Basic Assumption Ceteris Paribus – other things being equal - only consider price changes

Basic Assumption

Ceteris Paribus – other things being equal - only consider price changes

Selling Quantity Price Demanded

$ 3$ 2$ 1

$ 410

254060

15$ 5

Price

Quantity

$6

$5

$4

$3

$2

$1

10 20 30 40 50 600

Demand

Downsloping left

-Plot the pointsGraphing:

-Connect the dots

to right

Demand

Selling Quantity Price Supplied

$ 3$ 2$ 1

$ 460

251510

40$ 5

Price

Quantity

$6

$5

$4

$3

$2

$1

10 20 30 40 50 600

Upsloping right

-Plot the pointsGraphing:

-Connect the dots

to left

Supply

Selling Quantity Price Demanded Supplied

$ 3$ 2$ 1

$ 410

254060

15$ 5 60

251510

40$ 3 25 25

Price

Quantity

$6

$5

$4

$3

$2

$1

10 20 30 40 50 600

D

-Plot DemandGraphing:

-Plot Supply

D

S

S

Selling Quantity Price Old New

0

$ 3$ 2

$ 0$ 1

$ 41

$ 6

34

65

2$ 5

1

34

65

2

7

01

345

2

DecInc

Caused by a Change in a Determinant

Movement OF the curve

Price

Quantity

$6

$5

$4

$3

$2

$1

1 2 3 4 5 60

Old

Increase in Demand shifts out or to the right

Decrease in Demand shifts in or to the left

1

Why the curve shifts

2345

Consumer Incomes

Price of Other Goods

Consumer TastesNumber of

ConsumersConsumer Expectations

1 Consumer Incomes+tax cuts increase net

incomesConsumers have more money to spend, demand increases

-the $ depreciates against the EuroImported goods from Europe cost

more dollars, demand decreases

For Normal Goods!!!For Normal Goods!!!

Or why the curve shifts

-the $ depreciates against the EuroDomestic travel looks better,

demand increases

For Inferior Goods

Consumers switch to better goods, demand for Hot Dogs decreases

+tax cuts increase net incomes

2 Consumer Tastes-beanie hats make a

comebackDemand increases-Hula Hoops go out

of styleDemand decreases

3 Number of Consumers(also Demographics)

-Hurricanes around Labor Day

Fewer tourists touring Florida and the Gulf Coast,

demand decreasesMore tourists touring, NC and SC, demand increases

4 Price of Other GoodsIf airlines cut ticket prices

More demand for Luggage

Less demand for train tickets

Tickets and Luggage are compliments

Airlines and Trains are Substitutes

If ticket prices decrease, demand for Luggage increases

If ticket prices increase, demand for Luggage decreases

If air tickets increase, demand for Train tickets also increases

Compliments are consumed or used together (inverse relationship)

Substitutes replace each other (direct relationship)

5 Consumer Expectations-dealers reduce car

prices in AugustCar buyers wait, demand decreases-heavy rains have

damaged coffee cropConsumers expect shortages and higher prices so they buy more

now, demand increases

1

Why the curve shifts

2345

Consumer Incomes

Price of Other Goods

Consumer TastesNumber of

ConsumersConsumer Expectations

Consumers responding to a Change in the Price of the good

Caused by factors related to production of the good

Harder or costlier to produce, price goes up

Movement ALONG the curve

Quantity

$6

$5

$4

$3

$2

$1

1 2 3 4 5 60

Demand

Supply Curve

Current Price

Price

P Q

P Q

decrease

increase

Easier or less expensive to produce, price goes down

What makes the Supply Curve Shift??

P1

P2

P3

Q2 Q1 Q3

The Supply Schedule!!

What makes the Supply Curve Shift??

Selling Quantity Supplied Price Old New

6

$ 3$ 2$ 1

$ 45

$ 6

321

4$ 5

7

54

23

6 43

10

5

2

DecInc

Caused by a Change in a Determinant

Movement OF the curve

Price

Quantity

$6

$5

$4

$3

$2

$1

1 2 3 4 5 60

Old

Increase in Supply shifts out or to the right

Decrease in Supply

shifts in or to the left

1Resource Prices

Why the curve shifts

2Changes in Technology

3

Changes in Natural Conditions

Taxes and Subsidies

6

4Number of ProducersProducer Expectations

5

1 Changes is Natural ConditionsShift resources away from high production cost goods.

Caused by natural disasters or market price of other

goods

Or why the curve shifts

2 Resource Prices-gas is discovered

under CVCCSupply increases

-Minimum wage goes up

Supply decreases

3 Changes in Technology+ If a more powerful

computer is developedMakes production

easier (and cheaper)

- If stronger pollution controls are required

Makes production harder (and costly)

+ subsidies encourage production

Taxes and Subsidies- taxes discourage

production

4

5 Number of Producers

-fewer firms decrease supply

+more firms increase supply

6 Producer Expectations

-if prices are expected to increase, more

production

about prices and resource availability

-if prices are expected to decrease, less

production

Response to a Change in the Price of the goodCaused by factors related to consumers

Movement ALONG the curve

Quantity

$6

$5

$4

$3

$2

$1

1 2 3 4 5 60

SupplyCurrent

Price

Price

P1

P2

P3

Q2 Q1 Q3

1Resource Prices

Why the curve shifts

2Changes in Technology

3

Changes in Natural Conditions

Taxes and Subsidies

6

4Number of ProducersProducer Expectations

5

1

Why the curve shifts

2345

Consumer Incomes

Price of Other Goods

Consumer TastesNumber of

ConsumersConsumer Expectations

Quantity

$6

$5

$4

$3

$2

$1

1 2 3 4 5 60

Supply

Current Equilibrium

Price

P1

P2

P3

Q3 Q1 Q2

Caused by a change in a Determinant of Demand

Shifting the Demand Curve

decrease

increase

Demand

P Q

P Q

1Resource Prices

Why the curve shifts

2Changes in Technology

3

Changes in Natural Conditions

Taxes and Subsidies

6

4Number of ProducersProducer Expectations

5

Quantity

$6

$5

$4

$3

$2

$1

1 2 3 4 5 60

Demand

Current Equilibrium

Price

P Q

P Q

decrease

increaseP1

P2

P3

Q2 Q1 Q3

Supply

Caused by a change in a Determinant of Supply

Shifting the Supply Curve

Government Intervention in the Market:

Price Controls

• Price floor is a legally established minimum price that buyers must pay.

• It stops the price from dropping down to equilibrium level.

• Example: minimum wage• The direct effect of a price floor

above the equilibrium price is a surplus: quantity supplied

exceeds quantity demanded.

1. Price Floors

• A price floor like P1 sets a price above market

equilibriumcausing quantity supplied

QD …

•Non-price factors will become more important than

prices in determining where scarce

goods go.

to exceed quantity demanded

QS … resulting in a surplus.

The Impact of a Price FloorPrice

Quantity

Pricefloor

D

QD QS

P0

SP1

Surplus

• Direct effect: – Reduces employment of low-skilled

labor. • Indirect effects:• Reduction in non-wage component of

compensation.• Less on-the-job training.

• May encourage students to drop out of school

• A higher minimum wage does little to help the poor.

Minimum Wage Effects

http://www.thedailyshow.com/watch/tue-january-28-2014/wage-against-the-machine

Employment and the Minimum WagePrice (wage)

Quantity(employment)

Minimum wage level

D

E1 E0

S

$ 5.15

Excesssupply

$ 4.00

• If a price (wage) of $4.00 could bring equilibrium.

• A minimum wage (price floor) of $5.15 would increase

the earnings of those who stayed employed (E1), but

would reduce the employment of others.

• Those who lose their job (E0 to E1) would be pushed into

either unemployment or some other less preferred

form of employment.

• It stops the price from rising to the equilibrium level.

• Example: rent control• The direct effect of a price ceiling is a

shortage: quantity demanded exceeds quantity supplied.

2. Price Ceilings

• Price ceiling is a legally established maximum price that sellers may charge.

• In the rental housing market the price (rent) P0 would bring the quantity of rental units demanded

into balance with the quantity supplied.

• A price ceiling like P1sets a price below equilibrium …

quantity demanded QD …

exceeds quantity supplied QS …

resulting in a shortage.

The Impact of a Price CeilingPrice(rent)

Quantity of housing units

Priceceiling

D

QS QD

P0

S

P1

Shortage

Rental housing market

• The future supply of housing will decline.• The quality of housing will deteriorate.

• Non-price methods of rationing will increase in importance.

Effects of Rent Control

• Long-term renters will benefit at the expense of newcomers.