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Intro to Supply and Demand

This workbook focuses on the basics of SUPPLY and DEMAND and serves as introduction to Excel.

KEY IDEAS
When price changes, ceteris paribus, there is a movement along a fixed demand or supply curve.
If a variable other than price changes, the entire demand or supply curve shifts left (decrease) or right (increase).

When price is such that quantity demanded < quantity supplied, price tends to fall because there is a surplus (or excess supp
When price is such that quantity demanded > quantity supplied, price tends to rise because there is a shortage (or excess de
When price is such that quantity demanded = quantity supplied, price has no tendency to change and the market is in

Supply and demand analysis is the process by which we figure out the effect on price and quantity from a given shock.

ORGANIZATION

The Demand sheet shows the Law of Demand: when price changes, ceteris paribus, quantity demanded moves in the opposit
The Supply sheet illustrates the Law of Supply: ceteris paribus, price and quantity supplied move together.
The Market sheet puts Demand and Supply together and shows the equilibrium position.
ight (increase).

s a surplus (or excess supply).


is a shortage (or excess demand).
and the market is in equilibrium.

y from a given shock.

manded moves in the opposite direction.


Demand for Ground Beef for a family of five per month.
The family uses ground beef for a variety of dishes, including hamburgers.
Given its situtation, including the prices given for various products, income, and preferences, the family decides how much gro

Use the scroll bars-0.05


to 139 Price of Ground Beef (cents per pound)
change the values -0.002
of 99 Price of Hamburger Buns (cents per pack of eigh
the cells in range-0.001 200 Price of Ketchup (cents per bottle)
F5:F11. 0.003 180 Price of Hot Dogs (cents per pack of eight)
The red dot is the 0 $ 387,000 Price of Lamborghini Murcielago
quantity demanded;
-0.001 0.1 30 Household Income (thousands of dollars per yea
the entire line is
demand. 0.15 100 Ground Beef Preference (index units; 100 is ave
10 10.292
P ric e (c ents/lb))

Quantity
Price Demanded
189 Demand for Ground Beef (cents per (pounds per
pound) month)
169 99 12.292 99 12.292
149 109 11.792 109 11.792
119 11.292 119 11.292
129
129 10.792 129 10.792
109 139 10.292 139 10.292
89 149 9.792 149 9.792
159 9.292 159 9.292
169 8.792 169 8.792
Quantity (lbs/month)
179 8.292 179 8.292
s, the family decides how much ground beef it demands (or wants to buy).

nd Beef (cents per pound)


burger Buns (cents per pack of eight)
hup (cents per bottle)
Dogs (cents per pack of eight)
borghini Murcielago http://edmunds.com
come (thousands of dollars per year)
Preference (index units; 100 is average taste for ground beef)
Supply of Ground Beef by a farmer.
The farmer raises cattle from which ground beef is made.
Given its situtation, including the prices given for various products, expectations, and technology, the farmer decides how muc

Use the scroll bars to10 139 Price of Ground Beef (cents per pound)
change the values -40of 90 Price of Feeder Cattle (cents per pound)
the cells in range -1 100 Price of Cattle Feed (corn in dollars per ton)
F16:F20. -20 100 Expectations about Future Price of Ground Beef
The red dot is the
53.392 100 Technology (index units; 100 is the current prod
quantity supplied; the
10 1029.2
entire line is supply.
P ric e (c ents/lb))

Quantity
Price Supplied
Supply of Ground Beef (cents per (pounds per
189 pound) month)
99 629.2 99 629.2
169
109 729.2 109 729.2
149 119 829.2 119 829.2
129 929.2 129 929.2
129
139 1029.2 139 1029.2
109 149 1129.2 149 1129.2
159 1229.2 159 1229.2
89
169 1329.2 169 1329.2
129.200000000001 1129.2
Quantity (lbs/month)
179 1429.2 179 1429.2
ology, the farmer decides how much ground beef to supply (or produce).

nd Beef (cents per pound)


er Cattle (cents per pound)
e Feed (corn in dollars per ton)
about Future Price of Ground Beef (index units; 100 is constant expectations)
ndex units; 100 is the current production technology)
Market for Ground Beef
Unlike demand or supply alone, where individuals decide how much to buy or sell at given prices (and given other variables), w
price is determined by the forces of supply and demand. In other words, price adjusts based on the buying and selling decisio
DEMAND
As in the Demand sheet, -0.05 159 Price of Ground Beef (cents per pound)
-0.002
these scroll bars shift 99 Price of Hamburger Buns (cents per pack of
Demand. -0.001 200 Price of Ketchup (cents per bottle)
0.003 180 Price of Hot Dogs (cents per pack of eight)
Use the Current Price 0 $ 387,000 Price of Saleen S7 Supercar
Scroll Bar-0.001
below to change 0.1 30 Household Income (thousands of dollars per
the price. 0.15 100 Ground Beef Preference (index units; 100 is
100000 Number of Buyers
10 929,200

These scroll bars shift


Supply.
SUPPLY
Use the Current Price 10 159 Price of Ground Beef (cents per pound)
Scroll Bar below to set a-40 90 Price of Feeder Cattle (cents per pound)
price and click the -1 100 Price of Cattle Feed (corn in dollars per ton)
Equilbrate button to see-20 100 Expectations about Future Price of Ground B
the market work. 53.392 100 Technology (index units; 100 is the current p
1000 Number of Sellers
1,229,200

Current Price Scroll Bar


159 Price of Ground Beef (cents per pound)
P ric e (c ents/lb))

Quantity
Price Demanded
Market for Ground Beef (cents per (pounds per
189 pound) month)
99 1229200 629200 99 1229200
169
Pe 139.00 109 1179200 729200 109 1179200
Qe 1,229,200 149 119 1129200 829200 119 1129200
129 1079200 929200 129 1079200
129
139 1029200 1029200 139 1029200
109 149 979200 1129200 149 979200
159 929200 1229200 159 929200
89
169 879200 1329200 169 879200
129200.000000001 1129200
Quantity (lbs/month)
179 829200 1429200 179 829200
50
Speed of Convergence
Speed Anima P Pe
The Speed of Convergence Scroll BarDiffsets how fast the
Speed Converg
market Next P The
equilibrates.
1 159 139 20 0.5 149
extreme left gives no convergence and the extreme right gives instant convergence.
s (and given other variables), when we put demand and supply together,
n the buying and selling decisions of the buyers and sellers.

nd Beef (cents per pound)


burger Buns (cents per pack of eight)
up (cents per bottle)
ogs (cents per pack of eight)
n S7 Supercar http://www.saleen.com/
come (thousands of dollars per year)
Preference (index units; 100 is average taste for ground beef)

nd Beef (cents per pound)


er Cattle (cents per pound)
e Feed (corn in dollars per ton)
about Future Price of Ground Beef (index units; 100 is constant expectations)
ndex units; 100 is the current production technology)

nd Beef (cents per pound)


Quantity
Supplied
(pounds per
month) Market Status
629200 Shortage: 600000
729200 Shortage: 450000
829200 Shortage: 300000
929200 Shortage: 150000
1029200 Equilibrium
1129200 Surplus: 150000
1229200 Surplus: 300000
1329200 Surplus: 450000
1429200 Surplus: 600000