • If a new price is set above the equilibrium price • then a surplus will result, until the market corrects itself. • If a new price is set below the equilibrium price • then a shortage will result, until the market corrects itself.

13. Drawing the Market Generic: a market must always have a firm’s supply and a household’s demand S0 Price EQUILIBRIUM POINT P0 Always use the proper numbers if you are given them…if not, then just use Ps and Qs. D0 Q0 Quantity

14. Coffee Market, Price @ $2.50 S0 Price $2.50 D0 Q0 Quantity of Coffee

15. Analyzing the Market Price in thousands of dollars S0 35 30 • What is the market price? • And at that price what quantity will be sold? 25 20 $20,000 15 10 5 D0 600 2 4 6 8 10 12 Quantity in hundreds

16. Analyzing the Market Price in thousands of dollars Any Price set above equilibrium results in a surplus S0 35 • If price were raised to $25,000 how many cars would be demanded? • How many cars are supplied? • What is this called? 30 25 20 400 cars 15 10 5 800 cars D0 2 4 6 8 10 12 Quantity in hundreds QS>QD = A Surplus of 400 Cars

17. Analyzing the Market S0 35 30 Price in thousands of dollars 25 20 If price were changed to $10,000, what would be the economic result? 15 10 5 There would be a shortage of 8,00 cars!! D0 2 4 6 8 10 12 Quantity in hundreds

18. Factors other than price can change!! • Demand: income & wealth, tastes & preferences, complements, substitutes, ∆ in expectations. • Supply: cost of production, inputs, technology, productivity, government involvement, similar resources, numbers of sellers, ∆ in expectations

19. RULES FOR CHANGES IN DEMAND • If price was not a factor and supply stays constant, what would happen to price if demand increased? Price S PRICE & QUANTITY WILL BOTH INCREASE P1 P0 D1 D0 Quantity Q0 Q1

20. RULES FOR CHANGES IN DEMAND • If price was not a factor and supply stays constant, what would happen to price if demand decreased? S PRICE & QUANTITY WILL BOTH DECREASE P P0 P1 D0 D1 Q Q1 Q0

21. RULES FOR CHANGES IN SUPPLY • If price was not a factor and demand stays constant, what would happen to price if supply increased? S0 PRICE WILL DECREASE AND QUANTITY WILL INCREASE P S1 P0 P1 D0 Q Q1 Q0

22. RULES FOR CHANGES IN SUPPLY • If price was not a factor and demand stays constant, what would happen to price if supply decreased? S1 S0 P PRICE WILL INCREASE AND QUANTITY WILL DECREASE P1 P0 D0 Q Q1 Q0

23. Always start all scenarios with this: Sentence to write: ___________ will __________, due to _________, {explain in your own words}; as a result price will _________. Graphing Scenarios S0 P P0 D0 Q0 Q

24. Practicing Scenarios • Coffee’s equilibrium price is $4.50 for a large. There is a hurricane in Brazil destroying the coffee bean plants. How will this affect price? • There are 19,000 seats available in the HSBC Arena. The Sabres are on a hot streak; how will this affect price? • Very few consumers are buying 35mm cameras anymore. How is this affecting the price of 35mm film?

25. Practicing Scenarios • William Ford, great-grandson of Henry and CEO of Ford, approves the creation of a manufacturing plant in Bangalore (where they make good tea) and the hiring of 12,000 Indian workers. How will this affect the price of Ford cars? • In an attempt to raise revenues, Time Warner authorizes raising the price of its television services to $15 per month up from the previous $65. What affect will this have? • The iPhone is currently $399.99 at most stores and selling successfully (at equilibrium). Apple authorizes dropping the price to $199.99 for the holiday season. What affect will this have?

26. A Change in QD or QS • A surplus results • A shortage results • The price of a two liter of soda is increased to $4.99 each. • OPEC votes to increase the price of oil to $100 per barrel.

28. A Change in Demand • A change in consumer income • A change in consumer tastes • An increase to the price of a substitute • A decrease of the price of a complement • A change in expectations • An apple a day keeps the doctors away • Affect on creamer when coffee triples in price.

30. A Change in Supply • A change in expectations • A change in the cost of production • Government subsidies on citrus • New health codes as set by the FDA • Frost of corn fields • New shoes stores open on Sheridan Drive • Kristen stops making pot holders and starts making head bands