Calvin and Hobbes Questions Why is Susie (the girl) upset with the price that Calvin is charging? What economic principle does Calvin cite as the reason for the high price? Do you agree or disagree with Calvin’s argument of how supply and demand works? Explain your answer.

Supply & Demand Terms Demand Quantity Demanded Supply Quantity Supplied Normal goods/Inferior goods Equilibrium Price Effect Substitution Effect Income Effect

Demand/Quantity Demanded Demand is the desire to own a good combined with the ability & willingness to pay for it. The Demand curve shows the relationship of Price to Quantity from the consumer’s perspective. Quantity Demanded is a point on the Demand curve QD is the quantity of a good a person is willing to buy at a certain Price. As Price increases, QD decreases. As Price decreases, QD increases.

Supply/Quantity Supplied Supply is the amount of a good producers produce. The Supply curve shows the relationship of Price to Quantity from the producers perspective. Quantity Supplied is a point on the Supply curve The Quantity of a good producers are willing to sell at a certain Price. As Price decreases, QS decreases. As Price increases, QS increases.

Normal goods / Inferior goods The Demand for normal goods increases when consumer income rises. The Demand for inferior goods decreases when consumer income rises. This has little to do with the quality of the good.

Equilibrium The market state where economic forces are balanced. Equilibrium occurs at the point where quantity demanded and quantity supplied are equal. At equilibrium the amount of goods demanded is equal to the amount of goods supplied. Equilibrium is established due to the forces of competition and price.

Price Effect The impact a ∆ value has on the demand for a good. The price effect consists of The substitution effect The income effect

Substitution Effect Income Effect Effect caused by a rise in price. The consumer is induced to buy more of a relatively lower- priced good and less of a higher- priced one. A change in demand of a good induced by a change in income. An increase income increases demand.

Supply & Demand There are two separate laws Each works independently. Law of Supply Law of Demand Each works independently. We will discuss Demand first.

Demand Schedule (Ice Cream) Price of Ice Cream Cones QD of Ice Cream cones $.0.00 12 $0.50 10 $1.00 8 $1.50 6 $2.00 4 $2.50 2 $3.00

Demand Curve (Ice Cream)

Demand Curve (Ice Cream)

Price of Ice Cream Cones Market Demand The Market’s Demand Schedule (Ice Cream) Price of Ice Cream Cones Cathy’s QD Nick’s QD Market QD $.0.00 12 7 19 $0.50 10 6 16 $1.00 8 5 13 $1.50 4 $2.00 3 $2.50 2 $3.00 1

Market Demand

Arbitrage and Scalping

Ticket Demand Schedule Price of Tickets QD of Tickets before Announcement $350 2,500 $300 3,000 $250 4,000 $200 5,500 $150 7,500 $100 10,000

Ticket Demand Curve Complete graph on next slide

Shift of Demand Curve Complete graph on next slide

Shift of Demand Curve

Determinates of Demand (Demand shifters) ∆ consumer taste (preferences) ∆ number of consumers ∆ income ∆ Expectations Concerning Future Prices or Income ∆ Prices of a substitute good ∆ Price of a complementary good Lets look at these demand shifters

∆ Number of Consumers Original Number of buyers More buyers Fewer Buyers

∆ Expectations Concerning Future Price Let Pp ≡ present Price Let Fp ≡ future Price If Fp > Pp demand increases in the present because consumers act before Prices rise. If Fp < Pp demand decreases in the present because consumers wait for Price to fall. ( ≡ ) means represent

∆ Price of Substitute Goods Steak Chicken

∆ Price of a Complementary Good Buns Hot Dogs

Demand Shift Quiz (4 Questions) Explain whether each of the following events represents: Shift of Demand curve Movement along Demand curve

Customers are willing to pay more for umbrellas on rainy days. Shift of Demand curve Movement along Demand curve

Customers are willing to pay more for umbrellas on rainy days. Because of the rain the QD of umbrellas is higher at any given Price. This causes a rightward shift of the Demand curve.

When XYZ Telecom offered reduced rates on weekends, the volume of weekend calling increased sharply. Shift of Demand curve Movement along Demand curve

When XYZ Telecom offered reduced rates on weekends, the volume of weekend calling increased sharply. The QD of weekend calls rises in response to the Price reduction. This causes a movement along the Demand curve to the right.

People buy more roses the week of Valentine's Day, even though the Prices are higher than at other times during the year. Shift of Demand curve Movement along Demand curve

People buy more roses the week of Valentine's Day, even though the Prices are higher than at other times during the year. The Demand for roses increases on Valentine's Day. This causes a rightward shift of the Demand curve.

The rise in the Price of gas leads many commuters to join carpools. Shift of Demand curve Movement along Demand curve

The rise in the Price of gas leads many commuters to join carpools. The QD of gas falls in response to a rise in Price. This causes a movement along the Demand curve to the left.

Law of Supply Producers are profit maximizers Producers have an incentive to produce more QS. The graph shows that as Price ↑ so does QS

QS of Tickets before Announcement Supply Schedule Price of Tickets QS of Tickets before Announcement $350 9,800 $300 9,500 $250 9,000 $200 8,000 $150 6,000 $100 3,000

Supply Curve

Supply Curve

Shift of Supply Curve

Shift of Supply Curve

Determinants of Supply (Supply Shifters) ∆ Resource Prices ∆ Technology ∆ Taxes and subsidies ∆ The Price of other goods ∆ Price expectations ∆ number of sellers A change in any of the determinants of Supply will shift the Supply curve

Supply Shift Quiz (4 Questions) Explain whether each of the following events represents: Shift of Demand curve Movement along Demand curve

Many strawberry farmers open temporary roadside stands during harvest season, even though Prices are usually low at that time. Shift of Supply curve Movement along Supply curve.

Many strawberry farmers open temporary roadside stands during harvest season, even though Prices are usually low at that time. QS of strawberries is higher at any given Price. This is a rightward shift of the Supply curve.

Immediately after the school year begins, fast-food chains must raise wages to attract workers. Shift of the Supply curve Movement along the Supply curve.

Immediately after the school year begins, fast-food chains must raise wages to attract workers. The QS of labor is lower at any given wage. This causes a leftward shift of the Supply curve compared to the summer Supply curve. In order to attract workers, chains have to offer higher wages.

Many construction workers move to areas that have suffered hurricanes, lured by higher wages. Shift of the Supply curve Movement along the Supply curve. Hint: we are talking about the QS of labor not the wages.

Many construction workers move to areas that have suffered hurricanes, lured by higher wages. The QS of labor rises in response to a rise in wages. This is a movement along the Supply curve.

Since technology has made it possible to build larger, cheaper per person cruise ships, Caribbean Cruise Line has offered more cabins at lower Prices. Shift of the Supply curve Movement along the Supply curve.

Since technology has made it possible to build larger, cheaper per person cruise ships, Caribbean Cruise Line has offered more cabins at lower Prices. The QS of cabins is higher at any given Price. This is a rightward shift of the Supply curve.

5 Questions: Shifts & Movements of Supply or Demand The following market situations begin in equilibrium. Then an event occurs. Use your knowledge to answer each question and draw a correct graph. What effect will the event have on Demand and Supply? What will happen to the Price?

1. In 1997 California wine growers produced a bumper crop of grapes. What will happen to Demand & Supply? What will happen to equilibrium Price? grapes

1. In 1997 California wine growers produced a bumper crop of grapes. Supply curve shifts right. Price falls.

2. After a hurricane, Florida hotels find that many people cancel their vacations, leaving them with empty hotel rooms. What will happen to Demand & Supply? What will happen to equilibrium Price? Hotel rooms

2. After a hurricane, Florida hoteliers find that many people cancel their vacations, leaving them with empty hotel rooms. Demand shifts left. Price falls.

3. After a heavy snowfall, many people want to buy snowblowers at the local tool shop. What will happen to Demand & Supply? What will happen to equilibrium Price? Snowblowers

3. After a heavy snowfall, many people want to buy snowblowers at the local tool shop. Demand curve shifts right. Price rises.

4. As the Price of gas fell people bought more big cars. What will happen to Demand & Supply? What will happen to equilibrium Price? Cars

4. As the Price of gas fell people bought more big cars. Demand for gas does not shift, Price is not a Demand shifter. Demand for cars shifts right caused by a decrease in Price of its complement. Prices rise.

What will happen to Demand & Supply? 5. As technological innovation lowered the cost of recycling used paper, paper made from recycled stock is used more frequently. What will happen to Demand & Supply? What will happen to equilibrium Price? paper

5. As technological innovation lowered the cost of recycling used paper, paper made from recycled stock is used more frequently. Right shift in Supply. Price falls.

Graphing Simultaneous ∆ Supply & Demand Shifts in Demand or Supply cause Price and Quantity to change in predictable ways. But if both curves shift, at the same times it is difficult to tell how or if Price and Quantity change. Lets look at four examples.

Gretzky Tickets at Equilibrium

What if Market Price is Above Equilibrium?

Economic Fact The Price of a good will fall whenever there is a surplus. That is, whenever the Price is above equilibrium.

What if Price is Below Equilibrium?

Economic Fact The Price of a good will rise whenever there is a shortage. That is, whenever the Price is below equilibrium.

THANK YOU TO… Erica Thompson, Victor Schools Ross Hunkovic, Victor Schools Dave Larsen, Pittsford School For sharing their outstanding work which assisted in the making of this presentation!! Thank you!!!