PowerPoint PresentationSlide 2Slide 3Slide 4Slide 5Slide 6Slide 7Slide 8Slide 9Slide 10Slide 11Slide 12Slide 13Slide 14Slide 15Slide 16Slide 17Slide 18Slide 19Slide 20Slide 21Slide 22Slide 23Slide 24Slide 25Slide 26Slide 27Slide 28Slide 29Slide 30Slide 31Slide 32Slide 33Slide 34Slide 35Slide 36Slide 37Slide 38Slide 39Slide 40Law of Demand: Ceteris Paribus, a rise in the price of a good or service will decrease the quantity demanded of that good or service.PriceQuantityDemandP1P0Q1Q0At price P0 the quantity demanded of this good equals Q0. If the price rises to P1, the quantity demanded falls to Q1.Changes (Shifts) in DemandP0P0P0P0Q0Q0Q0Q0PricePricePricePriceQuantityQuantityQuantityQuantityEVENT: Increase in average household income (NORMAL GOOD)EVENT: Rise in the price of a substitute goodEVENT: Increase in the number of householdsEVENT: Increase in average household income (INFERIOR GOOD)DDDDD’Q1D’Q1D’Q1D’Q1Changes (Shifts) in Demand (Continued) P0P0P0P0Q0Q0Q0Q0PricePricePricePriceQuantityQuantityQuantityQuantityEVENT: Increase in the price of a complementary goodEVENT: Increase in expected future income or wealth (Normal Good)EVENT: Change in Tastes and Preferences: good becomes more desirableEVENT: Increase in Household Wealth, or Net Worth (Normal Good)DDDDD’Q1D’Q1D’Q1D’Q1Changes (Shifts) in Demand (Continued) P0P0P0P0Q0Q0Q0Q0PricePricePricePriceQuantityQuantityQuantityQuantityEVENT: Decrease in expected future price of this goodEVENT: Decrease in expected future income or wealth(Inferior Good)EVENT: Increase in government subsidies to buyersEVENT: Increase in advertising (which makes the good known to consumers or persuades them that is superior to substitutes)DDDDD’Q1D’Q1D’Q1D’Q1Law of Supply: Ceteris Paribus, a rise in the price of a good or service will increase the quantity supplied of that good or service.PriceQuantitySupplyP1P0Q1Q0At price P0 the quantity supplied of this good equals Q0. If the price rises to P1, the quantity supplied rises to Q1.(Marginal Cost)Changes (Shifts) in SupplyP0P0P0P0Q0Q0Q0Q0PricePricePricePriceQuantityQuantityQuantityQuantityEVENT: Improved technology in productionEVENT: Decrease in the cost (rental rate) of capitalEVENT: Increase in the price of an intermediate good used in productionEVENT: Decrease in the price of labor (wages)SSSSQ1S’S’Q1S’Q1S’Q1Changes in Supply [Continued]P0P0P0P0Q0Q0Q0Q0PricePricePricePriceQuantityQuantityQuantityQuantityEVENT: Increase in the price of a jointly produced goodEVENT: Decrease in the cost of advertising EVENT: Decrease in the cost of energy used in productionEVENT: Increase in the price of an alternative good (output) in productionSSSSS’Q1Q1S’S’Q1S’Q1Changes in Supply [Continued]P0P0P0Q0Q0Q0PricePricePriceQuantityQuantityQuantityEVENT: Increase in government subsidies to producing firmsEVENT: Increase in the number of firms in the marketEVENT: Increase in excise or sales taxesSSSS’Q1Q1S’S’Q1PricePeQeSupply: Quantities sellers are both willing and able to sell at different prices. Demand: Quantities buyers are both willing and able to buy at different prices. Equilibrium Price: at this price, quantity demanded by buyers equals quantity supplied by sellersEquilibrium Quantity SoldPricePeQeSupplyDemandP1QS[P1]QS [P1] is the Quantity Supplied of this Good at Price P1.QD[P1]QD [P1] is the Quantity Demanded of this Good at Price P1.We have “Excess Demand”, or a “Shortage” at price P1 which is equal to:ED = QD[P1] – QS[P1]Unless government policy prevents it, the price will rise from P1 to Pe.EXCESS DEMAND: Price will riseEDPricePeQeSupplyDemandP2QD[P2]QS [P2] is the Quantity Supplied of this Good at Price P2.QS[P2]QD [P2] is the Quantity Demanded of this Good at Price P2.We have “Excess Supply”, or a “Surplus” at price P2 which is equal to:ES = QS[P2] – QD[P2]Unless government policy prevents it, the price will fall from P2 to Pe.EXCESS SUPPLY: Price will fallESComparative Statics in the Basic Supply and Demand ModelPPP0P0Q0Q0EVENT: Increase in the Price of Crude OilP______ Q_______EVENT: Rise in the Price of GasolineP______ Q_______SSDDGasolineSUVsP1Q1S’P1Q1D’Comparative Statics in the Basic Supply and Demand ModelPPD’P0Q0Q0EVENT: Increase in subsidies to Ethanol producersP______ Q_______EVENT: Rise in the price of feed cornP______ Q_______SSDDCornBeefP1P1Q1Q1P0S’Comparative Statics in the Basic Supply and Demand ModelPPP0P0Q0Q0EVENT: Rise in the Price of CornP______ Q_______EVENT: Rise in the Price of Barley MaltP______ Q_______SSDDBarley MaltBeerP1P1Q1Q1S’S’Comparative Statics in the Basic Supply and Demand ModelPPP0P0Q0Q0EVENT: Increase in wages paid to auto workers.P______ Q_______EVENTS: Decrease in subsidies to Public Universities and an Increase in availability of student loansP______ Q_______SSDDAutosPublic University EducationP1P1Q1S’S’D’?Comparative Statics in the Basic Supply and Demand ModelPPP0P0Q0Q0EVENTs: A recession is expected in the near future and tariffs on foreign produced textiles are increased.P______ Q_______EVENT: Rise in mortgage interest ratesP______ Q_______SSDDFinished ClothingNew HousesP1Q1D’D’S’?Q1Comparative Statics in the Basic Supply and Demand ModelPPP0P0Q0Q0EVENTS: Published news that occupants of small cars are more likely to suffer severe injury in accidents and a rise in the price of gasolineP______ Q_______EVENTS: Rise in the price of jet fuel and a rise in average household income.P______ Q_______SSDDSmall CarsAir Travel????P1D’S’Comparative Statics in the Basic Supply and Demand ModelPPP0P0Q0Q0EVENTS: Rise in cigarette taxes and favorable weather for tobacco productionP______ Q_______EVENT: Decrease in the price of Ipod playersP______ Q_______SSDDCigarettesRecorded CDs???D’P1Q1Following a rise in the price of a substitute good in consumption, the equilibrium price will _________ and the quantity exchanged will _________.a) increase; increaseb) increase; decreasec) decrease; increased) decrease; decreasee) remain the same; remain the same DemandFollowing a rise in the price of an intermediate good used in production, the equilibrium price will _________ and the quantity exchanged will _________.a) increase; increaseb) increase; decreasec) decrease; increased) decrease; decreasee) remain the same; remain the same SupplyIn the market for a normal good, following a rise in the