Supply Demand and Equilibrium 1 Review 1

Supply, Demand, and Equilibrium 1

Review 1. Explain the Law of Demand 2. Explain the Law of Supply 3. Identify the 5 shifters of demand 4. Identify the 6 shifters of supply 5. Define Subsidy 6. Explain why price DOESN’T shift the curve 7. Define Equilibrium 8. Define Shortage 9. Define Surplus 10. Identify 10 stores in the mall 2

Putting Supply and Demand Together!!! 3

Supply and Demand are put together to determine equilibrium price and equilibrium quantity 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 4

Supply and Demand are put together to determine equilibrium price and equilibrium quantity 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 5

Supply and Demand are put together to determine equilibrium price and equilibrium quantity 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 6

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 7

How much is the surplus if the price is $5? 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: 40 price 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 8

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 9

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 10

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 11

Shifting Supply and Demand 12

Assume shifts in supply or demand change equilibrium P and Q instantaneously 13

Supply and Demand Analysis 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) Time to Practice! 14

S&D Analysis Practice 1. Before Change (Draw equilibrium) 2. The Change (S or D, Identify Shifter) 3. After Change (Price and Quantity After) Analyze Hamburgers 1. Price of sushi (a substitute) increases 2. New grilling technology cuts production time in half 3. Price of burgers falls from $3 to $1. 4. Price for ground beef triples 5. Human fingers found in multiple burger restaurants. 15

Double Shifts • Suppose the demand for sports cars fell at the same time as production technology improved. • Use S&D Analysis to show what will happen to PRICE and QUANTITY. If TWO curves shift at the same time, EITHER price or quantity will be indeterminate. 16

Use a S&D to explain this double shift 17

Voluntary Exchange In the free-market, buyers and sellers voluntarily come together to seek mutual benefits. 18

Voluntary Exchange In the free-market, buyers and sellers voluntarily come together to seek mutual benefits. 19

Voluntary Exchange In the free-market, buyers and sellers voluntarily come together to seek mutual benefits. 20

Voluntary Exchange In the free-market, buyers and sellers voluntarily come together to seek mutual benefits. 21

Example of Voluntary Exchange Ex: You want to buy a truck so you go to the local dealership. You are willing to spend up to $20, 000 for a new 4 x 4. The seller is willing to sell this truck for no less than $15, 000. After some negotiation you buy the truck for $18, 000. Analysis: Buyer’ Maximum- $20, 000 Sellers Minimum- $15, 000 Price- $18, 000 Consumer’s Surplus-$2, 000 Producer’s Surplus- $3, 000 22

Voluntary Exchange Terms Consumer Surplus is the difference between what you are willing to pay and what you actually pay. It is a measure of consumer satisfaction. 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. It is a measure of producer satisfaction PS = Price – Seller’s Minimum 23

Pearl Exchange Activity 24

Voluntary Exchange Activity 25

CONSUMER AND PRODUCER SURPLUS WITH A CEILING 26

Consumer and Producer’s Surplus P $10 Calculate the area of: 1. Consumer Surplus 2. Producer Surplus 3. Total Surplus S 8 6 $5 4 CS PS 1. CS= $25 2. PS= $20 3. Total= $45 2 1 D 2 4 6 8 10 Q 27