Economic History of the United States
Scarcity
Production Possibilities and Opportunity Cost
Supply and Demand
Define supply and demand use two examples from
the textbook to show how principles of supply and
demand can explain events in history.
In a world characterized by scarcity
Produce the maximum goods and services that people
want and do it efficiently
Distribute (ration, allocate) the goods and services in a
way that maximizes human well being and do it
efficiently
Political Process
Produce and distribute through political institutions
Rulers, politicians, experts, and bureaucracies
Plan, legislate, and regulate production
Redistribute income
Market Process
Minimal government interference
The law of supply governs production
The law of demand governs distribution
Demand
Self interested buyers seek lowest possible price but
want the highest possible quantity and quality
Supply
Self interested sellers seek highest possible price at
the lowest possible quantity and quality
The amount of a good people will purchase at
various prices
The law of demand asserts that the relationship
between price and quantity is negative
At a high price, less is purchased
At a low price, more is purchased.
Pwheat
5
4
3
2
1
D
4 8 12 16 20
QDwheat
Demand is a list of quantities purchased at
various prices
Quantity demanded is a single quantity
purchased at a single price
Pwheat
5
4
3
2
1
D
4 8 12 16 20
QDwheat
Pwheat
5
4
3
2
1
D2
D1
4 8 12 16 20 24
QDwheat
Change in income
Change in population
Change in tastes and preferences
Change in the price of related goods
Substitutes
Compliments
*Change in expectations of future prices
* We will not use this determinant when using supply and demand analysis on any
paper, exam, and other assignment unless it is specifically asked for by Mr. Green
Pwheat Demand Shifts Forward . . .
D2 • When income increases
• When population increases
D1
• When the good is in fashion
• When substitute prices
increase
• When compliment prices
decrease
• *When buyers expect prices
to increase soon
QDwheat
Pwheat Demand Shifts Backward . . .
D1 • When income decreases
D1 • When population decreases
• When the good is out of
fashion
• When substitute prices
decrease
• When compliment prices
increase
QDwheat • *When buyers expect prices
to decrease soon
The amount of a good people will offer at various
prices
The law of supply asserts that the relationship
between price and quantity is positive
At a high price, more is offered
Assume the supplier has time to adjust
At a low price, less is offered
Pwheat
5
S
4
3
2
1
0 8 12 16 20
QSwheat
Supply is a list of quantities offered at various
prices
Quantity supplied is a single quantity offered at a
single price
Pwheat
S
5
4
3
2
1
0 8 12 16 20
QSwheat
Pwheat
S1
5 S2
4
3
2
1
0 8 12 16 20 24
QSwheat
Changes in factor costs
Interest rates, wages and salaries, rents
Government taxation and regulatory policies
New technologies
The creation ,discovery, loss, or destruction of
factors
*Changes in expectations about future prices
* We will not use this determinant when using supply and demand analysis on any
paper, exam, and other assignment unless it is specifically asked for by Mr. Green
Pwheat
Supply Shifts Forward . . .
• When factor costs decrease
S1
• When political policy lowers
S2 costs
• With the creation of new
technology lowers costs
• When new factors are created
or discovered
• *When suppliers expect prices
QDwheat to decrease soon
Pwheat
Supply Shifts Backward . . .
S2 • When factor costs increase
• When political policy raises
S1
costs
• When factors are lost or
destroyed
• *When suppliers expect prices
to increase soon
QDwheat
Pressure on
P QD QS Price Formula
Suppliers who QS > QD
5 2 20 need money Excess Supply
force price
4 7 16 down
Surplus
3 12 12 Equilibrium QS = QD
Demanders QD > QS
2 16 8 who need Excess Demand
wheat force
Shortage
1 20 0 price up
P
S
P
D
Q Wheat
P PQ
S
New Equilibrium
P2
P1
D2
D1
Q1 Q2 Q
P P Q
S
New Equilibrium
P1
P2
D1
D2
Q2 Q1 Q
P P Q S1
S2
P1 New Equilibrium
P2
D
Q1 Q2 Q
P P Q S2
S1
New Equilibrium
P2
P1
D
Q2 Q1 Q
Demand Supply
• Δ Income • Δ Factor costs (Wages,
Interest Rates, Rents)
• Δ Population
• Δ Tastes and Preferences • Δ Political Policy
• Δ Price of substitutes • New technology (only
increases supply)
• Δ Price of compliments
• The discovery, creation, loss,
or destruction of factors
Supply and Demand: Shifting Two Curves
P
S1 S1
P S2
S2
Supply forward a little QS Supply forward a lot QS
P P
S1 S S1
2
P2 S2
P1
P1 P2
D2 D2
D1 D1
Q1 Q2 QS Q1 Q2 QS
Supply forward a little Supply forward a lot
Demand forward a lot Demand forward a little
P? Q
Supply Supply
Forward Backward
Demand
Forward P? Q
Demand
Backward
P P S2
S2
S1
S1
P1 P2
P2 P1
D1 D1
D2 D2
Q2 Q1 QS Q2 Q1 QS
Supply backward a little Supply backward a lot
Demand backward a lot Demand backward a little
P? Q
Supply Supply
Forward Backward
Demand
Forward P? Q
Demand
Backward P? Q
P P S1
S1 S2
S2
P1 P1
P2 P2
D1 D1
D2 D2
Q2 Q1 Q 1 Q2
QS QS
Supply forward a little Supply forward a lot
Demand backward a lot Demand backward a little
P Q?
Supply Supply
Forward Backward
Demand
Forward P? Q
Demand
Backward P Q? P? Q
P P S2
S2
S1
P2 S1 P2
P1 P1
D2
D1 D2
D1
Q1 Q2 Q 2 Q1
QS QS
Supply backward a little Supply backward a lot
Demand forward a lot Demand forward a little
P Q?
Supply Supply
Forward Backward
Demand
Forward P? Q P Q?
Demand
Backward P Q? P? Q