HouseholdsBusinesses
Product Markets
Factor Markets
Selling Quantity Price Demanded
$ 3$ 2$ 1
$ 410
254060
15$ 5
Price
Quantity
$6
$5
$4
$3
$2
$1
10 20 30 40 50 600
Demand
Downsloping left
-Plot the pointsGraphing:
-Connect the dots
to right
Demand
Selling Quantity Price Supplied
$ 3$ 2$ 1
$ 460
251510
40$ 5
Price
Quantity
$6
$5
$4
$3
$2
$1
10 20 30 40 50 600
Upsloping right
-Plot the pointsGraphing:
-Connect the dots
to left
Supply
Selling Quantity Price Demanded Supplied
$ 3$ 2$ 1
$ 410
254060
15$ 5 60
251510
40$ 3 25 25
Price
Quantity
$6
$5
$4
$3
$2
$1
10 20 30 40 50 600
D
-Plot DemandGraphing:
-Plot Supply
D
S
S
Selling Quantity Price Old New
0
$ 3$ 2
$ 0$ 1
$ 41
$ 6
34
65
2$ 5
1
34
65
2
7
01
345
2
DecInc
Caused by a Change in a Determinant
Movement OF the curve
Price
Quantity
$6
$5
$4
$3
$2
$1
1 2 3 4 5 60
Old
Increase in Demand shifts out or to the right
Decrease in Demand shifts in or to the left
1
Why the curve shifts
2345
Consumer TastesPrice of Other GoodsConsumer IncomesNumber of
ConsumersConsumer Expectations
1 Consumer Tastes-beanie hats make a
comebackDemand increases-Hula Hoops go out
of styleDemand decreases
Or why the curve shifts
2 Price of Other GoodsIf airlines cut ticket prices
More demand for Luggage
Less demand for train tickets
Tickets and Luggage are compliments
Airlines and Trains are Substitutes
If ticket prices decrease, demand for Luggage increases
If ticket prices increase, demand for Luggage decreases
If air tickets increase, demand for Train tickets also increases
Compliments are consumed or used together (inverse relationship)
Substitutes replace each other (direct relationship)If air tickets decrease, demand for
Train tickets also decreases
3 Consumer Incomes
+tax cuts increase net incomes
Consumers have more money to spend, demand increases
-the $ depreciates against the EuroImported goods from Europe cost
more dollars, demand decreases
For Normal Goods!!!For Normal Goods!!!
-the $ depreciates against the EuroDomestic travel looks better,
demand increases
For Inferior Goods
Consumers switch to better goods, demand for Hot Dogs decreases
+tax cuts increase net incomes
4Number of Consumers(also Demographics)
-Hurricanes arrive on Labor Day weekend
Fewer tourists touring, demand decreases
Canada sells to 290 million US consumers, demand for their goods
increases
+NAFTANorth American Free Trade Agreement
5 Consumer Expectations-dealers reduce car
prices in AugustCar buyers wait, demand decreases-heavy rains have
damaged coffee cropConsumers expect shortages and higher prices so they buy more
now, demand increases
Quantity
$6
$5
$4
$3
$2
$1
1 2 3 4 5 60
Supply
Current Equilibrium
Price
P1
P2
P3
Q3 Q1 Q2
Caused by a change in a Determinant of Demand
Shifting the Demand Curve
decrease
increase
Demand
P Q
P Q
1
Why the curve shifts
2345
Consumer TastesPrice of Other GoodsConsumer IncomesNumber of
ConsumersConsumer Expectations
Selling Quantity Supplied Price Old New
6
$ 3$ 2$ 1
$ 45
$ 6
321
4$ 5
7
54
23
6 43
10
5
2
DecInc
Caused by a Change in a Determinant
Movement OF the curve
Price
Quantity
$6
$5
$4
$3
$2
$1
1 2 3 4 5 60
Old
Increase in Supply shifts out or to the right
Decrease in Supply
shifts in or to the left
1 Resource PricesWhy the curve shifts
2 Changes in Technology3 Prices of other goodsTaxes and Subsidies
45 Number of
Producers
1 Resource Prices-gas is discovered
under CVCCSupply increases
-Minimum wage goes up
Supply decreases
Or why the curve shifts
2 Changes in Technology+ If a more powerful
computer is developedMakes production
easier (and cheaper)
- If stronger pollution controls are required
Makes production harder (and costly)
3 Elements of Nature/Prices of other goods
Shift resources away from high production cost goods.
Caused by natural disasters or market price of other
goods
+ subsidies encourage production
Taxes and Subsidies- taxes discourage production
4
5 Number of Producers
-fewer firms decrease supply
+more firms increase supply
6 Producer Expectations
-if prices are expected to increase, more
production
about prices and resource availability
-if prices are expected to decrease, less
production
1 Resource PricesWhy the curve shifts
2 Changes in Technology3 Prices of other goodsTaxes and Subsidies
45 Number of
Producers6 Producer Expectations
Consumers responding to a Change in the Price of the good
Caused by factors related to production of the good
Harder or costlier to produce, price goes up
Movement ALONG the curve
Quantity
$6
$5
$4
$3
$2
$1
1 2 3 4 5 60
Demand
Supply Curve
Current Price
Price
P Q
P Q
decrease
increase
Easier or less expensive to produce, price goes down
What makes the Supply Curve Shift??
P1
P2
P3
Q2 Q1 Q3
The Supply Schedule!!
What makes the Supply Curve Shift??
Quantity
$6
$5
$4
$3
$2
$1
1 2 3 4 5 60
Demand
Current Equilibrium
Price
P Q
P Q
decrease
increaseP1
P2
P3
Q2 Q1 Q3
Supply
Caused by a change in a Determinant of Supply
Shifting the Supply Curve
Response to a Change in the Price of the goodCaused by factors related to consumers
Movement ALONG the curve
Quantity
$6
$5
$4
$3
$2
$1
1 2 3 4 5 60
SupplyCurrent
Price
Price
P1
P2
P3
Q2 Q1 Q3
Economic Examples
• A reduction in the supply of unskilled labor … pushes the wage rates of fast-food workers upward.
ResourcesMarket
Employment
$7.50
DR
S1
Price(wage)
E1E2
S2
$6.25
Resource Prices, and Product Markets
PriceProductMarket
Q1
DP
Q2
S1
Quantity
S2
$2.25
$2.00
• Higher wages cause a reduction in supply.
This leads to higher hamburger prices.
2. Increase in the Demand for Loanable Funds
r2
Q1
r1
Q2
Interestrate
Quantity of loanable funds
• At the interest rate r the quantity of loanable funds demanded by borrowers into equals quantity supplied by lenders.• An increase in demand will move D1 to D2
• Higher interest rates encourage additional savings, making it possible to fund more borrowing.
the interest rises to r2 and increasing borrowing to Q2
S
D1
D2
Lending
Borrowing
3. Increase in the Demand for Foreign Exchange
0.20
Q1 Q2
Exchange rate($ per quetzal)
Quantity of quetzal exchange
S
D1
U.S. sales toGuatemala
U.S. purchasesfrom Guatemala
D20.10
• Begin in equilibrium, where the dollar price of the quetzal is $.10 (10 cents = 1quetzal).• An increase in American demand for Guatemalan coffee will also increase the demand for quetzals (with which American importers pay Guatemalan coffee growers).
• Equilibrium occurs where the new demand D2 just equals the supply S
•– at $.20 per quetzal with Q2 > Q1 quetzals clearing the market.
Price Controls
• It stops the price from rising to the equilibrium level.
– Example: rent control• The direct effect of a price ceiling is a
shortage: quantity demanded exceeds quantity supplied.
1. Price Ceilings
• Price ceiling is a legally established maximum price that sellers may charge.
• In the rental housing market the price (rent) P0 would bring the quantity of rental units demanded into balance with the quantity supplied.• A price ceiling like P1sets a
price below equilibrium …
quantity demanded QD …
exceeds quantity supplied
QS … resulting in a shortage.
The Impact of a Price CeilingPrice(rent)
Quantity of housing units
Priceceiling
D
QS QD
P0
S
P1
Shortage
Rental housing market
• Price floor is a legally established minimum price that buyers must pay.
• It stops the price from dropping down to equilibrium level.
– Example: minimum wage• The direct effect of a price floor
above the equilibrium price is a surplus: quantity supplied exceeds quantity demanded.
2. Price Floors
• A price floor like P1 imposes a price above market equilibrium … causing quantity supplied
QD …
• Because prices are not allowed to direct the market to equilibrium, non-price elements of exchange will become more important in determining where scarce goods go.
to exceed quantity
demanded QS … results in a surplus.
The Impact of a Price FloorPrice
Quantity
Pricefloor
D
QD QS
P0
S
P1
Surplus
Employment and the Minimum Wage Price
(wage)
Quantity(employment)
Minimum wage level
D
E1 E0
S
$ 5.15
Excesssupply
$ 4.00
• Consider where a price (wage) of $4.00 could bring the quantity of labor demanded into balance with the quantity supplied.
• A minimum wage (price floor) of $5.15 would increase the earnings of those who were able to maintain employment (E1), but would reduce the employment of others. • Those who lose their job (E0 to E1) would be pushed into either the unemployment rolls or some other less preferred form of employment.
• Elastic demand– quantity demanded is sensitive to small changes in price.– Easy to substitute away from good.
• Inelastic demand – quantity demanded is not sensitive to changes in price.– Difficult to substitute away from good.
Elastic and Inelastic Demand Curves
Percent change in Quantity demandedPercent change in Price
Measuring Elasticity
> 1 : Elastic sensitive to Price changes
< 1 : Inelastic not sensitive to Price changes
Price Quantity (by more %) TRPrice Quantity (by more %) TR
Price Quantity (by less %) TR Price Quantity (by less %) TR
2. Necessity vs Luxury
What affects Elasticity???
3. Proportion of Income
1. Available Substitutes
4. Time to shop around
And the Drug Problem
Demand
Price
P1
Q1
Supply
Quantity
Inelastic Demand - necessity
Change supply:
Inelastic Demand
Price
decrease
increaseP1
P2
P3
Q2Q1Q3
Supply
Quantity
or Q then P
Q then P
eradication
legalization
• Elastic supply– quantity supplied is sensitive to changes in price.
Inelastic demand – quantity supplied is not sensitive to changes in price.
Elastic and Inelastic Supply Curves
Price Price
Quantity Quantity
a. Market Period
What affects Elasticity of Supply???
b. Short Run
1. Time
c. Long Run