1. 10/22/2014CRC Economics1

2. 10/22/2014CRC Economics2 What did you study last time? Chapter 4 The Market Forces of Demand & Supply III.Market situations

3. 10/22/2014CRC Economics3 What do you study now? Chapter 4 The Market Forces of Demand & Supply IV.Effects of changes in demand and/or supply on markets

4. 10/22/2014CRC Economics4 Do you know … what causes shifts (changes) in demand and supply? what happens in a market when only demand shifts/changes? what happens in a market when only supply shifts/changes?

5. 10/22/2014CRC Economics5 Do you know … what happens in a market when both demand and supply shift/change? how to analyze changes in equilibrium?

6. 10/22/2014CRC Economics6 1. What cause shifts (changes) in demand and supply? Shifts (Changes) in the demand curvesupply curve are caused by changes in non-price factors (determinants): incomeweather prices of related goodsprices of resources tastestechnology expectations number of buyersnumber of sellers

7. 10/22/2014CRC Economics7 2a. What happens in a market when only demand shifts/changes? 8 4 Qx (units) Px ($) O 1 1 S 4 3 2 D What happens if demand increases by 4 units at each price? E Pe Qe D’ E’ 6 Q’e P’e 2 Suppose that a market is originally at equilibrium. An increase in demand increases both price and quantity in the market.

8. 10/22/2014CRC Economics8 2b. What happens in a market when only demand shifts/changes? 8 4 Qx (units) Px ($) O 1 1 S 4 3 2 D E Pe Qe 6 D’’ E’’ P’’e 2 Q’’e What happens if demand decreases by 4 units at each price? Suppose that a market is originally at equilibrium. A decrease in demand decreases both price and quantity in the market.

9. 10/22/2014CRC Economics9 3a. What happens in a market when only supply shifts/changes? 8 4 Qx (units) Px ($) O 1 1 S 4 3 2 D E Pe Qe S’ E’ 6 Q’e P’e 2 What happens if supply increases by 4 units at each price? Suppose that a market is originally at equilibrium. An increase in supply decreases price and increases quantity.

10. 10/22/2014CRC Economics10 3b. What happens in a market when only supply shifts/changes? 8 4 Qx (units) Px ($) O 1 1 S 4 3 2 D E Pe Qe 6 S’’ E’’ P’’e 2 Q’’e What happens if supply decreases by 4 units at each price? Suppose that a market is originally at equilibrium. A decrease in supply increases price and decreases quantity.

11. 10/22/2014CRC Economics11 4. Effects of changes in D or S on the market—Summary table 1 is unchanged (stays the same) increases is unchanged (stays the same) increases P is the same Q is the same P increases Q increases P decreases Q increases decreases P increases Q decreases decreases P decreases Q decreases and supply If D e m a n d

12. 10/22/2014CRC Economics12 5a. What happens in a market if both D & S increase? is unchanged (stays the same) increases is unchanged (stays the same) increases P is the same Q is the same P increases Q increases P decreases Q increases and supply If D e m a n d P is ambiguous Q increases

13. 10/22/2014CRC Economics13 5b. What happens in a market if both D & S decrease? is unchanged (stays the same) is unchanged (stays the same) P is the same Q is the same decreases P increases Q decreases decreases P decreases Q decreases and supply If D e m a n d P is ambiguous Q decreases

14. 10/22/2014CRC Economics14 5c. What happens in a market if D increases & S decreases? is unchanged (stays the same) is unchanged (stays the same) increases P is the same Q is the same P increases Q increases decreases P increases Q decreases and supply If D e m a n d P increases Q is ambiguous

15. 10/22/2014CRC Economics15 5d. What happens in a market if D decreases & S increases? is unchanged (stays the same) increases is unchanged (stays the same) P is the same Q is the same P decreases Q increases decreases P decreases Q decreases and supply If D e m a n d P decreases Q is ambiguous

16. 10/22/2014CRC Economics16 5e. Effects of changes in D and/or S on the market—Summary table 2 is unchanged (stays the same) increases is unchanged (stays the same) increases P is the same Q is the same P increases Q increases P decreases Q increases decreases P increases Q decreases decreases P decreases Q decreases and supply If D e m a n d P is ambiguous Q increases P increases Q is ambiguous P decreases Q ambiguous P is ambiguous Q decreases

17. 10/22/2014CRC Economics17 5f. What happens in a market if both D & S shift/change? If DD > SS then D dominates the market, i.e. the market is affected by the change in demand only. DD = SS No side dominates the market, so either Pe or Qe would be the same as the original. DD < SS To remove the “ambiguity” in price or quantity, we need more information about the magnitude of the changes. S dominates the market, i.e. the market is affected by the change in supply only.

18. 10/22/2014CRC Economics18 6. How to analyze changes in equilibrium? By following the steps below: i.Determine the market in question; ii.Determine the event; iii.Decide whether the event shifts/changes the demand curve or the supply curve (or both);

19. 10/22/2014CRC Economics19 6. How to analyze changes in equilibrium? iv.Decide which direction the curve(s) shift(s); v.Use the demand-supply diagram to see how the shift(s) change(s) the equilibrium.

20. 10/22/2014CRC Economics20 Now you know … what causes shifts (changes) in demand and supply. what happens in a market when only demand shifts/changes. what happens in a market when only supply shifts/changes.

21. 10/22/2014CRC Economics21 Now you know … what happens in a market when both demand and supply shift/change. how to analyze changes in equilibrium.

22. 10/22/2014CRC Economics22 Summary One has to be able to determine the market’s original situation (before the changes) and the market’s new situation (after the changes). Changes in market equilibrium are caused by changes in the other factors that affect (shift) demand and/or supply curves.

23. 10/22/2014CRC Economics23 Summary Supply & demand together determine the prices of G&S. In market economies, prices are the signals that guide the allocation of resources.

24. 10/22/2014CRC Economics24 What did you study? Chapter 4 The Market Forces of Demand & Supply Introduction I.Demand (D) II.Supply (S) III.Market situations IV.Effects of changes in demand & supply on markets

25. 10/22/2014CRC Economics25 What will you study next? Chapter 5 Elasticity & Applications I.Price elasticity of demand II.Income elasticity of demand III.Cross-price elasticity of demand IV.Price elasticity of supply V.Applications

26. 10/22/2014CRC Economics26