NOW PLAYING:NOW PLAYING:

MARKET ANALYSISMARKET ANALYSIS

Presented by:Presented by:Mr. KuzmichMr. KuzmichEconomicsEconomics

Only two things can change Only two things can change the relative scarcity of a the relative scarcity of a

productproduct

SupplySupplyDemandDemand

How do changes in supply How do changes in supply or demand affect or demand affect

equilibrium prices and equilibrium prices and quantities exchanged?quantities exchanged?

Quantity ExchangedQuantity Exchanged

It’s simple.It’s simple.An increase in supply or demand causes An increase in supply or demand causes

an increase in quantity exchanged.an increase in quantity exchanged.A decrease in supply or demand causes A decrease in supply or demand causes

a decrease in quantity exchanged. a decrease in quantity exchanged.

Equilibrium PriceEquilibrium Price

It’s simple.It’s simple.An increase in supply or a decrease in An increase in supply or a decrease in

demand puts downward pressure on demand puts downward pressure on prices.prices.

A decrease in supply or an increase in A decrease in supply or an increase in demand puts upward pressure on prices. demand puts upward pressure on prices.

Changes in Supply or Changes in Supply or DemandDemand

Impact on Impact on Equilibrium Equilibrium

PricePrice

Impact on Impact on Quantity Quantity

ExchangedExchanged

Increase in Increase in SupplySupply

DownDown UpUp

Decrease in Decrease in SupplySupply

UpUp DownDown

Increase in Increase in DemandDemand

UpUp UpUp

Decrease in Decrease in DemandDemand

DownDown DownDown

Changes in relative scarcityChanges in relative scarcityA product becomes A product becomes moremore scarce if:scarce if:

demand increasesdemand increasessupply decreasessupply decreases

price will riseprice will riseA product becomes A product becomes lessless scarce if:scarce if:

demand ____________demand ____________supply _____________supply _____________

price will _________price will _________

Changes in relative scarcityChanges in relative scarcityA product becomes A product becomes moremore scarce if:scarce if:

demand increasesdemand increasessupply decreasessupply decreases

price will riseprice will riseA product becomes A product becomes lessless scarce if:scarce if:

demand decreasesdemand decreasessupply increasessupply increases

price will fallprice will fall

Three Steps of Three Steps of Market AnalysisMarket Analysis

1.1. Identify the MarketIdentify the Market

Product, place, timeProduct, place, time

2.2. Identify the changeIdentify the change

Supply or demand, increase or decrease?Supply or demand, increase or decrease?

3.3. Effect on relative scarcity, price, Effect on relative scarcity, price, quantityquantity

Major rule:Major rule:

One event causes either demand orOne event causes either demand or

supply to change, never both.supply to change, never both.

Predicting the FuturePredicting the Future

The world market for oil, 2005. Iraq The world market for oil, 2005. Iraq oil wells come back on line.oil wells come back on line.

Demand or supply? Increase or Demand or supply? Increase or decrease?decrease?

Relative scarcity, price, quantity?Relative scarcity, price, quantity?

Predicting the FuturePredicting the Future

In SF in 2006, the market for 49er In SF in 2006, the market for 49er stuff when the 49ers, under the stuff when the 49ers, under the amazing leadership of Alex Smith, amazing leadership of Alex Smith, football playing economist, and the football playing economist, and the 49ers win the Super Bowl.49ers win the Super Bowl.

Demand or supply? Increase or Demand or supply? Increase or decrease?decrease?

Relative scarcity, price, quantity?Relative scarcity, price, quantity?

Explaining the presentExplaining the present

Market, gasoline in California, Summer, Market, gasoline in California, Summer, 20052005

OPEC increases supplyOPEC increases supply CaliforniansCalifornians

buy more, bigger, more powerful cars and buy more, bigger, more powerful cars and drive them farther and fasterdrive them farther and faster

avoid mass transitavoid mass transit Some oil refineries are shut down for Some oil refineries are shut down for

maintenancemaintenance Relative scarcity and price?Relative scarcity and price?

What has caused What has caused these prices to change?these prices to change?

Computer prices fall.Computer prices fall. It is September and peach, berry, and other It is September and peach, berry, and other

fruit prices rise.fruit prices rise. The price of a major league baseball star’s The price of a major league baseball star’s

rookie card is falling.rookie card is falling. The price of artichokes rises.The price of artichokes rises. Saudi king dies and price of oil rises.Saudi king dies and price of oil rises. Dukes of Hazzard comes out and price of Dukes of Hazzard comes out and price of

1969 Dodge Charger increases.1969 Dodge Charger increases. The price of yo-yo’s go up and down.The price of yo-yo’s go up and down. The price of ancient statues falls.The price of ancient statues falls.

Explaining the pastExplaining the past

Europe in 1510. The market for Europe in 1510. The market for spices after da Gama found a less spices after da Gama found a less costly path to spices.costly path to spices.

Supply or demand? Increase or Supply or demand? Increase or decrease?decrease?

Relative scarcity, price, quantityRelative scarcity, price, quantity

Explaining the pastExplaining the past

Sacramento in 1850. The market for Sacramento in 1850. The market for pick axes and pans. pick axes and pans.

Supply or demand? Increase or Supply or demand? Increase or decrease?decrease?

Relative scarcity, price, quantityRelative scarcity, price, quantity

A Price A Price CeilingCeiling is a is a maximum legal price maximum legal price

BELOW BELOW the equilibrium. the equilibrium.

It provides perverse It provides perverse incentives, causing a incentives, causing a

shortage.shortage.

Ceiling, below, shortageCeiling, below, shortage

(CBS)(CBS)

Price controls (ceiling)Price controls (ceiling)

Assume that a market is in equilibrium and Assume that a market is in equilibrium and there is no change in supply or demand; there is no change in supply or demand; relative scarcity has not changed.relative scarcity has not changed.

A government sets a legal price below the A government sets a legal price below the equilibrium (price ceiling)equilibrium (price ceiling)

Buyers will want to buy _________Buyers will want to buy _________ Suppliers will want to supply ________Suppliers will want to supply ________ There is a (surplus or shortage).There is a (surplus or shortage). Rent controls, doctors, prescription drugsRent controls, doctors, prescription drugs

A Price A Price FloorFloor is a is a minimum legal price minimum legal price

ABOVEABOVE the equilibriumthe equilibrium

It provides perverse It provides perverse incentives, causing a incentives, causing a

surplus.surplus.

Floor, above, surplusFloor, above, surplus

(FAS)(FAS)

Price controls (floor)Price controls (floor)

Assume that a market is in equilibrium and Assume that a market is in equilibrium and there is no change in supply or demand; there is no change in supply or demand; relative scarcity has not changed.relative scarcity has not changed.

A government sets a legal price above the A government sets a legal price above the equilibriumequilibrium

Buyers will want to buy _________Buyers will want to buy _________ Suppliers will want to supply ________Suppliers will want to supply ________ There is a (surplus or shortage).There is a (surplus or shortage). Minimum wage, agricultural price supportsMinimum wage, agricultural price supports

Price controls (natural Price controls (natural disaster)disaster)

The market for lumber in Los The market for lumber in Los Angeles, after an earthquake Angeles, after an earthquake destroys many buildingsdestroys many buildings

Demand has increased.Demand has increased.Lumber is now relatively______ Lumber is now relatively______

scarce. scarce. Price will ______________Price will ______________

Price controls (natural Price controls (natural disaster, ceiling)disaster, ceiling)

To avoid “price gouging” government To avoid “price gouging” government sets legal price below new higher sets legal price below new higher equilibrium price.equilibrium price.

At lower price, demanders demand At lower price, demanders demand ________

At lower price, suppliers supply At lower price, suppliers supply ____________

The price ceiling causes a ________The price ceiling causes a ________

ExampleExample

Maximum rent on apartments set Maximum rent on apartments set below equilibriumbelow equilibrium

Lower price will have what effect on Lower price will have what effect on prospective demanders?prospective demanders?

Lower price will have what effect on Lower price will have what effect on prospective suppliers?prospective suppliers?

Price below market clearing price will Price below market clearing price will cause a ____________. cause a ____________.

What will happen to the price What will happen to the price of energy in California?of energy in California?

The population increases.The population increases.People have more computers.People have more computers.Many power plants are shut down for Many power plants are shut down for

maintenance.maintenance.The snow pack in the Sierras is lower The snow pack in the Sierras is lower

than normal.than normal.

Let’s save the energy Let’s save the energy consumers of Californiaconsumers of California

Impose a price ceiling (a legal price below Impose a price ceiling (a legal price below the equilibrium)the equilibrium)

As the price falls, the incentives for As the price falls, the incentives for suppliers and demanders changes. suppliers and demanders changes.

With a lower price, suppliers will supply With a lower price, suppliers will supply ________________

With a lower price, demanders will want to With a lower price, demanders will want to buy _________buy _________

There will be a __________There will be a __________

Let’s save the energy Let’s save the energy consumers of Californiaconsumers of California

Market AnalysisMarket Analysis

Change in Change in SupplySupply

(WAGTIP)(WAGTIP)

Change in Change in DemandDemand

(TIPSE)(TIPSE)

EquilibriuEquilibrium Pricem Price

Quantity Quantity SuppliedSupplied

Quantity Quantity DemandeDemande

dd

Quantity Quantity ExchangeExchange

dd

IncreaseIncrease

__________________DownDown

__________________UpUp UpUp

DecreaseDecrease

__________________UpUp

__________________DownDown DownDown

__________________IncreaseIncrease UpUp UpUp

__________________UpUp

__________________DecreaseDecrease DownDown DownDown

__________________DownDown

How do changes in demand How do changes in demand affect affect quantity suppliedquantity supplied??

A change in quantity supplied occurs in the A change in quantity supplied occurs in the short-run as suppliers respond to a change in short-run as suppliers respond to a change in the price of the product the price of the product with no change in with no change in WAGTIPS. WAGTIPS.

If demand increases, price will rise, and If demand increases, price will rise, and suppliers will attempt to squeeze more out of suppliers will attempt to squeeze more out of their resources with no change in WAGTIPS.their resources with no change in WAGTIPS.

If demand falls, price will fall, causing If demand falls, price will fall, causing suppliers to supply less, with no change in suppliers to supply less, with no change in WAGTIPS. WAGTIPS.

Change in demand causes a change in price Change in demand causes a change in price which causes a change in which causes a change in quantity suppliedquantity supplied, , no change in WAGTIPS.no change in WAGTIPS.

How do changes in supply affect How do changes in supply affect quantity demandedquantity demanded??

A change in quantity demanded occurs as A change in quantity demanded occurs as buyers respond to a change in the price of buyers respond to a change in the price of the product the product with no change in TIPSE. with no change in TIPSE. If If supply increases, price will fall and buyers supply increases, price will fall and buyers will buy more with no change in TIPSE.will buy more with no change in TIPSE.

If supply decreases, price will rise and If supply decreases, price will rise and buyers will buy less with no change in buyers will buy less with no change in TIPSE. TIPSE.

Change in supply causes a change in price Change in supply causes a change in price which causes a change in which causes a change in quantity quantity demanded demanded with no change in TIPSE.with no change in TIPSE.

QuestionsQuestions

Demand or supply?Demand or supply? Increase or decrease? Increase or decrease? Equilibrium price?Equilibrium price?Quantity supplied?Quantity supplied?Quantity demanded?Quantity demanded?Quantity exchanged?Quantity exchanged?