Review
1. Identify the 5 shifters of demand
2. Identify the 6 shifters of supply
3. Explain why price DOESN’T shift the curve
4. Identify 10 stores in the mall
1
Putting Supply and Demand
Together!!!
2
Supply and Demand are put together to determine
equilibrium price and equilibrium quantity
Demand P
Schedule $5
P Qd
Supply
Schedule
S
P Qs
4
$5 10
$5 50
3
$4 20
$3 30
$2 50
$1 80
$4 40
2
$3 30
1
o
D
10
20
30
40
50
60
70
80
Q
$2 20
$1 10
3
Supply and Demand are put together to determine
equilibrium price and equilibrium quantity
Demand P
Schedule $5
P Qd
S
P Qs
4
$5 10
Equilibrium Price = $3
(Qd=Qs)
3
$4 20
$3 30
$2 50
$1 80
Supply
Schedule
2
$5 50
$4 40
$3 30
1
D
o
10
20
30
40
50
60
70
Equilibrium Quantity is 30
80
Q
$2 20
$1 10
4
Supply and Demand are put together to determine
equilibrium price and equilibrium quantity
Demand P
Schedule $5
P Qd
3
$4 20
$2 50
$1 80
S
P Qs
4
$5 10
$3 30
Supply
Schedule
2
What if the price
increases to $4?
1
o
$5 50
$4 40
$3 30
D
10
20
30
40
50
60
70
80
Q
$2 20
$1 10
5
At $4, there is disequilibrium. The quantity
demanded is less than quantity supplied.
Demand P
Schedule $5
P Qd
How much is the
surplus at $4?
Answer: 20
$4 20
$1 80
P Qs
4
3
$2 50
S
Surplus
(Qd<Qs)
$5 10
$3 30
Supply
Schedule
2
$4 40
$3 30
1
o
$5 50
D
10
20
30
40
50
60
70
80
Q
$2 20
$1 10
6
How much is the surplus if the price is $5?
Demand P
Schedule $5
P Qd
3
$4 20
$2 50
$1 80
S
P Qs
4
$5 10
$3 30
Supply
Schedule
2
What if the Answer:
price 40
decreases to $2?
1
o
D
10
20
30
40
50
60
70
80
Q
$5 50
$4 40
$3 30
$2 20
$1 10
7
At $2, there is disequilibrium. The quantity
demanded is greater than quantity supplied.
Demand P
Schedule $5
P Qd
S
P Qs
4
How much is the
shortage at $2?
Answer: 30
$5 10
3
$4 20
$3 30
$2 50
$1 80
Supply
Schedule
2
o
10
20
30
40
$4 40
$3 30
Shortage
(Qd>Qs)
1
$5 50
D
50
60
70
80
Q
$2 20
$1 10
8
How much is the shortage if the price is $1?
Demand P
Schedule $5
P Qd
Supply
Schedule
S
P Qs
4
$5 10
Answer: 70
3
$4 20
$3 30
$2 50
$1 80
$5 50
$4 40
2
$3 30
1
o
D
10
20
30
40
50
60
70
80
Q
$2 20
$1 10
9
The FREE MARKET system automatically pushes the
price toward equilibrium.
Demand P
Schedule $5
P Qd
Supply
Schedule
S
When there is a
surplus, producers P Qs
lower prices
$5 50
When there is a
shortage, producers $4 40
raise prices
$3 30
4
$5 10
3
$4 20
$3 30
$2 50
$1 80
2
1
o
D
10
20
30
40
50
60
70
80
Q
$2 20
$1 10
10
Shifting Supply and Demand
11
Assume shifts in supply or demand change
equilibrium P and Q instantaneously
12
Supply and Demand Analysis
Easy as 1, 2, 3
1. 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)
Let’s Practice!
13
S&D Analysis Practice
1. Before Change (Draw equilibrium)
2. The Change (S or D, Identify Shifter)
3. After Change (Price and Quantity After)
Analyze Hamburgers
1. Price of sushi (a substitute) increases
2. New grilling technology cuts
production time in half
3. Price of burgers falls from $3 to $1.
4. Price for ground beef triples
5. Human fingers found in multiple
burger restaurants.
14
Double Shifts
• Suppose the demand for sports cars fell at the
same time as production technology improved.
• Use S&D Analysis to show what will happen to
PRICE and QUANTITY.
If TWO curves shift at the same time,
EITHER price or quantity will be
indeterminate.
15
Voluntary Exchange
In the free-market, buyers and sellers voluntarily come
together to seek mutual benefits.
16
Voluntary Exchange
In the free-market, buyers and sellers voluntarily come
together to seek mutual benefits.
17
Voluntary Exchange
In the free-market, buyers and sellers voluntarily come
together to seek mutual benefits.
18
Voluntary Exchange
In the free-market, buyers and sellers voluntarily come
together to seek mutual benefits.
19
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’ MaximumSellers Minimum-
PriceConsumer’s SurplusProducer’s Surplus20
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
21
Consumer and Producer’s Surplus
Calculate the area of:
1. Consumer Surplus
2. Producer Surplus
3. Total Surplus
P
$10
S
8
6
$5
4
CS
PS
2
1
D
2 4 6 8 10
Q
22
Pearl Exchange
Activity
23