1. Unit 1-8: Basic Economic Concepts

2. Supply and Demand Analysis
Easy as 1, 2, 3
Before the change:
Draw supply and demand
Label original equilibrium price and quantity
The change:
Did it affect supply or demand first?
Which determinant caused the shift?
Draw increase or decrease
After change:
Label new equilibrium?
What happens to Price? (increase or decrease)
What happens to Quantity? (increase or decrease)
Let’s Practice!

3. S&D Analysis Practice Analyze Hamburgers
Before Change (Draw equilibrium)
The Change (S or D, Identify Shifter)
After Change (Price and Quantity After)
Analyze Hamburgers
New grilling technology cuts production time in half
Price of chicken sandwiches (a substitute) increases
Price of hamburgers falls from $3 to $1.
Price for ground beef triples
Human fingers found in multiple burger restaurants
1. Supply Increases
2. Demand Increases
3. No Shift. Shortage
4. Supply Decreases
5. Demand Decreases

4. Qe Q1 New grilling technology cuts production time in half Price S S1Pe
P decrease
Q increase P1 D Qe Q1
Quantity 4

5. Qe Q1 2. Price of chicken sandwiches (a substitute) increases Price S
P increase
Q increase P1 Pe D1 D Qe Q1
Quantity

6. Qs Qe Qd 3. Price of hamburgers falls from $3 to $1. Price S Shortage
Qd increase
Qs decrease Pe P1 D Qs Qe Qd
Quantity

7. Q1 Qe 4. Price for ground beef triples Price S1 S P1 Pe D Quantity
P increase
Q decrease D Q1 Qe
Quantity

8. Q1 Qe 5. Human fingers found in multiple burger restaurants Price S Pe
P decrease
Q decrease Pe P1 D1 D Q1 Qe
Quantity

9. Double Shifts Double Shift Rule:
Suppose the demand for milk increased at the same time as production technology improved.
Use S&D Analysis to show what will happen to PRICE and QUANTITY.
Double Shift Rule:
If TWO curves shift at the same time, EITHER price or quantity will be indeterminate (ambiguous).

10. Qe Q1 Demand increases AND supply increases Price S S1 P1 Pe D1 D
P indeterminate
Q increase Qe Q1
Quantity

11. Trick: Draw it out separately and combine the results
P indeterminate
Q increase

12. What if supply increases and demand falls?
P decrease
Q indeterminate

13. What if supply decreases and demand falls?
P indeterminate
Q decrease

14. Supply and Demand Practice Worksheet14

15. Example of Voluntary Exchange
Ex: You want to buy a truck so you go to the local dealership. You are willing to spend up to $20,000 for a new 4x4. The seller is willing to sell this truck for no less than $15,000. After some negotiation you buy the truck for $18,000.
Analysis:
Buyer’ Maximum-
Sellers Minimum-
Price-
Consumer’s Surplus-
Producer’s Surplus-
$20,000
$15,000
$18,000
$2,000
$3,000

16. Voluntary Exchange Terms
Consumer Surplus is the difference between what you are willing to pay and what you actually pay.
CS = Buyer’s Maximum – Price
Producer’s Surplus is the difference between the price the seller received and how much they were willing to sell it for.
PS = Price – Seller’s Minimum