DEMAND AND SUPPLYRevisited

Along with elasticity, shifters, equilibrium & disequilibrium

THE LAW OF DEMAND

Quantity demanded

price

0 30

5 25

10 20

15 15

20 10

25 5

30 0

QD

P

AS THE PRICE FOR A GOOD OR SERVICE INCREASES, THE QUANTITY DEMANDED DECREASES EXAMPLE CANDY AUCTION

All of the Prices paired with the Quantities Demanded = Demand

Price can only indicate a change in the quantity demanded– It cannot change Demand

Only Six (6)things can change Demand

▲ Income, ▲Population, ▲Tastes & Preferences ▲Consumer Expectations, ▲Price of Substitutes ▲Price of Complements

CH

AN

GE IN

DEM

AN

D

What could change this graph?

ELA

STIC

ITY

OF D

EM

AN

D: W

HAT M

AK

ES

TH

E S

LO

PE O

F T

HE L

INE C

HA

NG

E?

Elastic Inelastic

How sensitive to a change in price is the change in the quantity demanded?

THE LAW OF SUPPLY

Quantity Supplied

price

0 0

5 5

10 10

15 15

20 20

25 25

30 30QS

P

AS THE PRICE FOR A GOOD OR SERVICE INCREASES, THE QUANTITY SUPPLIED ALSO INCREASES P Q

All of the Prices paired with the Quantities Supplied = Supply

Price can only indicate a change in the quantity supplied– It cannot change Supply

Only Six (6) things can change Supply

▲ Cost of Inputs, ▲# of Producers, ▲Producer Expectations, ▲Technology ▲Government Policy, ▲Natural Events/Disasters

HOW DO YOU KNOW WHEN THE PRICE IS RIGHT?

Equilibrium QD & QS Intersect at the Same Price

. Equilibrium point

PRICE CONTROLS =GOVERNMENT INVOLVEMENT

• Price Floor = price set above Equilibrium

Surplus

Shortage

Price Ceiling = Price set below Equilibrium