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P
D1
D3
D 2 S3
Q
“OK, I was wrong. It is a matter
of supply and demand, and now
I think you da “man”.
and
Demand
S1
S2
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 was going to buy a
Honda but this car is
$4,000 cheaper.
I’m saving money
at the lower price.
I normally eat
one, but at this
low price, I’m
having two.
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 inversely with price.
P1
QS1
QS2
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.”
Supply (and Demand)
Bread
“Bread & Butter” of Economics
[“perfectly competitive markets”]
Butter
Law of Supply – QS varies directly with price.
Suppliers offer more for sale at higher 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 an incentive
to sell a product. The higher the price, the
more incentive he has.
SUPPLY
DEFINED
SUPPLY SCHEDULE
Various Amounts
CORN
P QS
$1
2
3
4
5
5
20
35
50
60
And why is talk so cheap?
Supply is excessive.
Cut Supply & you will increase demand.
“Let’s make more.”
LAW OF SUPPLY
- As price increases
…Q S also increases
-As price decreases
… QS also decreases
“Take it. We are losing money.”
S
P2
P1
QS1
P1
QS2
S
P2
QS2
Direct relationship between P & QS
QS1
I only
have
200
acres
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]
Corn
Broccoli
S
P2
P1
P
S2
S1
“Substitutes in production”
S1 S2
P
QS1 QS2
“Supply Shifters” [RATNEST]
1. Resource Cost [wages
Alternative Output Price Change
[INVERSE]
/raw materials
] [INVERSE]
2. Alternative Output Prices [INVERSE]
3. Technology [DIRECT]
.
4. Number of Suppliers [DIRECT]
[new football league- bigger “S” of games]
5. Expectations [about future price] [INVERSE]
6. Subsidies [DIRECT]
7. Taxes [INVERSE]
S3 S1 S2
Don’t confuse these
two with Chg in QS.
“Suppliers produce smaller/
larger quantities at each price.”
QS3 QS1 QS2
Supply Shifters [“RATNEST”]
• Resource Cost[wages & raw materials] [inverse]
• Alternative Output price changes [inverse]
• Technology [direct]
• Number of Suppliers [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
DETERMINANTS [Shifters] OF SUPPLY
[RATNEST – non PL]
AS3
AS1
AS2
P
• 1. Resource Cost [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).
S1 S2
P
Supply
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
4. Number of producers [direct]
AS3
AS1
AS2
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.
5.
Producer Expectations about Future Price [Inverse]
AS3
AS1
AS2
59. If oil producers expect future oil prices
to decline, they will (increase/decrease)
current production.
P
Oil Prices Expected to decrease
Supply
6. Subsidies – free money from “G”
Free money from the government (subsidies) induces
suppliers to supply more.
7. Taxes – take away business
profits and decrease supply.
55. Businesses have their taxes increased
which moves the supply curve to the (left/right).
Shortage of Face Masks for SARS
Young Hong Kong ballet dancers wear masks to protect
themselves from SARS. 770 people died from this disease.
So What to use if there is a shortage?
Effects of an Increase in Demand on Equilibrium
P
$1200
D2
D1
S
$900
$600
Shortage
QS=8
QD=16
$300
4
8
12
16
Q
Effects of a Decrease in Demand on Equilibrium
P
D1
$40 D
2
$30
QD=10
Surplus
S
QS=30
$20
$10
10
20
30
40
Q
Effects of an Increase in Supply on Equilibrium
P
$4
S1
D
S2
QD=40
$3
Surplus
QS=80
$2
$1
20
40
60
80
Q
Effects of an Decrease in in Supply on Equilibrium
P
D
$800
S2
S1
$600
$400
QS=2
Shortage
QD=6
$200
20
40
60
80
Q
Decrease in Supply
S2
D
P2
P1
Shortage
Q2 Q1
S1
Increase in Supply
S1
D
1.35
$2.70
S2
P1
Surplus
P2
Q2 Q2
Juicy “Orange” Prices
Decide if the price of oranges is going to rise, fall, or stay the same.
R
___1.
All of the growers meet & agree to grow fewer oranges next year.
F
___2.
Growers plant more acres of orange trees.
R
___3.
Orange growers run an advertising campaign promoting
oranges as a symbol of good health.
S
___4.
One grower [out of thousands] retires and stops growing oranges.
R
___5.
Growers develop a bigger and better tasting orange.
R
___6.
Orange growers are struck by the disease-causing Mediterranean
fruit fly.
Quantity of Oranges
“Increase in
D1
D2
P2
P1
D”
S
“Decrease in
D1
S
P1 D2
P2
QD1 QD2
(A)
QD2 QD1
TIMER (B)
D”
“Increase in S”
D
S1
S2
P1
P2
“Decrease in S”
S2
D
S1
P2
P1
QD1 QD2
QD2 QD1
(C) RATNEST (D)
A
___1.
Decrease in income on market for used cars.
B
___2.
Decrease in income on market for new cars.
B
___3.
Consumer expectations about a price decrease.
C
___4.
Producer expectations about a price decrease.
C
___5.
Increase in # of producers on the market for computers.
A
___6.
Increase in # of consumers on the market for used cars.
A
___7.
Increase in # of consumers on the market for new cars.
A
___8.
Decrease in the price of movies upon the market for popcorn.
C
___9.
Decrease in business taxes on the market for computers.
A
___10.
Consumer expectations of a shortage of apples.
C
___11.
Decrease in resource cost on market for computers.
D
___12.
Increase in price of wheat upon market for corn.
A
___13.
Consumer expectations of a shortage of cell phones.
D
___14.
Producers expectations about a price increase.
A
___15.
Increase in income on the market for iPod nanos.
MARKET DEMAND & SUPPLY
Price of Corn
CORN
MARKET
P QD
$5 2,000
$4 4,000
$3 7,000
$2 11,000
$1 16,000
S
$5
P Q
Market
$5 12,000
S
Clearing
$4 10,000
Equilibrium
$3 7,000
$2 4,000
$1 1,000
4
$3
2
1
o
CORN
MARKET
D
2
4
6
78
10 12 14 16
Quantity of Corn
Q
Banana Supply & Demand
Price (per pound)
Crop Freezing
Damage…
P
D1
S2
S1
P2
P1
o
Q2
Q1
Quantity
Q
Price Floor – minimum price [creates surpluses]
Such as:
Minimum Wage P
Agricultural
Price Supports
S
D
Price Floor-minimum price
$2.50
The price has to be
IN the house. It can’t
be below the floor.1.90
QS exceeds QD
Surplus
Price per gallon
Equilibrium price for milk
.
Some call agricultural price
supports “udder insanity.”
0
14
19
24
Millions of gallons per month
Q
Price Ceiling - maximum price [creates shortages]
Such as:
Rent controls in NYC
Wartime price controls
Rock concert prices
Super Bowl tickets
P
S
D
The price has to be
in the house. It can’t
be above the ceiling.
$2,000
NYC
1,200
Reliant Stadium
Super Bowl Ticket Prices
E-Bay
1967 - $12.00
o
2004 - $500
$2-6,000
Price Ceiling-maximum price
Rent Controls
QD exceeds QS
Shortage
2.5
3
7
3.5 Millions of Dwellings Rented
NFL could raise the price & make another $150 M but the average man couldn’t attend.