Section 2 Supply and Demand

Module 7 Changes in Equilibrium1What you will learn in this Module:How equilibrium price and quantity are influenced/affected when there is a change in either supply or demandHow equilibrium price and quantity are influenced/affected when there is a simultaneous change in both supply and demand

What Happens When the Demand Curve Shifts?3 Questions to ask yourself:What shifter is at work in the market?What curve is shifting and in which direction?What happens to equilibrium price and quantity?Example: Tickets to a popular band. As the band experiences more success and gets more air time on the radio, they become more popular with fans. What happens to the price of a concert ticket?

3Concert Tickets Anyone? Increase in DemandDraw the market demand curve for tickets to see this band. Identify the original price as Pe (equilibrium) and quantity of as Qe. What shifter is at work in the market? What curve is shifting and in which direction?What happens to equilibrium price and quantity?4Concert Tickets Anyone? Increase in DemandDraw the market demand curve for tickets to see this band. Identify the original price as Pe (equilibrium) and quantity of as Qe. What shifter is at work in the market? What curve is shifting and in which direction?What happens to equilibrium price and quantity?1) Stronger taste for the band2)Demand shifts right3)Price and quantity both increasewhy?Price TicketPeP1QeQ1D1D2SShortageQty of TicketsAn increase in demand Quantity risesLeads to a movement along the supply curve to a higher equilibrium price and higher equilibrium quantityE1E25Effects of a Decrease in Demand During a recession, people buy fewer new cars. What happens to the price of a new car? Draw the market for new cars.Identify the original price as Pe and quantity Qe.What shifter is at work in the market? What curve is shifting and in which direction?What happens to equilibrium price and quantity?

6Effects of a Decrease in Demand During a recession, people buy fewer new cars. What happens to the price of a new car? Draw the market for new cars.Identify the original price as Pe and quantity Qe.What shifter is at work in the market? What curve is shifting and in which direction?What happens to equilibrium price and quantity?

Price of carsPeP1QeQ1D1D2SQty of CarsA decrease in demand Quantity demanded fallsLeads to a movement along the supply curve to a lower equilibrium price and lower equilibrium quantityE1E2Surplus1) Lower income during a recession .2) Demand shifts to the left for normal goods.3) Price and quantity both decrease.

7A Review: Write a test question that corresponds to what is happening in these graphs.

8Summary: Market Response to a Change in DemandAn increase in demand leads to a rise in both e_____________p______ and the e_____________ q____________supplied.A decrease in demand leads to a ______ in both the equilibrium price and the equilibrium quantity supplied. DemandDemandEquilibrium price & QsEquilibrium Price & Qs9Summary: Market Response to a Change in DemandAn increase in demand leads to a rise in both equilibrium price and the equilibrium quantity supplied.A decrease in demand leads to a fall in both the equilibrium price and the equilibrium quantity supplied. DemandDemandEquilibrium price & QsEquilibrium Price & Qs10What Happens When the Supply Curve Shifts?3 questions to ask yourself:What shifter is at work in the market?What curve is shifting and in which direction?What happens to equilibrium price and quantity?Keep in mind when supply increases, it increases horizontally (more quantity) not vertically.

11Forever in Blue Jeans: Decreasing SupplyExample: Cotton is a important raw material when making clothes like denim jeans. If the global price of cotton rises, what happens to the price of jeans?Draw the market for jeans. Identify the original price as Pe and quantity as Qe. What shifter is at work in the market? What curve is shifting and in which direction?What happens to equilibrium price and quantity?

12Forever in Blue Jeans: Decreasing SupplyExample: Cotton is a important raw material when making clothes like denim jeans. If the global price of cotton rises, what happens to the price of jeans?Draw the market for jeans. Identify the original price as Pe and quantity as Qe. What shifter is at work in the market? What curve is shifting and in which direction?What happens to equilibrium price and quantity?

S1Input price has increased (cotton)Supply of jeans shifts to the leftPrice increases and quantity supplied decreases. WHY?Price of jeansSDPeP1QeQ1EE2Quantity of jeansQuantity supplied decreases

13Corny Supply Curve Shifts: Increasing SupplyProduction technology has greatly improved agriculture, producing more corn on the same amount of land. How has the better technology affected the price of corn?Draw the market for corn, Identify the original price as Pe and quantity as Qe.What shifter is at work in the market? What curve is shifting and in which direction?What happens to equilibrium price and quantity?

14Corny Supply Curve Shifts: Increasing SupplyProduction technology has greatly improved agriculture, producing more corn on the same amount of land. How has the better technology affected the price of corn?Draw the market for corn, Identify the original price as Pe and quantity as Qe.What shifter is at work in the market? What curve is shifting and in which direction?What happens to equilibrium price and quantity?

Price of cornQuantity of CornPeQeDSS1P1Q1EE1Better technology leads to more cornSupply curve shifts to the right (growing)Price decreases and quantity supplied increases. WHY?

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A Review: Write a test question that corresponds to what is happening in these graphs.16Summary: Market Response to a Change in SupplyAn increase in supply leads to a ________ in the equilibrium price and a rise in the equilibrium quantity.

A decrease in supply leads to a rise in e_______________ p_______ and a rise in the e_______________ q__________. SupplyFall in Equilibrium Price & quantitySupplyRise in Equilibrium price & quantity17Summary: Market Response to a Change in SupplyAn increase in supply leads to a fall in the equilibrium price and a rise in the equilibrium quantity.

A decrease in supply leads to a rise in equilibrium price and a rise in the equilibrium quantity. SupplyFall in Equilibrium Price & quantitySupplyRise in Equilibrium price & quantity18Simultaneous Shifts of Supply & Demand CurvesFour possible scenarios. Graphs will follow.

When there is both a demand and a supply shift, here is a summary of what we can, and cannot, predict.

Demand and Supply move in opposite directions.

When demand increases and supply decreases, the equilibrium price rises but the change in the equilibrium quantity is ambiguous.

19Simultaneous Shifts of Supply & Demand Curves: Demand Increases & Supply DecreasesWhen demand increases and supply decreases the equilibrium price definitely increases, but quantity is ambiguousEx: the demand for wheat increases AND the supply of wheat decreasesthe result is a definite increase in the market price, but an indeterminate change in quantity.

20Simultaneous Shifts of Supply & Demand Curves: Demand Decreases & Supply IncreasesWhen demand decreases and supply increases the equilibrium price definitely decreases, but quantity is ambiguousEx: A decrease in the demand for pop music combined with an increase in pop artists (think 1970s) would reduce the market price but would have an indeterminate effect on the quantity of pop music produced.

21Simultaneous Shifts of Supply & Demand CurvesDemand and Supply move in the same directionWhen demand and supply increase, the change in equilibrium price is ambiguous, but equilibrium quantity definitely increasesEx: The recent Summer Olympics has increased the popularity of volleyball and more companies have begun producing volleyballs. How will these events affect the market for volleyballs?

22Simultaneous Shifts of Supply & Demand Curves: Both demand and supply decreaseWhen demand and supply decrease, the change in equilibrium price is ambiguous, but equilibrium quantity definitely decreasesExample: a decrease in the demand for disco music combined with a decrease in disco artists would result in a definite decrease in the quantity of disco produced, but would have an indeterminate effect on the price of the music.

23Summary: Simultaneous Shifts of Supply & Demand CurvesDemand and Supply move in opposite directions: Q_________ is a_____________Demand and Supply move in the same direction: E______________ p__________is a______________

Notes:Summary: Simultaneous Shifts of Supply & Demand CurvesDemand and Supply move in opposite directions: Quantity is ambiguousDemand and Supply move in the same direction: equilibrium price is ambiguous

Notes:Simultaneous Shifts of Supply & Demand CurvesThe demand for corn has increased due to the new government regulation that gas must contain 10 % ethanol (ethanol is made from corn). The supply for corn has decreased due to a massive drought in the Midwestern US. How do these 2 events affect the market for corn?Will supply decrease?26Simultaneous Shifts of Supply & Demand CurvesThe demand for corn has increased due to the new government regulation that gas must contain 10 % ethanol (ethanol is made from corn). The supply for corn has decreased due to a massive drought in the Midwestern US. How do these 2 events affect the market for corn?Will supply decrease?Price CornNew E at a higher pricePeQeQuantity CornDD2SP1Demand for corn risesShortage due to droughtSupply falls?27A Way to Remember Demand & Supply ShiftersTRICE Shifts SUPPLYTechnologyRelated Prices (complements & Substitutes)Input pricesCompetition (# of producers)Expectations (of prices)MERIT Shifts DEMANDMarket Size (# of consumers ~ population)Expectations (of prices)Related Prices (complements & substitutes)Income (normal & inferior goods)Tastes of ConsumersDemand & Supply Analysis: Fill in the blank. Be prepared to draw the graph.The market for _______EventShifter (s)Causes the ___________ curve to____E Price _______E Quantity __________1. GasolineHurricane shuts down oil platforms in the gulf2. Silly bandsFriendship bracelets become a huge hit with teens3. Mussels Drought causes producers to exit the industry4. KeroseneWinter is coming. Gasoline production ramps down5. KeroseneWinter is coming6. New FurnitureGovt gives tax rebatesDemand & Supply Analysis: Fill in the blankThe market for _______EventShifter (s)Causes the ___________ curve to____E Price _______E Quantity __________1. Gasoline2. Friendship bracelets3. Mussels 4. Kerosene 5. Kerosene6. New Furniture Hurricane shuts down oil platforms in the gulfInput pricessupply curve shift leftincreasesdecreasesFriendship bracelets become a huge hit with teensConsumer tastesDemand curve to shift rightIncreases increasesDrought causes producers to exit the industryCompetition & Input pricesSupply curve shifts leftIncreases decreasesWinter is coming. Gasoline production ramps downExpectations of producer Supply shifts rightdecreasesIncreasesWinter is coming. People need warmthConsumer tastesDemand curve to shift rightIncreases Increases Govt gives tax rebatesIncome effectDemand curve shifts rightIncreasesincreasesModule 7 Review p. 75-76 all questions

Read Module 8 p.77-85

Finish Supply Activity Packet p. 29 31& Strive for a 5

31Module 8 Price Controls:Ceilings & Floors32What is the meaning of price control? How does the government use them to intervene in markets?How do price controls can create problems and make a market inefficient?Why are economists are often deeply skeptical of attempts to intervene in markets?Who benefits and who loses from price controls? Why they are used despite their well-known problems?What you will learn in this Module:Why Do Governments Control Prices?Unpopular market prices:

Examples?

2. Political pressure: Examples?

Why Do Governments Control Prices?Unpopular market prices:Sometimes when the market is efficient, it is judged as being unfair to some groups. Usually those that are disadvantaged (poor) and struggling to begin with.Examples?Political pressure: make markets fairExamples?

Terms to Know:Price Ceilings & Price FloorsPrice Control:

Price Ceilings:

Price Floors:

Video Clips: price Ceilings & FloorsTerms to Know:Price Ceilings & Price FloorsPrice Control: Legal restrictions on how high or low a market price may go.

Price Ceilings: Maximum price sellers are allowed to charge for a good or service

Price Floors: minimum price buyers are required to pay for a good or service

Video Clips: price Ceilings & FloorsHit da Roof ThinkaramaA price ceiling is a maximum price sellers are allowed to charge for a good.

Who would want such a thing? (Ding! Ding! Ding!)Consumers, of course!

Use your phone. With a partner: Use the space below and answer the questions.What goods/services do you consider to be unfairly expensive? List 3.

Should the government enact a price ceiling for your good or service?

Why or why not?

Be prepared to explain to the class.

Price CeilingsLegal maximum price typically imposed during a crisis (wars, harvest failures, natural disasters) to keep necessary goods and service available to the masses With your phone find examples.

Price CeilingsLegal maximum price typically imposed during a crisis (wars, harvest failures, natural disasters) to keep necessary goods and service available to the masses With your phone find examples.Raw Material prices during WWIIOil Embargo in 1970s led to price controlsCalifornia electricity shortageNew York City rent controlled apartments

Model of a Price Ceiling: Drawing ShortagesPricing below equilibrium will cause a shortage because __________will exceed __________. (example: biscuits)Shortage at Pc = Q___- Q___

If the Pc=$2, Qd =5.75 and Qs = 4 so there is a shortage of almost 2 biscuits.

Is this so bad? Arent consumers helped by this lower price?

Pricing below equilibrium will cause a shortage because demand will exceed supply. (example: biscuits)Shortage at Pc = Qd - Qs

If the Pc=$2, Qd =5.75 and Qs = 4 so there is a shortage of almost 2 biscuits.

Is this so bad? Arent consumers helped by this lower price? Yes, if you are among the lucky 4 who get biscuits!

Model of a Price Ceiling: Drawing ShortagesHow a Does a Price Ceiling Cause Inefficiency In the Market?Inefficient Allocation to Consumers:Wasted Resources: Inefficiently Low Quality: Black Markets:How a Does a Price Ceiling Cause Inefficiency In the Market?Inefficient Allocation to Consumers: people who want the good and are willing to pay the high price dont get it, & those who care little about the product & are only willing to pay a small amount get it Wasted Resources: people expend money effort and time to cope with the shortage caused by the price ceiling. Inefficiently Low Quality: sellers offer a low quality product at a low price even though buyers may prefer a high quality at a higher price Black Markets: market where goods & services are bought and sold illegally (illegal product or the price charged is prohibited by the price ceiling)

So WHY Are there Price Ceilings if They Are Inefficient?1. Benefit to some _______________: Consumers may have the __________________to persuade government that the equilibrium price is taking advantage of them. What kind of argument is this?________________2. _________________________________: When price ceilings have been in effect for a long time, buyers may not have a realistic idea of what would happen without them. Examples???3. Lack of _______________ _______________: Government officials often do not understand supply and demand analysis (or they may but just want to be re-elected)

So WHY Are there Price Ceilings if They Are Inefficient?1. Benefit to some consumers: Consumers may have the political clout to persuade government that the equilibrium price is taking advantage of them. What kind of argument is this?Normative2. Because it has always been done like that: When price ceilings have been in effect for a long time, buyers may not have a realistic idea of what would happen without them. Examples???3. Lack of Economic Understanding: Government officials often do not understand supply and demand analysis (or they may but just want to be re-elected)

Graphing a Price Ceiling: TAXI!!!!The City of San Francisco places a limit on the amount taxis can charge at the airport below equilibrium price. Draw the correctly labeled market for taxi transportation. Identify the original price ($30 per hr.) as Pe and quantity as Qe (35 taxis)Identify the price control at $10.00. Label the price control.Identify the result of the price control in terms of Qd and Qs.What is the difference between quantity supplied and quantity demanded?

Graphing a Price Ceiling: TAXI!!!!The City of San Francisco places a limit on the amount taxis can charge at the airport below equilibrium price. Draw the correctly labeled market for taxi transportation. Identify the original price ($30 per hr.) as Pe and quantity as Qe (35 taxis)Identify the price control at $10.00. Label the price control.Identify the result of the price control in terms of Qd and Qs.What is the difference between quantity supplied and quantity demanded?

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0DSPrice CeilingPeQeQd>QsShortagePriceQuantityChanging Directions:Price FloorsLegal ______________price that can be charged for a good or product. Used to push prices ____ instead of bring them ______.Examples:

Explain the cartoons on the right.

Changing Directions:Price FloorsLegal Minimum price that can be charged for a good or product. Used to push prices UP instead of bring them down.Examples: Agricultural products: wheat, milk, cornTrucking (phased out in 1980)Air Travel (phased out in 1978)Minimum wage

Model of a Price Floor:Minimum WagesDraw minimum wage price floorIf wages are above equilibrium, the supply of labor will be _____________. The demand for labor by businesses will ______ because wages (an ________ cost) has been made artificially _______.

Model of a Price Floor:Minimum WagesDraw minimum wage price floorIf wages are above equilibrium, the supply of labor will be abundant or in surplus. The demand for labor by businesses will fall because wages (an input cost) has been made artificially high.

PfHow Does A Price Floor Cause Inefficiency in the Market?

http://www.youtube.com/watch?v=P8G1HIlRppo&safety_mode=true&persist_safety_mode=1&safe=active

How Does A Price Floor Cause Inefficiency in the Market?Price floors lead to excess supply; the quantity supplied is greater than quantity demandedInefficiently Low Quantity:

2. Inefficient Allocation of sales Among Sellers:

3. Wasted Resources:How Does A Price Floor Cause Inefficiency in the Market?Price floors lead to excess supply; the quantity supplied is greater than quantity demanded1. Inefficiently Low Quantity: Since a price floor raises the price of a good to consumers, quantity demanded falls, so the quantity bought and sold falls, creating a loss to society.

2. Inefficient Allocation of sales Among Sellers: Those who would be willing to sell the good at the lowest price are not always those who actually manage to sell it. The price floor has just enabled a less efficient seller to make a sale, and might force an efficient seller out of the market.

3. Wasted Resources: Government price floors set above the equilibrium price cause surpluses which the government may be required to buy and destroy. Minimum wages result in fewer jobs available and so would-be workers waste time searching for a job.What do we do with the surplus food? Give it to lunch programs?Maybe they go to waste, even if the government purchases them.

How Does A Price Floor Cause Inefficiency in the Market?4. Inefficiently High Quality:

5. Illegal Activity:

How Does A Price Floor Cause Inefficiency in the Market?4. Inefficiently High Quality: Sellers offer high-quality goods at a high price, even though buyers would prefer a lower quality at a lower price.

The high price may induce suppliers to provide extravagantly expensive ingredients that would be unprofitable at the lower market price.

Consumers would probably just rather have a low-priced good without the fancy bells and whistles.

If they were really wanting expensive ingredients, their preferences would have been reflected in a stronger demand curve to begin with and the market price would have been higher.

5. Illegal Activity: Bribery of sellers or government officials.

Examples of working for less than minimum wage (off the books) because there is a surplus of labor willing to work.

Minimum wage laws are an example of price floors. Relatively high minimum wages in Europe lead to higher levels of unemployment and black markets in labor. In contrast, the minimum wage in the United States is set closer to the equilibrium wage, and labor is relatively more productive in the United States.

http://www.huffingtonpost.com/2013/08/21/mcdonalds-minimum-wage_n_3790745.html

Soooo Why Are There Price Floors?1. Benefit to some producers: Producers may have the _________ ________to persuade government that the equilibrium price is unfairly low. This is a ______________argument.2. Price floors create a persistent ________ of the good.3. ________ __________: There is also the temptation to engage in illegal activity, particularly ________ and corruption of government officials.

http://www.cbsnews.com/8301-250_162-57482105/top-15-super-pac-donors-through-june/

Soooo Why Are There Price Floors?1. Benefit to some producers: Producers may have the political clout to persuade government that the equilibrium price is unfairly low. This is a normative argument.2. Price floors create a persistent surplus of the good.3. Black Markets: There is also the temptation to engage in illegal activity, particularly bribery and corruption of government officials.

http://www.cbsnews.com/8301-250_162-57482105/top-15-super-pac-donors-through-june/

Graphing a Price Floor Husker StyleFarmers in the State of Nebraska lobby Congress to pass a bill that makes sets the price of corn above equilibrium price. Draw the correctly labeled market for corn, Identify the original price (3.00) as Pe and quantity as Qe (4 bushels)Identify the price control at $4.00. Label the price control.Identify the result of the price control in terms of Qd and Qs.What is the difference between quantity demanded and quantity supplied?

Graphing a Price Floor Husker StyleFarmers in the State of Nebraska lobby Congress to pass a bill that makes sets the price of corn above equilibrium price. Draw the correctly labeled market for corn, Identify the original price (3.00) as Pe and quantity as Qe (4 bushels)Identify the price control at $4.00. Label the price control.Identify the result of the price control in terms of Qd and Qs.What is the difference between quantity demanded and quantity supplied?

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