Unit 1-8: Basic Economic Concepts

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Supply and Demand AnalysisEasy 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! 2

S&D Analysis Practice

Analyze Hamburgers1. New grilling technology cuts production time in half2. Price of chicken sandwiches (a substitute) increases3. Price of hamburgers falls from $3 to $1. 4. Price for ground beef triples5. Human 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)

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4

1. New grilling technology cuts production time in half

Price

4

D

S

QuantityQe

S1

Pe

P1

Q1

P decreaseQ increase

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2. Price of chicken sandwiches (a substitute) increases

Price

D

S

QuantityQe

D1

Pe

P1

Q1

P increaseQ increase

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3. Price of hamburgers falls from $3 to $1.

Price

D

S

QuantityQe

Pe

P1

Qs

ShortageQd increaseQs decrease

Qd

7

4. Price for ground beef triples

Price

D

S

QuantityQe

S1

Pe

P1

Q1

P increaseQ decrease

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5. Human fingers found in multiple burger restaurants

Price

D

S

QuantityQe

D1

Pe

P1

Q1

P decreaseQ decrease

Double Shifts• Suppose the demand for milk increased at

the same time as production technology improved.

• Use S&D Analysis to show what will happen to PRICE and QUANTITY.

Double Shift Rule: If TWO curves shift at the same time, EITHER price or quantity

will be indeterminate (ambiguous).9

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Demand increases AND supply increases

Price

D

S

QuantityQe

D1

PeP1

Q1P indeterminate

Q increase

S1

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P indeterminateQ increase

Trick: Draw it out separately and

combine the results

12

P decreaseQ indeterminate

What if supply increases and demand falls?

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P indeterminateQ decrease

What if supply decreases and demand falls?

Supply and Demand Practice Worksheet

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Example of Voluntary ExchangeEx: 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’ Maximum-

Sellers Minimum-

Price-

Consumer’s Surplus-

Producer’s Surplus-

$20,000

$15,000

$18,000

$2,000

$3,00015

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

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