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Supply and Demand Model AP Economics Ms. LaRosa
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What would you be willing to buy? How many bags of your favorite candy would you be willing to buy at each of the following prices over one-week? – $1 – $2.50 – $5
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What is Demand? A schedule or curve that shows the various amounts of a product that consumers are willing and able to purchase at each of a series of possible prices during a specific time.
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Law of Demand If all other things remain equal, the higher the price of a good, the less people will demand that good. Is the Law of Demand a direct or inverse relationship?
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Change in Quantity Demand (ΔQd) A movement along a given demand curve caused by a change in demand price. Can only be caused by price
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Change in Demand (ΔD) A shift of the demand curve caused by a change in one of the “demand determinants.” NOTE: LEFT IS LESS. (Decrease) RIGHT IS MORE. (Increase)
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Factors that Shift the Demand Curve Demand Determinants: T - Tastes and preferences R - Related goods (prices) (substitutes & compliments) I - Income of buyers B - # of Buyers E - Expectations for the future
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Change in Quantity Demand vs. Change in Demand Change in Quantity Demand (ΔQd) Change in price of good A single movement along the curve Is the result of a change in price Change in Demand (ΔD) Change in a factor other than price A shift of the entire curve Results in a change of price
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What would you do? If you are selling a product and the sale price of the item increases, will you want to put more or less of the product on the market? Why?
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What is Supply? A schedule or curve showing the various amounts of a product that producers are willing and able to make available for sale at each of a series of possible prices during a specific time period
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Law of Supply As prices rises, the quantity supplied rises; as prices fall, the quantity supplied falls. Does the law of supply have a direct or inverse relationship?
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Change in Quantity Supply (ΔQs) A movement along a given supply curve caused by a change in supply price. Can only be caused by price
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Change in Supply (ΔS) A shift of the supply curve caused by a change in one of the “supply determinants.”
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Factors that Shift the Supply Curve Supply Determinants: R- Resource cost O - Other goods prices (substitutes & compliments) T - Taxes and subsidies T - Technology Changes E - Expectation of Suppliers N - Number of Suppliers
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Any factor that increases the cost of production decreases supply. Any factor that decreases the cost of production increases supply.
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Change in Quantity Supply vs. Change in Supply Change in Quantity Supply (ΔQs) Change in price of good A single movement along the curve Is the result of a change in price Change in Supply (ΔS) Change in a factor other than price A shift of the entire curve Results in a change of price
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Which Curve Shifts? Market: hot dog buns – The price of flour rises. Which direction will the curve move? – The price of hot dogs drop. Which direction will the curve move? – There is a new technology that makes hot dog buns faster. Which direction will the curve move? – Independence Day is approaching, and people want to have hot dogs at their BBQs. Which direction will the curve move?
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Equilibrium
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Things to note: Qs= Quantity supplied Qd= Quantity demanded
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What is Equilibrium? Also known as “market equilibrium” Where the supply and demand curves meet. It is where the amount of goods are equal for both supply and demand Qd=Qs
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What does it mean to be in Equilibrium? An economic situation is in equilibrium when no individual would be better off doing something different.
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What is Equilibrium Price? Also known as “market- clearing price” – Why? The price where the intentions of buyers and sellers meet What is the equilibrium price for the graph to the right?
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What is Equilibrium Quantity? The quantity where the intentions of buyers and sellers meet What is the equilibrium quantity for the graph to the right?
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What is Equilibrium?
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Compare the supply and demand curves at P1. What can you tell me about the quantity of the good?
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Surplus Also known as “excess supply” Occurs when Qs > Qd Occurs when the price is above its equilibrium level
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Compare the supply and demand curves at P1. What can you tell me about the quantity of the good?
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Shortage Also known as “excess demand” Occurs when Qs < Qd Occurs when the price is below its equilibrium level
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What is it a shortage or a surplus if the price of the good is $4?
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What is it a shortage or a surplus if the price of the good is $2?
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What about $1?
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Bringing back down (or up!) the market price! Buyers and sellers naturally will reset the price back at equilibrium. Surplus:Price willing to accept is decreased on the sellers’ side Shortage: Price willing to pay is increased on the buyers’ side
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So, what happens to equilibrium when we move the curves?
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Increase in Demand Demand: Price: Quanity:
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Decrease in Demand Demand: Price: Quanity:
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Increase in Supply Supply: Price: Quanity:
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Decrease in Supply Supply: Price: Quanity:
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What happens if both curves move?
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Both Curves Move in the Same Direction Supply increases; Demand increases – Equilibrium price indeterminate – Equilibrium quantity increases Supply decreases; Demand decreases – Equilibrium price indeterminate – Equilibrium quantity decreases
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Curves Move in Opposite Directions Supply increases; Demand decreases – Equilibrium price decreases – Equilibrium quantity indeterminate Supply decreases; Demand increases – Equilibrium price increases – Equilibrium quantity indeterminate
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