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Price Supply Pe Supply & Demand: the basics Demand Quantity Qe - Dr. D. Foster W.A. Franke College of Business Price Demand = Consumers Law of Demand: Supply All else equal, the quantity demanded of a good, that consumers are willing to buy and able to pay for, varies inversely with its price. Pe Supply = Producers Supply Relationship: All else equal, Demand the quantity supplied of a good, that producers are willing to sell and able to produce,Quantity varies directly with its price. Qe Demand Price Price Pe Supply A change in the price of the good will cause a movement along the curve: Change in Quantity Demanded (ΔQD) Demand Qe Quantity Quantity Demand Price A change in some other relevant factor of demand for the good Supply will cause a shift in the curve: Price Change in Demand (ΔD) Increase in Demand Pe Decrease in Demand D2 Qe D1 Demand D3 Quantity Quantity Supply Price Price Supply A change in the price of the good will cause a movement along the curve: Pe Change in Quantity Supplied (ΔQS) Demand Qe Quantity Quantity Supply Price Price A change in some other relevant factor of supply Supply for the good will cause a shift in the curve: Decrease in Supply Change in Supply (ΔS) Pe Increase in Supply S3 Demand S1 S2 Qe Quantity Quantity Price Factors that affect Demand • Income Supply • Tastes and Preferences • Expectations • Others (price of substitute/complement goods; size of market) Pe Factors that affect Supply • A change in the costs of production • A change in technology Demand • A changes in taxes/subsidies/restrictions • Others (price of other goods; expectations; Quantity size of market ). Qe Price Putting Demand & Supply Together Price Supply At P3 a shortage will drive up prices. P1 Pe Supply At P1 a surplus will drive down prices. P2 P3 Q1 Q2 QQ3 e At P2 the market is in Demand Demand equilibrium. Quantity Quantity Price Price Controls - Ceilings Price Supply Supply A price ceiling is a maximum (legal) price. Pe To Pebe “effective” it must be set below Pe P* Demand What problem does this cause? DemandQuantity How is it resolved? QS Qe QD Quantity Qe Price Price Controls - Floors Supply Price Supply A price floor is a minimum (legal) price. P* Pe To Pebe “effective” it must be set above Pe Demand What problem does this cause? Demand How is it resolved? Quantity QD Qe Qe QS Quantity Price Supply & Demand Problems #1. In the market for oranges, what will happen if Supply there is great weather in Florida and California? Price Supply Pe Pe Demand Demand Quantity Qe Qe Quantity Price Supply & Demand Problems #1. In the market for oranges, what will happen if Supply there is great weather in Florida and California? Costs fall = supply increases price falls & output rises Price Supply Pe New Supply Pe New Price Demand Demand Quantity Qe New Quantity Qe Quantity Price Supply Pe Supply & Demand: the basics Demand Quantity Qe - Dr. D. Foster W.A. Franke College of Business
