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Topic 2 - Demand, Supply & Equilibrium.docx

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Economics 1021A/B
Arvin Dar

Topic Two; Demand, Supply, Equilibrium 1. Introduction 2. Demand 3. Supply 4. Determination of equilibrium 5. Shifts in curves & changes in equilibrium 1. Introduction  Quantity demanded and quantity supplied (not just the stock variable, but a flow “Quantity demanded per day/week, etc.) refers to the “desired” or “planned” quantity given the price (You may want Ferraris but you can’t afford it. Sucker)  Stock variables: “The average student drinks 200 bottles of beer”  Flow variables: Has a time dimension. We use flow for the most part. “The average student drinks 200 bottles a week/semester/year” 2. Demand  - -/+ + +  Q =f(p, y, t, p , p ) d s c o Q = Quantity demanded  Quantity demanded depends on a number of factors:  P = Own price o Inverse/negative relationship  Y = Income o Normal goods  Positive relationship o Inferior goods (KD, cheap meat, used clothing)  Inverse/negative relationship  T = Tastes o Positive  Ps= Price of substitute(s) o Positive  As the price of margarine rises, people buy butter  Pc= Price of complement(s): cheese and crackers, shoes & laces o Inverse/Negative  As the price of shoes goes up, we buy less laces  We cannot graph all of these at once. Pick Y and one other variable  Q = f(p) | Y held fixed at some level | T held fixed at some level etc.  Assuming Ceteris Paribas  Slope is negative – curving out  Which variable is at which axis doesn’t really matter – it’s still a negative association  Quantity demanded on Y = quantity demanded curve  Price of Y = demand curve  this is what text etc. refers to d  Q = f (P) for income fixed at 45 K for taste fixed at 60 for price substitute at $2 for price substitute at $3  Change income to 50 K  Pick a random point on the quantity demanded curve  What happens to the point?  The point moves up: the distance changes demanding on the income change  As you pick more and more points, you create a new curve further out, creating a new Q curve “for income fixed at 50K” d  In the demand curve, as you increase income, the Q goes left or right  Increase price of a substitute  The demand increases  Increase/decrease in quantity demanded when there is a movement along a given demand curve. This obviously results from a change in price. o This means you’re moving along the curve, not shifting the curve  Increase/decrease in demand when have a shift in a D curve. This obviously results from a change in Y and/or T, s ,cP , etc. o Shifting the curve, not just moving on it 3. Supply  + - + +/- s  Q = f (P, I , S, P other commodities) o P = Own price o I = Price of factor inputs o S = State of technology o P = milk vs cheese  Price of cheese goes up, more farmers are producing cheese and not milk o Supply curve: Positive slope  New position for the supply curve: move all the points  Called: Change in supply
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