Warm Up
1. Read the article
2. Summarize what the article is saying
3. State if you agree or disagree and why
Line was cut off at the top. It reads: if not
for the multiple "fiscal crises" created
by congress over the past two years
Current Events
The production cost of an average milk
chocolate bar has surged by 25
percent over the last year, due to
growing demand in emerging
markets and bad weather in cocoaproducing countries. As a result, US
retail prices for chocolate are up 7
percent.
Practice Graphs
Putting Supply and Demand Together
Krugman’s Module 7
Demand / Supply
Market Equilibrium
• A market will determine the price at which the
quantity of a product demanded is equal to
the quantity supplied.
• At this price, the market will be in equilibrium,
meaning that the amount consumers wish to
purchase at this price is matched exactly by
the amount producers wish to sell.
TO DETERMINE EQUILIBRIUM NEED TO GRAPH
SUPPLY AND DEMAND TOGETHER
• Equilibrium occurs when quantity supplied
exactly equals quantity demanded.
Price
S
D
Quantity
S&D together = E so What is E point on graph below?
Demand P
Schedule $5
P Qd
Supply
Schedule
S
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
Demand P
Schedule $5
P Qd
S
P Qs
4
$5 10
$5 50
Equilibrium Price = $3
(Qd=Qs)
$4 40
3
$4 20
$3 30
$2 50
$1 80
Supply
Schedule
2
$3 30
1
o
D
10
20
30
40
50
60
70
Equilibrium Quantity is 30
80
Q
$2 20
$1 10
Demand P
Schedule $5
P Qd
3
$4 20
$2 50
$1 80
S
P Qs
4
$5 10
$3 30
Supply
Schedule
2
What if the price
increases to $4?
1
o
$5 50
$4 40
$3 30
D
10
20
30
40
50
60
70
80
Q
$2 20
$1 10
10
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
11
Demand P
Schedule $5
P Qd
3
$4 20
$2 50
$1 80
S
P Qs
4
$5 10
$3 30
Supply
Schedule
2
What if the Answer:
price 40
decreases to $2?
1
o
D
10
20
30
40
50
60
70
80
Q
$5 50
$4 40
$3 30
$2 20
$1 10
12
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
$4 40
$3 30
Shortage
(Qd>Qs)
1
$5 50
D
50
60
70
80
Q
$2 20
$1 10
13
The FREE MARKET system automatically pushes the
price toward equilibrium.
Demand P
Schedule $5
P Qd
Supply
Schedule
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
14
Always Assume shifts in supply or demand change
equilibrium P and Q instantaneously
15
Learning to Diagram the Change is Easy as 1, 2, 3
1. Before the change:
• Draw supply and demand
• Label original equilibrium price and quantity
2. The change:
• Did it affect supply or demand first?
• Which determinant caused the shift?
• Draw increase or decrease
3. After change:
• Label new equilibrium?
• What happens to Price? (increase or decrease)
• What happens to Quantity? (increase or decrease)
Warm Up: what does “You have brains in
this quote mean to you? your head. You have
feet in your shoes.
You can steer
yourself any direction
you choose. You're
on your own. And
you know what you
know. And YOU are
the one who'll decide
where to go...”
Review Supply
Changes in the Prices of Related Goods or Services A single producer
often produces a mix of goods rather than a single product. For
example, an oil refinery produces gasoline from crude oil, but it also
produces heating oil and other products from the same raw material.
When a producer sells several products, the quantity of any one good
it is willing to supply at any given price depends on the prices of its
other co-produced goods. This effect can run in either direction. An
oil refinery will supply less gasoline at any given price when the price
of heating oil rises, shifting the supply curve for gasoline to the left.
But it will supply more gasoline at any given price when the price of
heating oil falls, shifting the supply curve for gasoline to the right.
This means that gasoline and other co-produced oil products are
substitutes in production for refiners. In contrast, due to the nature of
the production process, other goods can be complements in
production. For example, producers of crude oil—oil-well drillers—
often find that oil wells also produce natural gas as a byproduct of oil
extraction. The higher the price at which drillers can sell natural gas,
the more oil wells they will drill and the more oil they will supply at
any given price for oil. As a result, natural gas is a complement in
production for crude oil.
Supply Clarification
substitutes in production: co-produced
products; goods for which producing more of
one requires producing less of the other
Ex. Gasoline and heating oil
complements in production: pairs of goods that
must be produced together
Ex. Crude oil and natural gas
Complements, in other words
• One of two goods that are produced jointly
using the same resource -- that is, the
production of one good automatically triggers
the production of the other.
Substitutes, in other words
• In terms of supply (that is, substitute-inproduction), one of two goods that replace
each other in either producing using the same
resources in an either/or fashion, such that an
increase in the price of one good leads to a
decrease in supply and a leftward shift in the
supply curve for the other good. If the supply
of good 1 decreases as the price of good 2
increases, the goods are substitutes-inproduction.
Going back to equilibrium
• Equilibrium= market clearing
price
• The market price will fall if it is
above equilibrium and it will rise
if it is below equilibrium
ANOTHER EXAMPLE USING COFFEE TO GO WITH YOUR BURGER
A price above equilibrium creates a surplus
A price below equilibrium creates a shortage
Remember, when supply
has increased, we did not
say anything about the
price!
Remember, at
equilibrium, there is no
tendency for anything
to change!
Up for auction:
the answers to the next test!
Calling all Math fans! Students
who truly get this! Graph fans!
Challenge fans!
Find the equilibrium:
Demand Equation:
P= 100-
2Qd
Supply Equation: P= 10+Qs
Qe=30,
Pe=$40
Shortage and Surplus
Determine the amount
Shortage, price falls below equilibrium
Surplus, price falls above equilibrium
Changing Equilibrium
1. What happens when the
demand curve shifts
2. What happens when the
supply curve shifts
3. Simultaneous shifts of
supply and demand
Practice
makes
perfect
Our world is
constantly
changing
Three things we have to know for AP:
1.What shifter is at work in the market?
2. What curve is shifting and in what direction?
3. What happens to equilibrium price and
quantity?
Led Zeppelin The cost of
the concert ticket (label
equilibrium price and
quantity
Now, add in these three
steps:
1. Change in tastes
2. Demand shifts to the
right
3. P and Q both
increase…but why?
There is a
shortage!!
So, the new
equilibrium
requires a
rise in price
and quantity
What happens when the
demand shifts inward?
-surplus
- Price must fall
- Equilibrium quantity
must fall
Jeans!!
1.Graph for jeans
2.An input price has increased (cotton)
3.Supply of jeans shifts to the left
4.Price increases and quantity
decreases…why?
5.Now, draw a new graph for jeans and
show technology improving cotton
production
Warm Up:
How does
this
represent
supply
and
demand?
Current Events
http://www.nytimes.com/2013/10/25/educati
on/despite-rising-sticker-prices-actual-collegecosts-stable-over-decade-study-says.html?_r=0
http://www.bbc.co.uk/news/world-europe24756409
http://www.bbc.co.uk/news/business24610074
To summarize how a market responds to a
change in demand: An increase in demand
leads to a rise in both the equilibrium price
and the equilibrium quantity. A decrease in
demand leads to a fall in both the
equilibrium price and the equilibrium
quantity.
To summarize how a market responds to a
change in supply: An 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 the equilibrium
price and a fall in the equilibrium quantity.
• Increase in demand = higher equilibrium price
and a higher equilibrium quantity.
• Decrease in demand = lower equilibrium price
and a lower equilibrium quantity.
• Increase in supply = lower equilibrium price and a
higher equilibrium quantity.
• Decrease in supply = higher equilibrium price and
a lower equilibrium quantity.
Two options:
1.Demand and Supply
move in the same
direction
2.Demand and Supply
move in opposite
directions
Opposite
When demand increases and supply decreases, the
equilibrium price rises but the change in equilibrium quantity
is ambiguous.
When demand decreases and supply increases, the
equilibrium price falls but the change in equilibrium quantity
is ambiguous.
http://reffonomics.com/Qd.ht
ml
http://reffonomics.com/Qs.html
http://reffonomics.com/Supply
andDemand.html
Same
When both supply and demand increase,
the equilibrium quantity increases but the
change in equilibrium price in ambiguous.
When both supply and demand decrease,
the equilibrium quantity decreases but the
change in equilibrium price is ambiguous.
Summary: Opposite=
quantity is ambiguous
Same= price is
ambiguous
For example, when
the Winter Olympics
come out, the
popularity of snow
boarding increases.
At the same time,
more companies
produce more
snowboards. How
will these effect the
market?
1.Graph the Demand Shift
and the effects on price
and quantity of
snowboards (both
increase)
2.Graph the Supply Shift
and the price decreases
and quantity increases
****There could
be no change
but there could
be an increase or
decrease as well
for price***
Both shifts generate an increase in the quantity, so we
can certainly predict a higher equilibrium quantity of
snowboards. However the change in price depends
on which of the two shifts is stronger.
For each of the following examples, explain how the
indicated change affects supply or demand for the good in
question and how the shift you describe affects equilibrium
price and quantity.
a. As the price of gasoline fell in the United States during
the 1990s, more people bought large cars.
b. As technological innovation has lowered the cost of
recycling used paper, fresh paper made from recycled stock
is used more frequently.
c. When a local cable company offers cheaper pay-perview films, local movie theaters have more unfilled seats.
The decrease in the price of gasoline caused a rightward
shift in the demand for large cars. As a result of the shift,
the equilibrium price of large cars rose and the
equilibrium quantity of large cars bought and sold also
rose
The technological innovation has caused a rightward shift
in the supply of fresh paper made from recycled stock. As
a result of this shift, the equilibrium price of fresh paper
made from recycled stock has fallen and the equilibrium
quantity bought and sold has risen.
The fall in the price of pay-per-view movies causes a
leftward shift in the demand for movies at local movie
theaters. As a result of this shift, the equilibrium price of
movie tickets falls and the equilibrium number of people
who go to the movies also falls.
Shifting
worksheet
practice!
Worksheets!!
Jelly Bean and shifters!
Skip number four for jelly
beans!
For Example
• An increase in the supply of grapes and a
decrease in the demand for wine led to lower
wine prices in 2001.
• An increase in the price of
jumbo tires used on
mining equipment
led to higher prices for
copper, coal, and zinc in 2006.
The equilibrium price aka the market-clearing price.
• When supply and demand change, equilibrium price
and output change.
• When only one curve shifts, the resulting changes in
equilibrium price and quantity can be predicted.
• But when both curves shift, we can only predict the
change in equilibrium price in some cases, and the
change in equilibrium quantity in others, but never
both.
Use a S&D graph to explain this double shift
Answer the following Question
• The price of cameras decreases and people
buy more cameras, this can be explained by:
A) an increase in demand for cameras.
B) an increase in the supply of cameras.
C) a decrease in demand for cameras.
D) A decrease in the supply of cameras.
• The price of cameras decreases and people
buy more cameras, this can be explained by:
A) an increase in demand for cameras.
B) an increase in the supply of cameras. Correct!
C) a decrease in demand for cameras.
D) A decrease in the supply of cameras.
Voluntary Exchange Terms
Consumer Surplus is the difference
between what you are willing to pay
and what you actually pay.
CS = Buyer’s Maximum – Price
Producer’s Surplus is the difference
between the price the seller received
and how much they were willing to sell
it for.
PS = Price – Seller’s Minimum
61
1. Before Change (Draw equilibrium)
2. The Change (S or D, Identify Shifter)
3. After Change (Price and Quantity After)
Analyze Sale of Hamburgers Again (getting hungry yet?)
WHAT IS THE RESULT FROM CHANGES BELOW
1.
2.
3.
4.
5.
Price of sushi (a substitute) increases
New technology cuts production time 1/2
Price of burgers falls from $3 to $1.
Price for ground beef triples
Fingers found in multiple burger restaurants.
1. Price of sushi (a substitute) increases D increases
2. New technology cuts production time ½
3. Price of burgers falls from $3 to $1.
S increases
no shift
4. Price for ground beef triples s decreases
5. Fingers found in multiple burger restaurants.
D decreases