Warm Up 1.Read the article 2.Summarize what the article is saying 3.State if you agree or disagree and why Line was cut off at the top. It reads: if not.

Warm Up1. Read the article

2. Summarize what the article is saying3. State if you agree or disagree and whyLine was cut off at the top. It reads: if not

for the multiple "fiscal crises" created by congress over the past two years

Current Events

The production cost of an average milk chocolate bar has surged by 25 percent over the last year, due to growing demand in emerging markets and bad weather in cocoa-producing countries. As a result, US retail prices for chocolate are up 7 percent.

Practice Graphs

Putting Supply and Demand Together

Krugman’s Module 7

Demand / Supply

Market Equilibrium

• A market will determine the price at which the quantity of a product demanded is equal to the quantity supplied.

• At this price, the market will be in equilibrium, meaning that the amount consumers wish to purchase at this price is matched exactly by the amount producers wish to sell.

TO DETERMINE EQUILIBRIUM NEED TO GRAPH SUPPLY AND DEMAND TOGETHER

• Equilibrium occurs when quantity supplied exactly equals quantity demanded.

D

SPrice

Quantity

Qo

$5

4

3

2

1

PDemand Schedule

10 20 30 40 50 60 70 80

P Qd

$5 10

$4 20

$3 30

$2 50

$1 80

D

SSupply

Schedule

P Qs

$5 50

$4 40

$3 30

$2 20

$1 10

S&D together = E so What is E point on graph below?

Qo

$5

4

3

2

1

PDemand Schedule

10 20 30 40 50 60 70 80

P Qd

$5 10

$4 20

$3 30

$2 50

$1 80

Supply Schedule

P Qs

$5 50

$4 40

$3 30

$2 20

$1 10

Equilibrium Price = $3 (Qd=Qs)

Equilibrium Quantity is 30

D

S

Qo

$5

4

3

2

1

PDemand Schedule

10 20 30 40 50 60 70 80

10

P Qd

$5 10

$4 20

$3 30

$2 50

$1 80

Supply Schedule

P Qs

$5 50

$4 40

$3 30

$2 20

$1 10

D

S

What if the price increases to $4?

Qo

$5

4

3

2

1

PDemand Schedule

10 20 30 40 50 60 70 80

11

P Qd

$5 10

$4 20

$3 30

$2 50

$1 80

Supply Schedule

P Qs

$5 50

$4 40

$3 30

$2 20

$1 10

D

S

At $4, there is disequilibrium. The quantity demanded is less than quantity supplied.

Surplus (Qd<Qs)

How much is the surplus at $4?

Answer: 20

Qo

$5

4

3

2

1

PDemand Schedule

10 20 30 40 50 60 70 80

12

P Qd

$5 10

$4 20

$3 30

$2 50

$1 80

Supply Schedule

P Qs

$5 50

$4 40

$3 30

$2 20

$1 10

D

S

Answer: 40What if the price decreases to $2?

Qo

$5

4

3

2

1

PDemand Schedule

10 20 30 40 50 60 70 80

13

P Qd

$5 10

$4 20

$3 30

$2 50

$1 80

Supply Schedule

P Qs

$5 50

$4 40

$3 30

$2 20

$1 10

D

S

At $2, there is disequilibrium. The quantity demanded is greater than quantity supplied.

Shortage(Qd>Qs)

How much is the shortage at $2?

Answer: 30

Qo

$5

4

3

2

1

PDemand Schedule

10 20 30 40 50 60 70 80

14

P Qd

$5 10

$4 20

$3 30

$2 50

$1 80

Supply Schedule

P Qs

$5 50

$4 40

$3 30

$2 20

$1 10

D

SWhen there is a

surplus, producers lower prices

The FREE MARKET system automatically pushes the price toward equilibrium.

When there is a shortage, producers

raise prices

Always Assume shifts in supply or demand change equilibrium P and Q instantaneously

15

Graphing Equilibrium (see chart from binder)

Learning to Diagram the Change is Easy as 1, 2, 31. Before the change:

• Draw supply and demand • Label original equilibrium price and quantity

2. The change: • Did it affect supply or demand first?• Which determinant caused the shift? • Draw increase or decrease

3. After change: • Label new equilibrium?• What happens to Price? (increase or decrease)• What happens to Quantity? (increase or decrease)

Warm Up:

Warm Up: what does this quote mean to you?

“You have brains in your head. You have feet in your shoes.

You can steer yourself any direction

you choose. You're on your own. And

you know what you know. And YOU are

the one who'll decide where to go...”

Review SupplyChanges in the Prices of Related Goods or Services A single producer often

produces a mix of goods rather than a single product. For example, an oil refinery produces gasoline from crude oil, but it also produces heating oil and other products from the same raw material. When a producer sells several products, the quantity of any one good it is willing to supply at any given price depends on the prices of its other co-produced goods. This effect can run in either direction. An oil refinery will supply less gasoline at any given price when the price of heating oil rises, shifting the supply curve for gasoline to the left. But it will supply more gasoline at any given price when the price of heating oil falls, shifting the supply curve for gasoline to the right. This means that gasoline and other co-produced oil products are substitutes in production for refiners. In contrast, due to the nature of the production process, other goods can be complements in production. For example, producers of crude oil—oil-well drillers—often find that oil wells also produce natural gas as a byproduct of oil extraction. The higher the price at which drillers can sell natural gas, the more oil wells they will drill and the more oil they will supply at any given price for oil. As a result, natural gas is a complement in production for crude oil.

Supply Clarification

substitutes in production: co-produced products; goods for which producing more of one requires producing less of the other

Ex. Gasoline and heating oil

complements in production: pairs of goods that must be produced together

Ex. Crude oil and natural gas

Complements, in other words

• One of two goods that are produced jointly using the same resource -- that is, the production of one good automatically triggers the production of the other.

Substitutes, in other words

• In terms of supply (that is, substitute-in-production), one of two goods that replace each other in either producing using the same resources in an either/or fashion, such that an increase in the price of one good leads to a decrease in supply and a leftward shift in the supply curve for the other good. If the supply of good 1 decreases as the price of good 2 increases, the goods are substitutes-in-production.

Graphing Practice

• Demand?

• Supply

Reading for Supply Practice

Going back to equilibrium

• Equilibrium= market clearing price• The market price will fall if it is

above equilibrium and it will rise if it is below equilibrium

ANOTHER EXAMPLE USING COFFEE TO GO WITH YOUR BURGER

A price above equilibrium creates a surplus

A price below equilibrium creates a shortage

Warm Up-- How do you determine when something is cool or not cool?

Current Events

Remember, when supply has increased, we did not

say anything about the price!

Remember, at equilibrium, there is no tendency for anything

to change!

Up for auction: the answers to the next test!

How to get rid of your shorty (shortage):

$ Increase your price! $

Calling all Math fans! Students who truly get this! Graph fans!

Challenge fans!

Find the equilibrium:

Demand Equation: P= 100-2Qd

Supply Equation: P= 10+QsQe=30, Pe=$40

Shortage and Surplus

Determine the amountShortage, price falls below equilibriumSurplus, price falls above equilibrium

Surprise: checking answers

Changing Equilibrium1. What happens when the

demand curve shifts2. What happens when the

supply curve shifts3. Simultaneous shifts of

supply and demand

Our world is constantly changing

Practice makes perfect

Three things we have to know for AP:

1.What shifter is at work in the market?2.What curve is shifting and in what direction?3.What happens to equilibrium price and

quantity?4.http://www.youtube.com/watch?v=2XY3AvVgDn5.http://www.youtube.com/watch?v=z7VJIlfKy3c

Malcolm X The cost of the concert ticket (label

equilibrium price and quantity

Now, add in these three steps:

1. Change in tastes2. Demand shifts to the

right3. P and Q both increase…

but why?

There is a shortage!! So, the new equilibrium requires a

rise in price and quantity

What happens when the demand shifts inward?

-surplus- Price must fall- Equilibrium quantity

must fall

Jeans!! 1.Graph Malcolm X for jeans2.An input price has increased (cotton)3.Supply of jeans shifts to the left4.Price increases and quantity

decreases…why?

5.Now, draw a new Malcolm X for jeans and show technology improving cotton production

Warm Up:

Warm Up:How does this represent supply and demand?

Current Eventshttp://www.nytimes.com/2013/10/25/education/despite-rising-sticker-prices-actual-college-costs-stable-over-decade-study-says.html?_r=0

http://www.bbc.co.uk/sport/0/baseball/24754114

http://www.bbc.co.uk/news/world-24753585

http://www.bbc.co.uk/news/world-europe-24756409

http://www.bbc.co.uk/news/business-24610074

To summarize how a market responds to a change in demand: An increase in demand leads to a rise in both the equilibrium price and the equilibrium quantity. A decrease in

demand leads to a fall in both the equilibrium price and the equilibrium

quantity.

To summarize how a market responds to a change in supply: An increase in supply

leads to a fall in the equilibrium price and a rise in the equilibrium quantity. A decrease in supply leads to a rise in the equilibrium price and a fall in the equilibrium quantity.

• Increase in demand =‘s higher equilibrium price and a higher equilibrium quantity.

• Decrease in demand =‘s lower equilibrium price and a lower equilibrium quantity.

• Increase in supply =‘s lower equilibrium price and a higher equilibrium quantity.

• Decrease in supply =‘s higher equilibrium price and a lower equilibrium quantity.

Now, what happens when they move at the SAME TIME?!

(beat song) (skip from 1:25-1:45!)

1.Demand and Supply move in the same

direction2.Demand and Supply

move in opposite directions

Two options:

When demand increases and supply decreases, the equilibrium price rises but the change in equilibrium quantity is ambiguous.

When demand decreases and supply increases, the equilibrium price falls but the change in equilibrium quantity is ambiguous.

Opposite

http://www.reffonomics.com/TRB/chapter4/SDshiftsbuttons.swf

http://www.reffonomics.com/TRB/chapter4/supplyanddemandTEAMquestionsINTERACTIVE/SandDTEAMinteractive.html

When both supply and demand increase, the equilibrium quantity increases but the change in equilibrium price in ambiguous.

When both supply and demand decrease, the equilibrium quantity decreases but the change in equilibrium price is ambiguous.

Same

Summary: Opposite= quantity is ambiguous

Same= price is ambiguous

For example, when the Winter Olympics come out, the popularity of snow boarding increases. At the same time, more companies produce more snowboards. How will these effect the market?

1.Graph the Demand Shift and the effects on price and quantity of snowboards (both increase)

2.Graph the Supply Shift and the price decreases and quantity increases

Both shifts generate an increase in the quantity, so we can certainly predict a higher equilibrium quantity of snowboards. However the change in price depends

on which of the two shifts is stronger.

****There could be no change but

there could be an increase or

decrease as well for price***

For each of the following examples, explain how the indicated change affects supply or demand for the good in question and how the shift you describe affects equilibrium price and quantity.

a. As the price of gasoline fell in the United States during the 1990s, more people bought large cars.

b. As technological innovation has lowered the cost of recycling used paper, fresh paper made from recycled stock is used more frequently.

c. When a local cable company offers cheaper pay-per-view films, local movie theaters have more unfilled seats.

The decrease in the price of gasoline caused a rightward shift in the demand for large cars. As a result of the shift,

the equilibrium price of large cars rose and the equilibrium quantity of large cars bought and sold also

rose

The technological innovation has caused a rightward shift in the supply of fresh paper made from recycled stock. As a result of this shift, the equilibrium price of fresh paper made from recycled stock has fallen and the equilibrium

quantity bought and sold has risen.

The fall in the price of pay-per-view movies causes a leftward shift in the demand for movies at local movie

theaters. As a result of this shift, the equilibrium price of movie tickets falls and the equilibrium number of people

who go to the movies also falls.

Shifting worksheet practice!

Surprise

Worksheets!!Jelly Bean and shifters!

Skip number four for jelly beans!

For Example

• An increase in the supply of grapes and a decrease in the demand for wine led to lower wine prices in 2001.

• An increase in the price of jumbo tires used on mining equipment led to higher prices for copper, coal, and zinc in 2006.

The equilibrium price aka the market-clearing price.

• When supply and demand change, equilibrium price and output change.

• When only one curve shifts, the resulting changes in equilibrium price and quantity can be predicted.

• But when both curves shift, we can only predict the change in equilibrium price in some cases, and the change in equilibrium quantity in others, but never both.

Use a S&D graph to explain this double shift

Answer the following Question

• The price of cameras decreases and people buy more cameras, this can be explained by:

A) an increase in demand for cameras.B) an increase in the supply of cameras.C) a decrease in demand for cameras.D) A decrease in the supply of cameras.

• The price of cameras decreases and people buy more cameras, this can be explained by:

A) an increase in demand for cameras.B) an increase in the supply of cameras. Correct!C) a decrease in demand for cameras.D) A decrease in the supply of cameras.

http://angel.bfwpub.com/section/default.asp?id=krugman_ap_econhelpern63550

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

Voluntary Exchange Terms

73

Analyze Sale of Hamburgers Again (getting hungry yet?)WHAT IS THE RESULT FROM CHANGES BELOW

1. Price of sushi (a substitute) increases2. New technology cuts production time 1/23. Price of burgers falls from $3 to $1. 4. Price for ground beef triples5. Fingers found in multiple burger restaurants.

1. Before Change (Draw equilibrium) 2. The Change (S or D, Identify Shifter)3. After Change (Price and Quantity After)

1. Price of sushi (a substitute) increases D increases

2. New technology cuts production time ½ S increases

3. Price of burgers falls from $3 to $1. no shift

4. Price for ground beef triples s decreases

5. Fingers found in multiple burger restaurants. D decreases