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Supply and Demand

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Supply and Demand Table of Contents The Basics The Law of Demand The Law of Supply Equilibrium Price and Quantity Equilibrium and Disequilibrium (2 slides) Shifts in Demand Shifts in Supply Double Shifts in Supply and Demand Price Controls - Price Floors and Price Ceilings Consumer and Produce Surplus Impacts of Price Control on Consumer/Produce surplus and deadweight lose Price Elasticity of Demand Price Elasticity of Supply Cross Price Elasticity of Demand Income Elasticity of Demand Market Failures- externalities

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Supply and Demand The Basics Demand (D) (MB) Quantity (Q) Price (P) Supply (S) (MC) Equilibrium (Qs= Qd) P e Q e TC Y X

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Supply and Demand The Law of Demand Demand- Different Quantities of goods and services that people are willing and able to buy at different prices. Quantity (Q) Price (P) The Law of Demand Price:Quantity Demanded Price and Quantity Demanded have an Inverse Relationship Q1 P1 P2 Q2 3 reasons why Substitution effect Income effect- loss of purchasing power. The more expensive the less you can buy Law of Diminishing maximum utility - Demand also is considered marginal benefits (MB) TC

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051015202530 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00 Student Demand for a Slice of Pizza at a specific price P Qd

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Supply and Demand The Law of Supply Supply- Different Quantities of goods and services that people are willing and able to produce at different prices. Quantity (Q) Price (P) The Law of Supply Price:Quantity Supplied Price and Quantity Supplied have an Direct Relationship Q1 P1 P2 Q2 Trade off between Labor and Leisure. The more money that can be made the more likely you will trade of leisure for labor. Opportunity Cost. Supply is also viewed as Marginal Cost TC

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Supply and Demand Equilibrium Equilibrium- The quantity where price has adjusted so that quantity demanded is equal to quantity supplied. The amount that the buyers are willing and able to purchase matches the amount that producers are willing and able to sell. TC Demand (D) Quantity (Q) Price (P) Supply (S) Equilibrium (Qs= Qd) P e Q e In nature water seeks its own level. Price does the same thing. Both Quantity supplied and Quantity demand works towards each other. S=D MC= MB

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Supply and Demand Equilibrium and Disequilibrium- Surplus TC Demand (D) Quantity (Q) Price (P) Supply (S ) Equilibrium (Qs= Qd) $5 P e Q e $20 Price Floor Qd Qs Surplus Surplus happens when Quantity supplied is greater than the quantity demanded Almost always result from price controls S > D or MC MSC @ Q fm Solution: Because the demand has increased, the price may increase as well. Government give a subsidy to consumer to help pay for the extra cost.

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Market Failure Positive Externalities (D) MSB (Q) (P) (S)- private P fm Q fm TC S1- MSC Q optimal MSC= MSB Problem: At Q free market, to little is being produced. MSB>MSC @ Q fm Solution: The Government can give the private supplier an incentive to increase the supply by paying them a subsidy to make up for the decrease in price due to the increase in supply

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Market Failure Negative Externalities (spillover cost) (D)= MSB (Q) (P) (S) private P fm Q fm TC S1- msc msc= private cost + external cost Q MSC= MSB Problem: At Q free market, to much is being produced. MSB