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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.