1. Only two things can change the
relative scarcity of a product
 δ (Supply)

δ (Demand) 1

2. How do changes in the
SUPPLY Curve or the
DEMAND Curve affect
the equilibrium prices
and the equilibrium
quantities exchanged?
2

3. for the Quantity Exchanged
 It’s (ceteris paribus) simple.
– An increase in the SUPPLY Curve
or DEMAND Curve causes an
increase in quantity exchanged.
– A decrease in the SUPPLY Curve or
DEMAND Curve causes a decrease
in quantity exchanged.
3

4. Equilibrium Price
 It’s (ceteris paribus) simple.
– An increase in the SUPPLY Curve or
a decrease in the DEMAND Curve
puts downward pressure on prices.
– A decrease in the SUPPLY Curve or
an increase in the DEMAND Curve
puts upward pressure on prices.
4

5. Changes in SUPPLY or
DEMAND
for changes (δ) in Impact on Impact on
the respective Equilibrium Quantity
Curves Price Exchanged
Increase in SUPPLY Down Up
Decrease in SUPPLY Up Down
Increase in DEMAND Up Up
Decrease in DEMAND Down Down
5

6. Changes in relative scarcity
 A product becomes more scarce if:
 DEMAND increases
 SUPPLY decreases
– and the price of the product will rise
 A product becomes less scarce if:
 DEMAND ____________
 SUPPLY _____________
– and the price of the product will _______
6

7. Changes in relative scarcity
 A product becomes more scarce if:
 DEMAND increases
 SUPPLY decreases
– and the price of the product will rise
 A product becomes less scarce if:
 DEMAND decreases
 SUPPLY increases
– and the price of the product will fall
7

8. Three Steps of Market
Analysis
1. Identify the Market
 the product, the place, the time
1. Identify the change
 SUPPLY or DEMAND, increase or decrease?
1. Identify the effect on relative scarcity, the
effect on price, the effect on quantity
8

9. A MAJOR RULE (to remember):
One event causes either
the DEMAND to change or the
SUPPLY to change, but never
causes both of them to change.
9

10. with respect to: Predicting the Future
For example consider:
The world market for oil 2005. Iraqi oil
wells come back on line.
DEMAND or SUPPLY? Increase or
decrease?
What is the impact on relative scarcity,
on the price and on the quantity?
10

11. with respect to: Predicting the Future
For another example consider:
What happened in San Francisco in 2011 in
the market for 49er stuff when the 49ers,
under the amazing leadership of Alex Smith
the football playing economist, leads the 49ers
win the 2012 Super Bowl.
DEMAND or SUPPLY? Increase or
decrease?
What is the impact on relative scarcity, on
the price and on the quantity?
11

12. with respect to: Explaining the Future
What would you expect to happen in the California
gasoline marketplace this upcoming summer if:
OPEC increases supply
Californians
– decide to buy more, larger more powerful cars and
further decide to drive them farther and faster
– avoid mass transit
Some oil refineries are shut down for maintenance
What would be the expected impact on the relative
scarcity and the price of gasoline?
12

13. HAZARD A GUESS: What has caused these prices to change?
 Computer prices fall.
 It is September and peach, berry, and other fruit
prices rise.
 The price of a major league baseball star’s rookie
card is falling.
 The price of artichokes rises.
 Saudi king dies and price of oil rises.
 Dukes of Hazzard comes out and price of 1969
Dodge Charger increases.
 The price of yo-yo’s go up and down.
 The price of ancient statues falls.
13

14. with respect to: Explaining the Past
 Europe in 1510. The market for spices
after Vasco da Gama found a less costly
path to spices.
 SUPPLY or DEMAND? Increase or
decrease?
 What is the impact or relative scarcity,
on the price and on the quantity
14

15. Explaining the Past
 Sacramento in 1850. Consider the
market for pick axes and pans.
 SUPPLY or DEMAND? Increase or
decrease?
 Expected impact on relative scarcity,
on the price and on the quantity
15

16. 16

17. A Price Ceiling is a maximum legal
price set BELOW the equilibrium
price determined by the free market.
It provides economically
perverse incentives and
thereby causes a shortage.
Ceiling, below, shortage
(CBS)
17

18. Price controls (a ceiling)
 Assume that a market is in equilibrium and
there is no change in supply or demand;
relative scarcity has not changed.
 A government sets a legal price below the
equilibrium (price ceiling)
 Buyers will want to buy _________
 Suppliers will want to supply ________
 There is a (surplus or shortage).
 Examples are: rent controls, doctors,
prescription drugs
18

19. A Price Floor is a minimum legal
price set ABOVE the equilibrium
price determined by the free market.
It provides economically
perverse incentives and
thereby causes a surplus.
Floor, above, surplus
(FAS)
19

20. Price Controls (floor)
 Assume that a market is in equilibrium and there
is no change in supply or demand; relative
scarcity has not changed.
 A government sets a legal price above the
equilibrium
 Buyers will want to buy _________
 Suppliers will want to supply ________
 There is a (surplus or shortage).
 Examples are: minimum wage, agricultural price
supports
20

21. Price Controls
(after a natural disaster)
 The market for lumber in Los Angeles,
after an earthquake destroys many
buildings
 Demand has increased.
 Lumber is now relatively______ scarce.
 Price would be expected to ___________
21

22. Price controls
(after natural disaster = ceiling)
 To avoid “price gouging” government sets
legal price below new higher equilibrium
price.
 At the lower price, demanders demand ____
 At the lower price, suppliers supply ______
 The price ceiling causes a ________
22

23. Another Example
 Maximum rent on apartments set below
equilibrium
 Lower price will have what effect on
prospective demanders?
 Lower price will have what effect on
prospective suppliers?
 Price being set below the market clearing
price will cause a ____________.
23

24. What will happen to the price
of energy in California?
 if the population increases.
 if people have more computers.
 If many power plants are shut down for
maintenance.
 if the snow pack in the Sierras is lower than
normal.
24

25. Let’s save the energy
consumers of California
 Impose a price ceiling (a legal price below the
equilibrium)
 As the price falls, the incentives for the
suppliers and the demanders changes
 With a lower price, suppliers will supply
________
 With a lower price, demanders will want to buy
_________
 There will be a __________ of energy!
25

26. Let’s save the energy
consumers of California
26

27. Market Analysis
Change in Change in Equilibrium Quantity Quantity Quantity
Supply Demand Price Supplied Demanded Exchanged
Increase Down Up Up
_________ _________
Decrease Up Down Down
_________ _________
Increase Up Up Up
_________ _________
Decrease Down Down Down
_________ _________
27

28. How do changes in
DEMAND affect quantity
supplied ?
 A change in quantity supplied occurs in the short-
run as suppliers respond to a change in the price
of the product.
 If DEMAND increases then price will rise and
suppliers will attempt to squeeze more out of their
resources.
 If DEMAND falls then price will fall and the action
will cause suppliers to SUPPLY less.
 Change in demand causes a change in price
which causes a change in quantity supplied.
28

29. How do changes in supply
affect quantity demanded ?
 A change in quantity demanded occurs as
buyers respond to a change in the price of the
product. If SUPPLY increases then prices will
fall and buyers will buy more.
 If SUPPLY decreases then prices will rise and
buyers will buy less.
 Change in SUPPLY causes a change in price
which causes a change in quantity demanded.
29

30. The “Usual”
Questions
 DEMAND or SUPPLY?
 Increase or decrease?
 Equilibrium price?
 Quantity supplied?
 Quantity demanded?
 Quantity exchanged?
30