NOW PLAYING:

MARKET ANALYSIS
Presented by:
Mr. Kuzmich
Economics

Only two things can change

the relative scarcity of a
product

Supply

Demand

How do changes in supply

or demand affect
equilibrium prices and
quantities exchanged?

Quantity Exchanged
Its

simple.

An

increase in supply or demand causes

an increase in quantity exchanged.
A decrease in supply or demand causes
a decrease in quantity exchanged.

Equilibrium Price
Its

simple.

An

increase in supply or a decrease in

demand puts downward pressure on
prices.
A decrease in supply or an increase in
demand puts upward pressure on prices.

Changes in Supply or
Demand

Increase in
Supply
Decrease in
Supply
Increase in
Demand
Decrease in
Demand

Impact on
Equilibrium
Price
Down

Impact on
Quantity
Exchanged
Up

Up

Down

Up

Up

Down

Down

Changes in relative scarcity

A

product becomes more scarce if:

demand

increases
supply decreases
price

will rise

product becomes less scarce if:

demand

____________
supply _____________
price

will _________

Changes in relative scarcity

A

product becomes more scarce if:

demand

increases
supply decreases
price

will rise

product becomes less scarce if:

demand

decreases
supply increases
price

will fall

Three Steps of
Market Analysis
1. Identify the Market

Product, place, time

2. Identify the change

Supply or demand, increase or decrease?

3. Effect on relative scarcity, price,

quantity

Major rule:

One event causes either demand or

supply to change, never both.

Predicting the Future

The

world market for oil, 2005. Iraq

oil wells come back on line.
Demand or supply? Increase or
decrease?
Relative scarcity, price, quantity?

Predicting the Future

In

SF in 2006, the market for 49er

stuff when the 49ers, under the
amazing leadership of Alex Smith,
football playing economist, and the
49ers win the Super Bowl.
Demand or supply? Increase or
decrease?
Relative scarcity, price, quantity?

Explaining the present

Market,

gasoline in California, Summer,

2005
OPEC increases supply
Californians
buy

more, bigger, more powerful cars and

drive them farther and faster
avoid mass transit
Some

oil refineries are shut down for

maintenance
Relative scarcity and price?

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 stars
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-yos go up and down.
The price of ancient statues falls.

Explaining the past

Europe

in 1510. The market for

spices after da Gama found a less
costly path to spices.
Supply or demand? Increase or
decrease?
Relative scarcity, price, quantity

Explaining the past

Sacramento

in 1850. The market for

pick axes and pans.
Supply or demand? Increase or
decrease?
Relative scarcity, price, quantity

A Price Ceiling is a
maximum legal price
BELOW the equilibrium.
It provides perverse
incentives, causing a
shortage.
Ceiling, below, shortage
(CBS)

Price controls (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).
Rent controls, doctors, prescription drugs

A Price Floor is a
minimum legal price
ABOVE the equilibrium
It provides perverse
It provides perverse
incentives, causing a
surplus.
Floor, above, surplus
(FAS)

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).
Minimum wage, agricultural price supports

Price controls (natural

disaster)
The

market for lumber in Los

Angeles, after an earthquake
destroys many buildings
Demand has increased.
Lumber is now relatively______
scarce.
Price will ______________

Price controls (natural

disaster, ceiling)
To

avoid price gouging government

sets legal price below new higher
equilibrium price.
At lower price, demanders demand
____
At lower price, suppliers supply
______
The price ceiling causes a ________

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 below market clearing price will
cause a ____________.

What will happen to the price

of energy in California?
The

population increases.
People have more computers.
Many power plants are shut down for
maintenance.
The snow pack in the Sierras is lower
than normal.

Lets save the energy

consumers of California
Impose

a price ceiling (a legal price below

the equilibrium)
As the price falls, the incentives for
suppliers and demanders changes.
With a lower price, suppliers will supply
________
With a lower price, demanders will want to
buy _________
There will be a __________

Lets save the energy

consumers of California

Market Analysis
Change in Change in
Supply
Demand
(WAGTIP)
(TIPSE)
Increase

Equilibriu
m Price

Quantity
Supplied

Down
_________

Decrease
_________

Up

Up

Down

Down

_________
Up

Up

_________

Up
_________

Decrease
_________

Quantity
Exchange
d

_________
Up

Increase

Quantity
Demande
d

Down

Down

Down
_________

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 with no change in
WAGTIPS.
If demand increases, price will rise, and
suppliers will attempt to squeeze more out of
their resources with no change in WAGTIPS.
If demand falls, price will fall, causing
suppliers to supply less, with no change in
WAGTIPS.
Change in demand causes a change in price
which causes a change in quantity supplied,
no change in WAGTIPS.

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 with no change in TIPSE. If
supply increases, price will fall and buyers
will buy more with no change in TIPSE.
If supply decreases, price will rise and
buyers will buy less with no change in
TIPSE.
Change in supply causes a change in price
which causes a change in quantity
demanded with no change in TIPSE.

Questions
Demand

or supply?
Increase or decrease?
Equilibrium price?
Quantity supplied?
Quantity demanded?
Quantity exchanged?