Explorations in Economics Alan B. Krueger & David A. Anderson Chapter 6: Exploring Economics - Module 16: Supply and Demand - Module 17: Changes in Supply and Demand - Module 18: Shortages, Surpluses, and the Role of Prices MODULE 16: SUPPLY AND DEMAND KEY IDEA: The interaction of supply and demand determines the price at which a good is sold in the market and the quantity of the good that is exchanged between buyers and sellers. OBJECTIVES: • To demonstrate how supply and demand work together to determine the price and quantity of a good. • To explain why market equilibrium occurs when the quantity supplied equals the quantity demanded. • To recognize how market forces cause the market price and quantity to adjust to equilibrium. PUTTING SUPPLY AND DEMAND TOGETHER: MARKET EQUILIBRIUM The market equilibrium is the point at which the quantity supplied equals the quantity demanded. PUTTING SUPPLY AND DEMAND TOGETHER: MARKET EQUILIBRIUM The equilibrium price is the price that equates the quantity supplied and the quantity demanded. The equilibrium quantity is the quantity that is supplied and demanded at the equilibrium price. PUTTING SUPPLY AND DEMAND TOGETHER: MARKET EQUILIBRIUM When the quantity demanded is larger than the quantity supplied, the difference between them is called excess demand. This creates a SHORTAGE. PUTTING SUPPLY AND DEMAND TOGETHER: MARKET EQUILIBRIUM When the quantity supplied is larger than the quantity demanded, the difference between them is called excess supply. This creates a SURPLUS. PUTTING SUPPLY AND DEMAND TOGETHER: MARKET EQUILIBRIUM Module 16 Review What is… A. Equilibrium? B. Equilibrium price? C. Equilibrium quantity? D. Excess demand? E. Excess supply? MODULE 17: CHANGES IN SUPPLY & DEMAND KEY IDEA: A change in supply or demand, as shown by a shift of the supply or demand curve, causes the equilibrium price and quantity to change in a predictable way. OBJECTIVES: • To explain how a change in supply affects the equilibrium price and quantity. • To explain how a change in demand affects the equilibrium price and quantity. • To explain what is known and what is unknown about the effect of a simultaneous change in both supply and demand. REVIEW OF DEMAND AND SUPPLY SHIFTERS CHANGES IN DEMAND An increase in demand = increase in PRICE and QUANTITY. CHANGES IN DEMAND A decrease in demand = decrease in PRICE and QUANTITY. A DECREASE IN SUPPLY A decrease in supply = increase in PRICE and a decrease in QUANTITY. AN INCREASE IN SUPPLY An increase in supply = decrease in PRICE and an increase in QUANTITY. CHANGES IN BOTH SUPPLY AND DEMAND If supply and demand decrease by the same amount, price will be unchanged and the quantity will decrease. CHANGES IN BOTH SUPPLY AND DEMAND If supply decreases less than demand, price will decrease and quantity will decrease. CHANGES IN BOTH SUPPLY AND DEMAND If supply decreases more than demand, price will increase and quantity will decrease. CHANGES IN BOTH SUPPLY AND DEMAND If supply increases and demand decreases, the price will decrease and the quantity will not change. SHIFTS IN DEMAND AND SUPPLY AND UNCERTAIN OUTCOMES When both demand and supply curves shift to the left, to the right or in opposite directions, there will be uncertainty in knowing the change on the market equilibrium. This table shows these changes. Shifts Supply Demand Decrease Increase Increase Decrease Decrease Decrease Increase Increase Changes in Market Equilibrium Price Quantity MODULE 17 REVIEW What happens to price and quantity when there is… A. An increase in demand? B. A decrease in demand? C. An increase in supply? D. A decrease in supply? E. A decrease in demand and in supply? F. A decrease in demand and an increase in supply? G. An increase in demand and a decrease in supply? H. An increase in both demand and supply? MODULE 18: SHORTAGES, SURPLUSES, & THE ROLE OF PRICES KEY IDEA: Equilibrium prices provide benefits that are lost when forces prevent markets from reaching their equilibrium price. OBJECTIVES: • To show how price ceilings and floors cause shortages and surpluses. • To explain the important incentives prices create. • To identify problems with rationing as a way of allocating goods and services. SHORTAGES AND SURPLUSES A shortage exists when an excess demand for a product persists for a significant period of time. A SHORTAGE will cause price to INCREASE. SHORTAGES AND SURPLUSES A surplus exists when an excess supply persists for a significant period of time. A SURPLUS will cause price to DECREASE. PRICE CEILINGS A price ceiling is a government- imposed limit on the highest price firms can charge in a market. A price ceiling will cause a SHORTAGE. PRICE FLOORS A price floor is a government- imposed limit below which prices cannot fall. Price floors tend to cause a SURPLUS. STICKY PRICES Sticky prices are prices that move to their equilibrium values very slowly. THE IMPORTANCE OF PRICES Rationing Rationing and the achievement of goals Finding the best level of production Keeping costs low Achieving consumer satisfaction What Prices Accomplish • Prices guide the economy to the best level of production • Prices help keep costs low • Prices help achieve consumer satisfaction • Prices help prevent shortages Module 18 Review What is… A. Shortage? B. Black market? C. Price ceiling? D. Price floor? E. Sticky prices? F. Rationing? G. Market failure? H. Surplus?