Intro - What trendy items have you seen that
have come and gone in society?
What caused them to arise?
What caused them to disappear?

Quantities of a particular good or service that
people are willing and able to buy at different
possible prices.

Consumers buy more of a good when its price
decreases and less of a good when its price
increases.

What caused this shift in demand?

Is this reliable if you are starting a business?

How can we better guarantee a successful
business?
Demand
Schedule
Price
Quantity
Demanded
$5
10
$4
20
Draw this large
in your notes
Price of Cereal
$5
4
3
2
$3
30
$2
50
1
$1
80
o
10
20
30
40
50
60
70
80
Q
Quantity of Cereal
6
Demand
Schedule
Price
Quantity
Demanded
$5
10
$4
20
Price of Cereal
$5
4
3
2
$3
30
$2
50
1
$1
80
o
Demand
10
20
30
40
50
Quantity of Cereal
60
70
80
Q
7
Changes in Income (the income effect)
1.
1.
Examples?
Prices or availability of substitutes (The
substitution effect)
2.

A substitute is a good/service that can be used in
place of another.

Prices or availability of complementary goods.

Complimentary goods are things that are often sold
or used together.

Changes in the number of buyers.

Changes in preference, tastes, and technology.

Supply: The amount of a product that is offered
for sale at all possible prices in a market.

The Tendency of suppliers to offer more of a
good/service at a higher price and less of that
good/service at lower prices.

Costs of inputs (factors of production)

Changes in productivity.

Change of the number of sellers in a market.

More sellers in a market = increased supply

Less sellers in a market = decreased supply

What do you think would happen if the
government placed a price cap (maximum price)
for the sale of gasoline?

Let’s say they force companies to sell for no more than
$3.00 per gallon.

The equilibrium price is the best price where
supply and demand intersect.

This is the point where suppliers and consumers are
in perfect harmony.
Supply and Demand are put together to
determine equilibrium price and equilibrium
quantity
Supply
Demand P
Schedule
P Qd
S
$5
Schedule
P Qs
4
$5 10
$5 50
3
$4 20
$3 30
$2 50
$1 80
$4 40
2
$3 30
1
o
D
10
20
30
40
50
60
70
80 Q
$2 20
$1 10
23
Supply and Demand are put together to determine
equilibrium price and equilibrium quantity
Supply
Demand P
S
$5
Schedule
Schedule
P Qd
P Qs
4
$5 10
$5 50
Equilibrium Price =
$3 (Qd=Qs)
$4 40
3
$4 20
$3 30
$2 50
$1 80
2
$3 30
1
o
D
10
20
30
40
50
60
70
Equilibrium Quantity is 30
80
Q
$2 20
$1 10
24
Supply and Demand are put together to determine
equilibrium price and equilibrium quantity
Supply
Demand P
S
$5
Schedule
Schedule
P Qd
$5 10
P Qs
4
What if the price
increases to $4?
$5 50
3
$4 20
$3 30
$2 50
$1 80
$4 40
2
1
o
$3 30
D
10
20
30
40
50
60
70
80
Q
$2 20
$1 10
25
At $4, there is disequilibrium. The quantity
demanded is less than quantity supplied.
Demand P
Schedule $5
P Qd
How much is
the surplus at
$4?
Answer: 20
$4 20
$1 80
P Qs
4
3
$2 50
S
Surplus
(Qd<Qs)
$5 10
$3 30
Supply
Schedule
2
$4 40
$3 30
1
o
$5 50
D
10
20
30
40
50
60
70
80
Q
$2 20
$1 10
26
How much is the surplus if the price is $5?
Demand P
Schedule $5
P Qd
$5 10
Supply
Schedule
S
P Qs
4
What if theAnswer:
price 40
decreases to $2?
$5 50
3
$4 20
$3 30
$2 50
$1 80
2
1
o
D
10
20
30
40
50
60
70
80
Q
$4 40
$3 30
$2 20
$1 10
27
At $2, there is disequilibrium. The quantity
demanded is greater than quantity supplied.
Demand P
Schedule $5
P Qd
S
P Qs
4
How much is
the shortage at
$2?
Answer: 30
$5 10
3
$4 20
$3 30
$2 50
$1 80
Supply
Schedule
2
o
10
20
30
40
50
$4 40
$3 30
Shortage
(Qd>Qs)
1
$5 50
D
60
70
80
Q
$2 20
$1 10
28
How much is the shortage if the price is
$1?
Demand P
Schedule $5
P Qd
Supply
Schedule
S
P Qs
4
$5 10
Answer: 70
3
$4 20
$3 30
$2 50
$1 80
$5 50
$4 40
2
$3 30
1
o
D
10
20
30
40
50
60
70
80
Q
$2 20
$1 10
29
The FREE MARKET system automatically
pushes the price toward equilibrium.
Supply
Schedule
Demand P
Schedule $5
P Qd
S
When there is a
surplus, producers P Qs
lower prices
$5 50
When there is a
shortage, producers $4 40
raise prices
$3 30
4
$5 10
3
$4 20
$3 30
$2 50
$1 80
2
1
o
D
10
20
30
40
50
60
70
80
Q
$2 20
$1 10
30

In an unregulated market system with open entry and
exit, market forces establish equilibrium prices and
quantities.

While equilibrium conditions may be efficient, not
everyone will be satisfied with the outcomes.



Consumers
Producers
3 Economic Questions – Can’t please everyone

Are usually enacted when policymakers
believe the market price is unfair to buyers or
sellers.

Result in government-created price ceilings or
price floors.
Price Ceiling

A legally established maximum price at
which a good can be sold.
Price Floor

A legally established minimum price at
which a good can be sold.

Scarcity leads to consumers bidding up the
price until the demand and supply reach an
equilibrium.



What are price ceilings?
What if there are price ceilings on a product?
(perhaps gas?)
What can that company do to fight the
shortage, without raising prices, so they aren’t
faced with losses?