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and Demand

D 2. S 3. S 1. D 1. S 2. D 3. P. Q. “OK, I was wrong. It is a matter of supply and demand, and now I think you da “man”. and Demand. Consumers and Producers Feel Differently About High and Low prices. Producers supply more at the higher price because

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and Demand

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  1. D2 S3 S1 D1 S2 D3 P Q “OK, I was wrong. It is a matter of supply and demand, and now I think you da “man”. and Demand

  2. Consumers and Producers Feel Differently About High and Low prices Producers supply more at the higher price because the opportunity cost increases if they don’t. Consumers consume less at the higher price because they now have less money to spend. Producers supply less at the lower prices because the opportunity cost decreases if they don’t. Consumers consume more at the lower price because they now have more money to spend. I normally eat one, but at this low price, I’m having two. I was going to buy a Honda but this car is $4,000 cheaper. I’m saving money at the lower price.

  3. Supply (& Demand) “Bread & Butter” of Economics[“perfectly competitive markets”] Direct – price and QS move in the same direction. (increase together or decrease together) S The Law of Supply says QS varies directly with price. P2 The Law Of Demand says QD varies inverselywithprice. P1 QS1QS2

  4. Supply (and Demand) “Bread & Butter” of Economics[“perfectly competitive markets”] The law of supply and demand is learned in infancy. Infants demand clean diapers and are willing to supply peace and quiet in exchange. Mothers demand peace and quiet and are willing to supply clean diapers in exchange. The terms of trade are arranged . . “One scream equals one diaper. The price of one diaper is one scream.” Supply – producers “willingness to sell.” Or, the “amount of products offered at each price during a specific time period.”

  5. Supply (and Demand)“Bread & Butter” of Economics[“perfectly competitive markets”] Butter Bread Law of Supply– QSvariesdirectlywithprice. Suppliers offer more for sale athigher prices than at lower prices. The consumers, being on the paying end, tend to buy a small amount of the product, but will buy more if the price is lowered. The supplier, on the receiving end, considers price as anincentive to sell a product. The higher the price, the more incentive he has.

  6. P QS SUPPLY DEFINED SUPPLY SCHEDULE CORN Various Amounts 5 20 35 50 60 $1 2 3 4 5 And why is talk so cheap? Supply is excessive. Cut Supply & you will increase demand.

  7. “Let’s make more.” LAW OF SUPPLY S P2 P1 - As price increases …Q S also increases • As price decreases • … QS also decreases QS1QS2 S P1 P2 “Take it. We are losing money.” QS2QS1 Directrelationship between P & QS

  8. Change in “Supply” [Curve] 1. “Non-price change” [RATNEST] 2. Whole supply curve “shifts” [There was a QS change but it was not caused by a change in price] I only have 200 acres . Corn Broccoli S1 S Alternative Output Price Change [INVERSE] S2 P2 P1 P “Substitutes in production” QS1 QS2 S1S2 P “Supply Shifters” [RATNEST] 1. Resource Cost [wages /raw materials ] [INVERSE] 2. Alternative Output Prices [INVERSE] 3. Technology [DIRECT] 4. Number of Suppliers [DIRECT] 5. Expectations [about future price] [INVERSE] 6. Subsidies [DIRECT] 7. Taxes [INVERSE] [new football league- bigger “S” of games] S3S1S2 Don’t confuse these two with Chg in QS. “Suppliers produce smaller/ larger quantities at each price.” QS1 QS3 QS2

  9. Supply Shifters [“RATNEST”] • ResourceCost[wages & raw materials] [inverse] • Alternative Output price changes[inverse] • Technology [direct] • Number ofSuppliers[direct] • Expectation(Suppliers) about future price [inverse] • Subsidies [direct] Taxes [inverse] Decr in “S” of broccoli Bigger supply of games “Take this money.” Up down

  10. DETERMINANTS [Shifters] OF SUPPLY[RATNEST– non PL] AS3AS1AS2 P • 1.ResourceCost [wages & raw materials] [inverse] • 58. Increase in wages (increases/decreases) supply. • Ex: A decrease in the price of computer chips (increases/decreases) the supply of computers. • 2.Alternative Output price changes[inverse] • 57.If the price of corn decreases, the supply of broccoli(increases/decreases). S1S2 P Supply

  11. 3.Technological Improvement “Can’t wait till milking time.” This lowers production costs & increases “S”. Ex: Suppose a new milking machine called “The Invisible Hand” has a very soothing effect on cows; cows find the new machine so “udderly” delightful that they produce 30% more milk. This technological advance will cause a shift to the right. 54

  12. 4. Number of producers[direct] AS3AS1AS2 56.If more firms enter an industry, the supply curve will shift to the (left/right). • When the American Basketball League began play in 1968, there was a (bigger/smaller) supply of basketball games each week. 60. A new professional football league will (increase/decrease)the supply of football games.

  13. 5.ProducerExpectations about Future Price [Inverse] AS3AS1AS2 59.If oil producers expect future oil prices to decline, they will (increase/decrease) current production. P Supply Oil Prices Expected to decrease

  14. Free money from the government (subsidies) induces suppliers to supply more. 6. Subsidies – free moneyfrom “G” 7. Taxes – take away business profits and decrease supply. 55. Businesses have their taxes increased which moves the supply curve to the (left/right).

  15. Shortage of Face Masks for SARS Young Hong Kong ballet dancers wear masks to protect themselves from SARS. 770 people died from this disease.

  16. So What to use if there is a shortage?

  17. Effects of an Increase in Demand on Equilibrium P D2 $1200 S D1 $900 Shortage $600 QS=8 QD=16 $300 Q 12 8 4 16

  18. Effects of a Decrease in Demand on Equilibrium P D1 $40 S D2 $30 QD=10 QS=30 Surplus $20 $10 20 30 40 10 Q

  19. Effects of an Increase in Supply on Equilibrium P S1 D $4 S2 $3 QD=40 QS=80 Surplus $2 $1 80 40 60 Q 20

  20. Effects of an Decrease in in Supply on Equilibrium P S2 D $800 S1 $600 $400 Shortage QS=2 QD=6 $200 40 20 60 80 Q

  21. Decrease in Supply S2 D S1 P2 Shortage P1 Q2 Q1

  22. Increase in Supply S1 D 1.35 $2.70 S2 P1 Surplus P2 Q2 Q2

  23. Juicy “Orange” Prices R F R Decide if the price of oranges is going torise,fall, or stay thesame. ___1. All of the growers meet & agree to grow fewer oranges next year. ___2. Growers plant more acres of orange trees. ___3. Orange growers run an advertising campaign promoting oranges as a symbol of good health. ___4. One grower [out of thousands] retires and stops growing oranges. ___5. Growers develop a bigger and better tasting orange. ___6. Orange growers are struck by the disease-causing Mediterranean fruit fly. S R R Quantity of Oranges

  24. “Increase in D” “Increase in S” “Decrease in S” “Decrease in D” S2 D S S1 D1D2 D D1 S1 S S2 P2 P2 D2 P1 P1 P1 P1 P2 P2 QD1 QD2 QD2QD1 QD1 QD2 QD2 QD1 (C) RATNEST (B) (D) TIMER (A) A ___1. Decrease in income on market for used cars. ___2. Decrease in income on market for new cars. ___3. Consumer expectations about a price decrease. ___4. Producer expectations about a price decrease. ___5. Increase in # of producers on the market for computers. ___6. Increase in # of consumers on the market for used cars. ___7. Increase in # of consumers on the market for new cars. ___8. Decrease in the price of moviesupon the market forpopcorn. ___9. Decrease in business taxeson the market for computers. ___10. Consumer expectations of a shortage of apples. ___11. Decrease in resource cost on market for computers. ___12. Increase in price of wheatupon market for corn. ___13. Consumer expectations of a shortage of cell phones. ___14. Producers expectations about a price increase. ___15. Increase in income on the market for iPod nanos. B B C C A A A C A C D A D A

  25. P QD P QS MARKET DEMAND & SUPPLY Price of Corn CORN MARKET CORN MARKET S $5 4 $3 2 1 2,000 4,000 7,000 11,000 16,000 12,000 10,000 7,000 4,000 1,000 $5 $4 $3 $2 $1 $5 $4 $3 $2 $1 Market Clearing Equilibrium D 7 o Q 2 4 6 8 10 12 14 16 Quantity of Corn

  26. Banana Supply & Demand P D1 S1 Crop Freezing Damage… S2 P2 Price (per pound) P1 o Q2 Q1 Q Quantity

  27. Price Floor – minimumprice[createssurpluses]. Such as: Minimum Wage Agricultural Price Supports The price has to be IN the house. It can’t be below the floor. P S D Price Floor-minimum price QS exceeds QD $2.50 Surplus Equilibrium price for milk 1.90 Price per gallon Some call agricultural price supports “udder insanity.” 141924 Q 0 Millions of gallons per month

  28. Such as: Rent controls in NYC Wartime price controls Rock concert prices Super Bowl tickets The price has to be in the house. It can’t be above the ceiling. Price Ceiling - maximum price[createsshortages] P S D $2,000 NYC Rent Controls Price Ceiling-maximum price QD exceeds QS 1,200 Shortage Reliant Stadium Super Bowl Ticket Prices E-Bay 1967 - $12.00 2004 - $500$2-6,000 7 o 3.5 2.5 Millions of Dwellings Rented 3 NFL could raise the price & make another $150 M but the average man couldn’t attend.

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