supply and demand: supply increases and decreases

Supply INCREASES

Supply and DemandSupply INCREASES

Price of

___

Quantity of _________

Demand*

Supply*

100

$1.00

ASSUMPTIONS:1. The Demand and Supply CurvesAre rigid (they keep the same Shape/slope)2. The market equilibrium price is $1.00 and the equilibrium quantity (Qd=Qs) is 100 units.

Qd=Qs

Supply and DemandSupply INCREASES

Price of

___

Quantity of _________

Demand*

Supply*

100

$1.00

Qd=Qs

NOW: Something in thisMarket causes SUPPLY to INCREASE by 50%.

1. Resource prices DECREASE2. Taxes DECREASE3. Subsidies INCREASE4. INCREASE in Technology5. Positive Extraneous variable6. Producer Expectations

Supply and DemandSupply INCREASES

Price of

___

Quantity of _________

Demand*

Supply*

100

$1.00

Qd=Qs

This means that at EVERY GIVEN PRICE the Quantity SUPPLIED is Going to be 50% more.

Supply and DemandSupply INCREASES

Price of

___

Quantity of _________

Supply*

100

$1.00

150Qd=Qs

This means that at EVERY GIVEN PRICE relative to Demand* the

Quantity Demanded is going to be 50% more.

$2.00

$.50

50 75 225

+50%

+50%

+50%

Demand 1Demand*

Supply 1

Supply and DemandSupply INCREASES

Price of

___

Quantity of _________

Supply*

100

$1.00

150Qd=Qs

$2.00

$.50

50 75 225

Demand 1Demand*

Supply 1

Now we have a NEW Supply CurveSupply 1

The Supply Curve has shifted to the RIGHT

Supply and DemandSupply INCREASES

Price of

___

Quantity of _________

Supply*

100

$1.00

150Qd=Qs

$2.00

$.50

50 75 225

Demand 1Demand*

Supply 1

Let’s assume for the moment that the PRICE does NOT change in reaction to this INCREASE in DEMAND

Supply and DemandSupply INCREASES

Price of

___

Quantity of _________

Supply*

100

$1.00

150Qd=Qs

$2.00

$.50

50 75 225

Demand 1Demand*

Supply 1

At a price of $1.00 the Quantity Supplied is going to be 150 BUT at a price of $1.00 there is still going to be a Quantity Demanded of 100.

OUR MARKET IS IN DIS-EQUILIBRIUM!!

Supply and DemandSupply INCREASES

Price of

___

Quantity of _________

Supply*

100

$1.00

150Qd=Qs

$2.00

$.50

50 75 225

Demand 1Demand*

Supply 1

Supply and DemandSupply INCREASES

Price of

___

Quantity of _________

Supply*

100

$1.00

150Qd=Qs

$2.00

$.50

50 75 225

Demand 1Demand*

Supply 1

At a price of $1.00 the Quantity Supplied is going to be 150 BUT at a price of $1.00 there is still going to be a Quantity Demanded of 100.

OUR MARKET IS IN DIS-EQUILIBRIUM!!

Notice: Quantity DemandedIs LESS than Quantity SuppliedAt this price

QsQd

Supply and DemandSupply INCREASES

Price of

___

Quantity of _________

Supply*

100

$1.00

150Qd=Qs

$2.00

$.50

50 75 225

Demand 1Demand*

Supply 1

At this Price and Quantity DemandedThere is no market---The Market Demanders are NOT going to Demand that Quantity at that price. Quantity Supplied is GREATER than Quantity Demanded

Supply and DemandSupply INCREASES

Price of

___

Quantity of _________

Supply*

100

$1.00

150Qd=Qs

$2.00

$.50

50 75 225

Demand 1Demand*

Supply 1

We have a SURPLUS in the Market!

SurplusSurplus

Supply and DemandSupply INCREASES

Price of

___

Quantity of _________

Supply*

100

$1.00

150Qd=Qs

$2.00

$.50

50 75 225

Demand 1Demand*

Supply 1

SurplusSurplus

This is where it is crucial to understand the difference between a CHANGE in DEMAND or Supply vs a CHANGE in Quantity Demanded or Quantity Supplied

Supply and DemandSupply INCREASES

Price of

___

Quantity of _________

Supply*

100

$1.00

150Qd=Qs

$2.00

$.50

50 75 225

Demand 1Demand*

Supply 1

SurplusSurplus

With our change in SUPPLY finished we now turn the focus to MOVEMENTS along our new Supply CURVE Relative to MOVEMENTS along our Demand CURVE…PRICE is going to dictate our changes in Quantity Demanded AND changes in Quantity Supplied

Supply and DemandSupply INCREASES

Price of

___

Quantity of _________

Supply*

100

$1.00

150Qd=Qs

$2.00

$.50

50 75 225

Demand 1Demand*

Supply 1

SurplusSurplus

Because there is a SURPLUS in this market, the pressure on the price of the good is going to be DOWNWARD. Let’s assume the Price DECREASES to $.85

Supply and DemandSupply INCREASES

Price of

___

Quantity of _________

Supply*

100

$1.00

150Qd=Qs

$2.00

$.50

50 75 225

Demand 1Demand*

Supply 1

At $.85 the Quantity Demanded (dictated by DEMAND 1) is 125 AND the Quantity Supplied (Dictated by Supply*) is135.$.85

135125

Supply and DemandSupply INCREASES

Price of

___

Quantity of _________

Supply*

100

$1.00

150Qd=Qs

$2.00

$.50

50 75 225

Demand 1Demand*

Supply 1

$.85

135125

We are STILL not in Market Equilibrium…Quantity Demanded (60 ) is LESS than Quantity Supplied (85)…A SURPLUS STILL exists in this market. The gap has closed some, but we are not in Market Equilibrium yet where Qd=Qs.

Surplus

Supply and DemandSupply INCREASES

Price of

___

Quantity of _________

Supply*

100

$1.00

150Qd=Qs

$2.00

$.50

50 75 225

Demand 1Demand*

Supply 1

$.85

135125

The pressure on the price is going to continue...Can you see where we are heading???? The SURPLUS will only be cleared when we reach the intersection of Demand and Supply!!

Supply and DemandSupply INCREASES

Price of

___

Quantity of _________

Supply*

100

$1.00

150Qd=Qs

$2.00

$.50

50 75 225

Demand 1Demand*

Supply 1

$.85

135125

As the price decreases Demanders are increasing their Quantity Demanded because as the price Decreases the quantity demanded Increases (Law of Demand).

Supply and DemandSupply INCREASES

Price of

___

Quantity of _________

Supply*

100

$1.00

150Qd=Qs

$2.00

$.50

50 75 225

Demand 1Demand*

Supply 1

$.85

135125

Current suppliers (producers) are DECREASING production (Quantity Supplied) in response to the LOWER price they are receiving (The Law of Supply)

Supply and DemandSupply INCREASES

Price of

___

Quantity of _________

Supply*

100

$1.00

150Qd=Qs

$2.00

$.50

50 75 225

Demand 1Demand*

Supply 1

$.85

135125

At a Price of $.75 (roughly) Qd = Qs at 130 Units.

The market is back in Equilibrium.$.75

130

Supply and DemandSupply INCREASES

Price of

___

Quantity of _________

S*

Pe

D*

S 1

P1

Qe Q1

This is a correctly labeled Supply and Demand graph showing an INCREASE in Supply…Notice I have replaced the numerical price and quantity with alphabetical designations and abbreviated the Demand and Supply Curves. This is the way I would like you to draw and label your supply and demand graphs from now on.

Supply Decreases

Supply and DemandSupply DECREASES

Price of

___

Quantity of _________

Demand*

Supply*

100

$1.00

ASSUMPTIONS:1. The Demand and Supply CurvesAre rigid (they keep the same Shape/slope)2. The market equilibrium price is $1.00 and the equilibrium quantity (Qd=Qs) is 100 units.

Qd=Qs50 15075 125 22525

Supply and DemandSupply INCREASES

Price of

___

Quantity of _________

Demand*

Supply*

100

$1.00

Qd=Qs

NOW: Something in thisMarket causes SUPPLY to DECREASE by 50%.

1. Resource prices INCREASE2. Taxes INCREASE3. Subsidies DECREASE4. DECREASE in Technology5. Negative Extraneous variable6. Producer Expectations

Supply and DemandSupply INCREASES

Price of

___

Quantity of _________

Demand*

Supply*

100

$1.00

Qd=Qs

This means that at EVERY GIVEN PRICE relative to Supply* the

Quantity Supplied is going to be 50% LESS.

Supply and DemandSupply DECREASES

Price of

___

Quantity of _________

Demand*

Supply*

100

$1.00

Qd=Qs

$2.00

$.50

50 15075 125 22525

This means that at EVERY GIVEN PRICE relative to Supply* the

Quantity Supplied is going to be 50% LESS.

-50%

-50%

-50%

Supply and DemandSupply DECREASES

Price of

___

Quantity of _________

Demand*

Supply*

100

$1.00

Qd=Qs

$2.00

$.50

50 15075 125 22525

-50%

-50%

-50%

Now we have a NEW Supply CurveSupply 1

The Supply Curve has shifted to the LEFT

Supply 1

Supply and DemandSupply DECREASES

Price of

___

Quantity of _________

Demand*

Supply*

100

$1.00

Qd=Qs

$2.00

$.50

50 15075 125 22525

Supply 1

Let’s assume for the moment that the PRICE does NOT change in reaction to this DECREASE in SUPPLY

Supply and DemandSupply DECREASES

Price of

___

Quantity of _________

Demand*

Supply*

100

$1.00

Qd=Qs

$2.00

$.50

50 15075 125 22525

Supply 1

At a price of $1.00 the Quantity Supplied is going to be 50 BUT at a price of $1.00 there is still going to be a Quantity Demanded of 100. OUR MARKET IS IN DIS-EQUILIBRIUM!!

Supply and DemandSupply DECREASES

Price of

___

Quantity of _________

Demand*

Supply*

100

$1.00

Qd=Qs

$2.00

$.50

50 15075 125 22525

Supply 1

Notice: Quantity DemandedIs Greater than Quantity SuppliedAt this price

At a price of $1.00 the Quantity Supplied is going to be 50 BUT at a price of $1.00 there is still going to be a Quantity Demanded of 100.

OUR MARKET IS IN DIS-EQUILIBRIUM!!

Qs Qd

Supply and DemandSupply DECREASES

Price of

___

Quantity of _________

Demand*

Supply*

100

$1.00

Qd=Qs

$2.00

$.50

50 15075 125 22525

Supply 1

Notice: Quantity DemandedIs Greater than Quantity SuppliedAt this price

Qs Qd

At this Price and Quantity SuppliedThere is no market---The Market Suppliers are NOT going to Supply that Quantity at that price. Quantity Demanded is GREATER than Quantity Supplied

Supply and DemandSupply DECREASES

Price of

___

Quantity of _________

Demand*

Supply*

100

$1.00

Qd=Qs

$2.00

$.50

50 15075 125 22525

Supply 1

Notice: Quantity DemandedIs Greater than Quantity SuppliedAt this price

Qs Qd

We have a SHORTAGE in the Market!

ShortageShortage

Supply and DemandSupply DECREASES

Price of

___

Quantity of _________

Demand*

Supply*

100

$1.00

Qd=Qs

$2.00

$.50

50 15075 125 22525

Supply 1

Notice: Quantity DemandedIs Greater than Quantity SuppliedAt this price

Qs Qd

ShortageShortage

This is where it is crucial to understand the difference between a CHANGE in DEMAND or Supply vs a CHANGE in Quantity Demanded or Quantity Supplied

Supply and DemandSupply DECREASES

Price of

___

Quantity of _________

Demand*

Supply*

100

$1.00

Qd=Qs

$2.00

$.50

50 15075 125 22525

Supply 1

Notice: Quantity DemandedIs Greater than Quantity SuppliedAt this price

Qs Qd

ShortageShortage

With our change in SUPPLY finished we now turn the focus to MOVEMENTS along our new Supply CURVE Relative to MOVEMENTS along our Demand CURVE…PRICE is going to dictate our changes in Quantity Demanded AND changes in Quantity Supplied

Supply and DemandSupply DECREASES

Price of

___

Quantity of _________

Demand*

Supply*

100

$1.00

Qd=Qs

$2.00

$.50

50 15075 125 22525

Supply 1

Notice: Quantity DemandedIs Greater than Quantity SuppliedAt this price

Qs Qd

Because there is a SHORTAGE in this market, the pressure on the price of the good is going to be UPWARD. Let’s assume the Price INCREASES to $1.20

Supply and DemandSupply DECREASES

Price of

___

Quantity of _________

Demand*

Supply*

100

$1.00

Qd=Qs

$2.00

$.50

50 15075 125 22525

Supply 1

Notice: Quantity DemandedIs Greater than Quantity SuppliedAt this price

Qs Qd

$1.30

60 85

At $1.30 the Quantity Demanded (dictated by DEMAND 1) is 60 AND the Quantity Supplied (Dictated by Supply*) in 85.

Supply and DemandSupply DECREASES

Price of

___

Quantity of _________

Demand*

Supply*

100

$1.00

Qd=Qs

$2.00

$.50

50 15075 125 22525

Supply 1

Notice: Quantity DemandedIs Greater than Quantity SuppliedAt this price

Qs Qd

$1.30

60 85

ShortageShortage

We are STILL not in Market Equilibrium…Quantity Demanded (60 ) is LESS than Quantity Supplied (85)…A SURPLUS STILL exists in this market. The gap has closed some, but we are not in Market Equilibrium yet where Qd=Qs.

Supply and DemandSupply DECREASES

Price of

___

Quantity of _________

Demand*

Supply*

100

$1.00

Qd=Qs

$2.00

$.50

50 15075 125 22525

Supply 1

Notice: Quantity DemandedIs Greater than Quantity SuppliedAt this price

Qs Qd

$1.30

60 85

The pressure on the price is going to continue...Can you see where we are heading???? The SHORTAGE will only be cleared when we reach the intersection of Demand and Supply!!

Supply and DemandSupply DECREASES

Price of

___

Quantity of _________

Demand*

Supply*

100

$1.00

Qd=Qs

$2.00

$.50

50 15075 125 22525

Supply 1

Notice: Quantity DemandedIs Greater than Quantity SuppliedAt this price

Qs Qd

$1.30

60 85

As the price increases Demanders are decreasing their Quantity Demanded because as the price Increases the quantity demanded Decreases (Law of Demand).

Supply and DemandSupply DECREASES

Price of

___

Quantity of _________

Demand*

Supply*

100

$1.00

Qd=Qs

$2.00

$.50

50 15075 125 22525

Supply 1

Notice: Quantity DemandedIs Greater than Quantity SuppliedAt this price

Qs Qd

$1.30

60 85

Current suppliers (producers) are INCREASING production (Quantity Supplied) in response to the HIGHER price they are receiving (The Law of Supply)

Supply and DemandSupply DECREASES

Price of

___

Quantity of _________

Demand*

Supply*

100

$1.00

Qd=Qs

$2.00

$.50

50 15075 125 22525

Supply 1

Notice: Quantity DemandedIs Greater than Quantity SuppliedAt this price

Qs Qd

$1.30

60 85

At a Price of $1.80 (roughly) Qd = Qs at 75 Units.

The market is back in Equilibrium.$1.80

Supply and DemandSupply DECREASES

Price of

___

Quantity of _________

D*

S*

Qe

Pe

Qd=QsQ1

S1

P1

This is a correctly labeled Supply and Demand graph showing an INCREASE in DEMAND…Notice I have replaced the numerical price and quantity with alphabetical designations and abbreviated the Demand and Supply Curves. This makes this is the way I would like you to draw and label your supply and demand graphs from now on.