[PRINECON] (P2) M2: The Market Forces of Supply and Demand

1.Shift the demand curve for cigarettes and other tobacco products

2.Try to raise the price of cigarettes

Two ways to reduce the quantity of smoking demanded: (2)

Shift the demand curve for cigarettes and other tobacco products

–Public service announcements

–Mandatory health warnings on cigarette packages

–Prohibition of cigarette advertising on television

•If successful

–Shift demand curve to the left

Try to raise the price of cigarettes

–Tax the manufacturer: higher price

–Movement along demand curve

•10% ↑ in price → 4% ↓ in smoking

•Teenagers: 10% ↑ in price → 12% ↓ in smoking

•Demand for cigarettes vs. demand for marijuana

–Appear to be complements

Quantity supplied

[Supply]

–Amount of a good

–Sellers are willing and able to sell

Law of supply

[Supply]

–Other things equal

–When the price of a good rises, the  quantity supplied of the good also rises

–When the price falls, the quantity supplied falls as well

Supply

Relationship between the price of a good and the quantity supplied

Market supply

Sum of the supplies of all sellers for a good or service

Market supply curve

–Sum of individual supply curves horizontally

–Total quantity supplied of a good varies

•As the price of the good varies

•All other factors that affect how much suppliers want to sell are hold constant

Increase in supply

•Any change that increases the quantity supplied at every price

•Supply curve shifts right

Decrease in supply

•Any change that decreases the quantity supplied at every price

•Supply curve shifts left

–Input prices

–Technology

–Expectations about future

–Number of sellers

Variables that can shift the supply curve (4)

Input prices

–Supply is negatively related to prices of inputs

–Higher input prices: decrease in supply

Technology

Advance in _____: reduces firms’ costs: increase in supply

Expectations about future

[Supply]

–Affect current supply

–Expected higher prices

•Decrease in current supply

Number of sellers, increases

[Supply] Market supply increases

Equilibrium

[Supply and Demand Together]

A situation in which market price has reached the level where

•Quantity supplied = Quantity demanded

Equilibrium

–Various forces are in balance

–Supply and demand curves intersect

Equilibrium price

[Supply and Demand Together]

–Balances quantity supplied and quantity demanded

–Market-clearing price

Equilibrium quantity

[Supply and Demand Together]

Quantity supplied and quantity demanded at the equilibrium price

Surplus

[Supply and Demand Together]

–Quantity supplied > Quantity demanded

–Excess supply

Surplus

[Supply and Demand Together]

–Downward pressure on price

•Movements along the demand and supply curves

•Increase in quantity demanded

•Decrease in quantity supplied

Shortage

[Supply and Demand Together]

–Quantity demanded > Quantity supplied

–Excess demand

Shortage

[Supply and Demand Together]

–Upward pressure on price

•Movements along the demand and supply curves

•Decrease in quantity demanded

•Increase in quantity supplied

Law of supply and demand

–The price of any good adjusts

•To bring the quantity supplied and the quantity demanded for that good into balance

–In most markets

•Surpluses and shortages are temporary

1. Decide whether the event shifts the supply curve, the demand curve, or, in some cases, both curves

2. Decide whether the curve shifts to the right or to the left

3. Use the supply-and-demand diagram

•Compare the initial and the new equilibrium

•Effects on equilibrium price and quantity

[Supply and Demand Together]

Three steps to analyzing changes in equilibrium

Shift in the supply curve

[Shifts vs. movements along curves]

Change in supply

Movement along a fixed supply curve

[Shifts vs. movements along curves]

Change in the quantity supplied

Shift in the demand curve

[Shifts vs. movements along curves]

Change in demand

Movement along a fixed demand curve

[Shifts vs. movements along curves]

Change in the quantity demanded

Supply and demand together

Determine the prices of the economy’s many different goods and services

Price Gouging

“Connecticut should pass its Senate Bill 60, which states that during a ‘severe weather event emergency, no person within the chain of distribution of consumer goods and services shall sell or offer to sell consumer goods or services for a price that is unconscionably excessive.’”

Prices

–Signals that guide the allocation of resources

–Mechanism for rationing scarce resources

–Determine who produces each good and how much is produced