The fundamentals of supply and demand. We take a look at President Obama\'s recent state of the union address and apply it to fundamental supply and demand principles to predict the outcomes.

2. ECON Designed by Amy McGuire, B-books, Ltd. McEachern 2010-2011 4 CHAPTER Demand, Supply, and Markets Macro

4. LO 1 The Demand Schedule and Demand Curve for Pizza The market demand D shows the quantity of pizza demanded, at various prices, by all consumers. Price and quantity demanded are inversely related. (a) Demand schedule Exhibit 1 D a b c d e Price per pizza Quantity Demanded Per week (millions) a b c d e $15 12 9 6 3 8 14 20 26 32 26 20 14 8 Millions of pizzas per week 32 0 9 6 3 12 Price per pizza $15

6. LO 1 An Increase in the Market Demand for Pizza An increase in the demand for pizza is shown by a rightward shift of the demand curve, so the quantity demanded increases at each price. Exhibit 2 D’ D b f 26 20 14 8 Millions of pizzas per week 32 0 9 6 3 12 Price per pizza $15

7. LO 2 The Supply Schedule and Supply Curve for Pizza The market supply S shows the quantity of pizza supplied, at various prices, by all pizza makers. Price and quantity supplied are directly related. (a) Supply schedule Exhibit 3 (b) Supply curve 24 20 16 12 Millions of pizzas per week 28 Price per pizza Quantity Supplied Per week (millions) $15 12 9 6 3 28 24 20 16 12 S 0 9 6 3 12 Price per pizza $15

8. LO 2 An Increase in the Supply of Pizza An increase in the supply of pizza is reflected by a rightward shift of the supply curve, from S to S’. Quantity supplied increases at each price level. Exhibit 4 24 20 16 12 Millions of pizzas per week 28 S’ S 0 9 6 3 12 Price per pizza $15 g h

9. LO 3 Equilibrium in the Pizza Market (a) Market schedules Exhibit 5(a) Millions of pizzas per Week Price per pizza Quantity Demanded Quantity Supplied Surplus or Shortage Effect on Price $15 12 9 6 3 8 14 20 26 32 28 24 20 16 12 Surplus of 20 Surplus of 10 Equilibrium Shortage of 10 Shortage of 20 Falls Falls Remains the same Rises Rises

11. LO 4 Effects of an Increase in Demand 24 20 Millions of pizzas per week 30 0 9 $12 Price per pizza Increase in demand: Rightward shift to D’ At P=$9: Q D >Q S ; shortage Upward pressure on P Q D decreases Q S increases New equilibrium g Higher P Higher Q Exhibit 6 S D c D’ g

12. LO 4 Effects of an Increase in Supply Increase in supply: Rightward shift to S’ At P=$9: Q S >Q D ; surplus Downward pressure on P Q D increases Q S decreases New equilibrium d Higher Q Lower P Exhibit 7 S 26 20 Millions of pizzas per week 30 0 $9 6 Price per pizza D c S’ d

13. LO 5 Price Floors and Price Ceilings Exhibit 11 (a) Price floor for milk (b) Price ceiling for rent No effect if price floor is set at or below equilibrium P No effect if price ceiling is set at or above equilibrium P S D $2.50 1.90 Price per gallon 19 14 Millions of gallons per month 0 24 S D $1,000 600 Monthly rental price 50 40 Thousands of rental units per month 0 60 Surplus Shortage