ECON 0100 Lecture 2: Lecture 2
Chapter 3
Supply & Demand
Competitive Markets
There are many buyers and sellers of the same good or service
§
No one buyer or seller's actions are able to influence the market price
§
○
Supply & Demand Model
You can identify what factors determine and affect the price and quantity of goods
being traded in a competitive market
§
○
•
Demand
QUESTION
How many cups of coffee would people buy if the price were $5? $4? $1?
§
Price
Quantity
Demanded
$5
1
$4
7
$3
15
$2
20
$1
25
○
Demand Schedule
Shows amount consumers are willing to buy at every price
§
○
Quantity Demanded
Amount consumers want to buy at a specific price
§
○
Demand Curve
Graphical representation of a demand schedule
§
○
Demand
The amount consumers want to purchase at EACH different price
§
This is the ENTIRE demand curve
§
○
Quantity Demanded
Amount consumers want to purchase for a specific curve
§
Graphically, this is ONE POINT on the demand curve
§
○
As the price of coffee decreases, the quantity demanded ____________.
Called the Law of Demand
All else equal, there is an INVERSE relationship between price and quantity
demanded.
As the price of a good ____, the quantity demanded ____.
®
As the price of a good ____, the quantity demanded ____.
®
□
§
○
•
Changes in Demand
All else equal means we are holding all other factors such as consumer income, tastes and
preferences, and the price of related goods constant.
○
What happens when one of these factors changes?
○
What happens to the demand for coffee during finals.
○
Price
Quantity
Demanded
(OLD)
Quantity
Demanded
(NEW)
$5
1
3
$4
7
12
$3
15
20
$2
20
24
$1
25
25
○
•
Factors that Demand Shift Demand
FACTOR 1: Change in Price of Related Goods
Two types of related goods
Compliments
□
Substitutes
□
§
Two goods are Compliments if:
INCREASE in the price of one good --> DECREASES the demand of the other good
□
These are goods that are typically consumed together
□
Example
You buy a coffee and bagel every morning. Bagel price goes up. You don't
want to drink coffee without eating your bagel. So you buy neither.
®
□
§
Two goods are Substitutes if:
INCREASE in the price of one good --> INCREASES the demand for the other good
□
These are goods that typically serve similar functions or are interchangeable
□
Example
Price of Coke increases, the demand for Pepsi increases
®
Price of coffee increases, the demand for tea goes up.
®
□
§
○
FACTOR 2: Change in Consumer Income
Normal Goods
Goods that when consumer income increases, the demand for them INCREASES
□
Example
Cars
®
House
®
□
§
Inferior Goods
Goods that when consumer income increases, the demand for them DECREASES
□
Example
Bus fair
®
Off-brand goods
®
□
§
○
FACTOR 3: Change in Tastes & Preferences
Examples
What is in in fashion
□
Change in food
□
Change in seasons
□
§
○
FACTOR 4: Change in Future Expectations
Examples
Extreme weather conditions
□
Investing in stock in a company that is starting to be good
□
Buying before Black Friday
□
§
○
FACTOR 5: Change in Number of Consumers
When we draw a Market Demand Curve, it is actually composed of several Individual
Demand Curves
§
○
•
The Market Demand Curve shows the quantity demanded for a good by all consumers
in the market at every given price.
§
It is the horizontal sum of all the individual demand curves.
§
As we add MORE consumers, the quantity demanded at every given price INCREASES
& the demand INCREASES.
§
CAREFUL!
Change in Demand
Caused by a change in one of the 5 factors listed.
□
Graphically, it is represented by a shift in the ENTIRE demand curve.
□
INCREASE in demand = shift the curve to the RIGHT
□
DECREASE in demand = shift the curve to the LEFT
□
§
Change in Quantity Demanded
Caused when the good's OWN price changes.
□
Graphically, represented by movement ALONG the demand curve.
Going from one point to another
®
□
§
○
PRACTICE PROBLEMS
Consider the market for popcorn. Illustrate what would happen if the price of DVDs
increased.
○
•
Once again, consider the market for popcorn. Illustrate what would happen if the price of
popcorn increased.
○
Assume popcorn is a normal good. Illustrate what would happen if consumer income
increased.
○
Which of the following would cause a DECREASE in demand for cars?
A decrease in the price of gasoline
A.
An increase in the price of cars
B.
An increase in the popularity of road trips
C.
An improvement in public transportation.
D.
○
Supply
Economists are also interested in modelling the behavior of sellers.
Much of this will look similar to what you saw when we were looking at consumers and
demanded.
§
○
Consider the following:
○
Price
Quantity
Supplied
$5
10
$4
8
$3
6
$2
4
$1
2
If the price is more, you will want to sell more
§
○
Supply Schedule
Graph that shows the amount of a good or service that will be supplied by sellers at
every given price
§
○
Quantity Supplied
Amount supplied at a SPECIFIC price
§
○
Supply Curve
Supply schedule represented graphically
§
○
Law of Supply
All else equal, there is a positive relationship between price and quantity supplied.
§
As the price of a good ____, the quantity supply____.
§
As the price of a good ____, the quantity supply ____.
§
○
•
Factors that Shift Supply
FACTOR 1: An input is any good or service used in production.
As input prices for a good INCREASE, supply _________ because ___________.
§
As input prices for a good DECREASE, supply _____________.
§
Example
Illustrate what happens to the supply of t-shirts if the price of cotton increases.
□
§
○
•
FACTOR 2: Change in Price of Related Goods
Two goods are Substitutes in Production if:
INCREASE in price of one good --> DECREASE the supply of the other good
□
These are goods that typically use the same resources
□
Producing one good prevents sellers from using resources to produce another.
□
Example:
Price for sandwiches goes up, you eat more bagels instead
®
□
§
Two goods are Compliments in Production if:
INCREASE in price of one good --> INCREASE the supply of the other good
□
Occurs if one good uses the product of the other
□
Example:
The price of beef increases, the price of leather increases
®
□
§
○
FACTOR 3: Technology
Improvements in technology should shift to the ________.
§
More efficient way to produce a good means that more of the good is being made,
supply goes ___.
§
Example:
Illustrate what effect the introduction of the assembly line had on the supply of
cars.
□
§
○
FACTOR 4: Expectations
If producers expect the price of a good to DROP in the future, supply will ____ in the
short run.
§
If producers expect the price of a good to INCREASE in the future, supply will ____ in
the short run.
§
○
FACTOR 5: Change in the Number of Producers
Similar to demand, the market supply curve is made up of several individual supply
curves
§
○
The market supply curve shows the quantity supplied or a good by all producers in the
market at every given price.
§
It is the horizontal sum of all the individual supply curves.
§
As we add more producers, the quantity supplied at every given price ___, and the
supply ____. Graphically, it becomes ___________.
§
CAREFUL!
Change in Supply
Caused by a change in one of the five factors.
§
Graphically, this is represented by a shift in the ENTIRE supply curve.
§
○
Change in Quantity Supplied
Occurs when the good's own price changes.
§
Graphically, this is represented by movement ALONG the supply curve.
§
○
We model an INCREASE in supply by shifting the supply curve to the _______.
○
We model an DECREASE in supply by shifting the supply curve to the _______.
○
•
Market Equilibrium
Equilibrium means that no one individual has the ability to make themselves better off by
doing something else.
○
•
Markets Move Towards Equilibrium
What happens when market price is above the equilibrium price? Below equilibrium price?
○
•
Changes in Market Equilibrium
What happens to market equilibrium when the demand curve shifts?
○
•
The INCREASE in demand causes prices to __________ and quantity to ____________.
§
What happens to market equilibrium when the demand curve shifts?
○
What happens to market equilibrium if both curves shifted simultaneously?
When both curves shift simultaneously, we can only determine the effect on P or Q,
NEVER both.
§
USEFUL TRICK:
Determine what the effect of each shift is separately, then combine to determine
the total effect.
□
§
Example:
Increase in Supply & Increase in Demand
□
§
○
Chapter 4
Consumer Surplus
The table below shoes the WTP for a Kennywood tickets.
○
Potential
Buyer
Willingness
to Pay
CS if
P=$45
Alice
$100
Bob
$85
Caroline
$60
David
$45
Evan
$40
Individual Consumer Surplus
Gain a single buyer gets from purchase
§
○
Total Consumer Surplus
Sum of all of the individual consumer surpluses
§
○
We can use the information on willingness to pay to construct a demand schedule and
graphically illustrate consumer to surplus.
On a graph, consumer surplus is everything BELOW THE DEMAND CURVE & ABOVE
THE PRICE.
§
○
•
Area of a Triangle
(Base*Height)/2
§
○
Consumer Surplus After a Price Change
•
What would happen if the price would have increased?
○
Producer Surplus
Potential
Seller
Cost
PS if
P=$40
Frank
$10
Gregory
$25
Hanna
$35
Ingrid
$45
Jacqueline
$55
○
Individual Producer Surplus
Gain a single seller gets from selling something
§
○
Total Producer Surplus
Sum of all of the individual producer surpluses
§
○
We can use the information on seller cost to construct a supply schedule and graphically
illustrate producer surplus.
On a graph, producer surplus is everything ABOVE THE SUPPLY CURVE & BELOW
THE PRICE.
§
○
•
Producer Surplus After a Price Change
What would happen to producer surplus after a price decrease?
○
•
All Together - Total Surplus
Total Surplus
Producer Surplus + Consumer Surplus
§
Illustrates one of the key economic principles: INCENTIVES
§
○
Markets are usually efficient.
This is when, in equilibrium, the Total Surplus is at a max.
§
○
EXAMPLE
Identify and calculate consumer surplus, producer surplus, and total surplus in the
following market.
§
○
•
Chapter 5
Price Controls
Policies that restrict how high or low a price can be
○
Price Ceiling
Dictates the MAX price sellers are allowed to charge for a good or service.
§
A common example is apartment rent laws in NYC.
§
○
Price Floor
Dictates the MIN price sellers are allowed to charge for a good or service.
§
A common example is minimum wage.
§
○
•
Modeling a Binding Price Ceiling
•
Deadweight Loss (DWL)
The loss in the total surplus whenever a policy or action distorts the quantity being
traded in a market away from the efficient Q.
§
○
Area of a Trapezoid
(Side1+ Side2)*Height / 2
§
○
Modeling a Binding Price Floor
•
What happens if a price floor is set above equilibrium price?
○
What happens if a price floor is set below equilibrium price?
○
Is the shift in demand or quantity
demanded? _________________
•
The two goods are ________________.
•
Is the shift in demand or quantity
demanded? _________________
•
Is the shift in demand or quantity
demanded? _________________
•
A market is in equilibrium when the
price in the market is such that
_________________ = ________________.
○
What would happen if a seller tried
to charge prices above what other
sellers were charging?
○
_________________________
What would happen if a buyer tried
to negotiate a price well below what
other buyers were paying?
○
_________________________
Consider the market for tennis shoes and
assume it is initially in equilibrium. An
increase in the popularity in running causes
the demand for tennis shoes to _____. As a
result, the _______ curve shifts to the______.
Initially, there is a ________ of tennis shoes.
This causes _____________________________.
○
Consider the market for chairs and
assume it is initially in equilibrium
○
Illustrate what would happen if the price
of wood INCREASED.
○
Total Effect:
Price ________
Quantity _____
Price ____, Quantity ___
Price ____, Quantity ____
Area ___ represents the original CS
before the price decrease.
○
Area ___ represents the increase in
CS to original buyers after the price
decreases.
○
Area ___ represents the increase in
CS gained by new buyers.
○
Area ___ represents the original PS
before the price increase.
○
Area ___ represents the increase in
PS to original sellers after the price
increase.
○
Area ___ represents the increase in
PS gained by new sellers entering.
○
Side effect of introducing a
binding price ceiling into an
efficient market:
Shortage
○
Inefficient Allocation
○
Wasted Resources (Time)
○
Low Quality
○
Black Markets
○
•
Side effect of introducing a binding
price floor into an efficient market:
Surplus
○
Inefficient Allocation of Products
○
Wasted Resources
○
Inefficiency of High Quality
○
Black Markets
○
•
Lecture 2
Sunday,*May*20,*2018
3:41*PM
Chapter 3
Supply & Demand
Competitive Markets
There are many buyers and sellers of the same good or service
§
No one buyer or seller's actions are able to influence the market price
§
○
Supply & Demand Model
You can identify what factors determine and affect the price and quantity of goods
being traded in a competitive market
§
○
•
Demand
QUESTION
How many cups of coffee would people buy if the price were $5? $4? $1?
§
Price
Quantity
Demanded
$5
1
$4
7
$3
15
$2
20
$1
25
○
Demand Schedule
Shows amount consumers are willing to buy at every price
§
○
Quantity Demanded
Amount consumers want to buy at a specific price
§
○
Demand Curve
Graphical representation of a demand schedule
§
○
Demand
The amount consumers want to purchase at EACH different price
§
This is the ENTIRE demand curve
§
○
Quantity Demanded
Amount consumers want to purchase for a specific curve
§
Graphically, this is ONE POINT on the demand curve
§
○
As the price of coffee decreases, the quantity demanded ____________.
Called the Law of Demand
All else equal, there is an INVERSE relationship between price and quantity
demanded.
As the price of a good ____, the quantity demanded ____.
®
As the price of a good ____, the quantity demanded ____.
®
□
§
○
•
Changes in Demand
All else equal means we are holding all other factors such as consumer income, tastes and
preferences, and the price of related goods constant.
○
What happens when one of these factors changes?
○
What happens to the demand for coffee during finals.
○
Price
Quantity
Demanded
(OLD)
Quantity
Demanded
(NEW)
$5
1
3
$4
7
12
$3
15
20
$2
20
24
$1
25
25
○
•
Factors that Demand Shift Demand
FACTOR 1: Change in Price of Related Goods
Two types of related goods
Compliments
□
Substitutes
□
§
Two goods are Compliments if:
INCREASE in the price of one good --> DECREASES the demand of the other good
□
These are goods that are typically consumed together
□
Example
You buy a coffee and bagel every morning. Bagel price goes up. You don't
want to drink coffee without eating your bagel. So you buy neither.
®
□
§
Two goods are Substitutes if:
INCREASE in the price of one good --> INCREASES the demand for the other good
□
These are goods that typically serve similar functions or are interchangeable
□
Example
Price of Coke increases, the demand for Pepsi increases
®
Price of coffee increases, the demand for tea goes up.
®
□
§
○
FACTOR 2: Change in Consumer Income
Normal Goods
Goods that when consumer income increases, the demand for them INCREASES
□
Example
Cars
®
House
®
□
§
Inferior Goods
Goods that when consumer income increases, the demand for them DECREASES
□
Example
Bus fair
®
Off-brand goods
®
□
§
○
FACTOR 3: Change in Tastes & Preferences
Examples
What is in in fashion
□
Change in food
□
Change in seasons
□
§
○
FACTOR 4: Change in Future Expectations
Examples
Extreme weather conditions
□
Investing in stock in a company that is starting to be good
□
Buying before Black Friday
□
§
○
FACTOR 5: Change in Number of Consumers
When we draw a Market Demand Curve, it is actually composed of several Individual
Demand Curves
§
○
•
The Market Demand Curve shows the quantity demanded for a good by all consumers
in the market at every given price.
§
It is the horizontal sum of all the individual demand curves.
§
As we add MORE consumers, the quantity demanded at every given price INCREASES
& the demand INCREASES.
§
CAREFUL!
Change in Demand
Caused by a change in one of the 5 factors listed.
□
Graphically, it is represented by a shift in the ENTIRE demand curve.
□
INCREASE in demand = shift the curve to the RIGHT
□
DECREASE in demand = shift the curve to the LEFT
□
§
Change in Quantity Demanded
Caused when the good's OWN price changes.
□
Graphically, represented by movement ALONG the demand curve.
Going from one point to another
®
□
§
○
PRACTICE PROBLEMS
Consider the market for popcorn. Illustrate what would happen if the price of DVDs
increased.
○
•
Once again, consider the market for popcorn. Illustrate what would happen if the price of
popcorn increased.
○
Assume popcorn is a normal good. Illustrate what would happen if consumer income
increased.
○
Which of the following would cause a DECREASE in demand for cars?
A decrease in the price of gasoline
A.
An increase in the price of cars
B.
An increase in the popularity of road trips
C.
An improvement in public transportation.
D.
○
Supply
Economists are also interested in modelling the behavior of sellers.
Much of this will look similar to what you saw when we were looking at consumers and
demanded.
§
○
Consider the following:
○
Price
Quantity
Supplied
$5
10
$4
8
$3
6
$2
4
$1
2
If the price is more, you will want to sell more
§
○
Supply Schedule
Graph that shows the amount of a good or service that will be supplied by sellers at
every given price
§
○
Quantity Supplied
Amount supplied at a SPECIFIC price
§
○
Supply Curve
Supply schedule represented graphically
§
○
Law of Supply
All else equal, there is a positive relationship between price and quantity supplied.
§
As the price of a good ____, the quantity supply____.
§
As the price of a good ____, the quantity supply ____.
§
○
•
Factors that Shift Supply
FACTOR 1: An input is any good or service used in production.
As input prices for a good INCREASE, supply _________ because ___________.
§
As input prices for a good DECREASE, supply _____________.
§
Example
Illustrate what happens to the supply of t-shirts if the price of cotton increases.
□
§
○
•
FACTOR 2: Change in Price of Related Goods
Two goods are Substitutes in Production if:
INCREASE in price of one good --> DECREASE the supply of the other good
□
These are goods that typically use the same resources
□
Producing one good prevents sellers from using resources to produce another.
□
Example:
Price for sandwiches goes up, you eat more bagels instead
®
□
§
Two goods are Compliments in Production if:
INCREASE in price of one good --> INCREASE the supply of the other good
□
Occurs if one good uses the product of the other
□
Example:
The price of beef increases, the price of leather increases
®
□
§
○
FACTOR 3: Technology
Improvements in technology should shift to the ________.
§
More efficient way to produce a good means that more of the good is being made,
supply goes ___.
§
Example:
Illustrate what effect the introduction of the assembly line had on the supply of
cars.
□
§
○
FACTOR 4: Expectations
If producers expect the price of a good to DROP in the future, supply will ____ in the
short run.
§
If producers expect the price of a good to INCREASE in the future, supply will ____ in
the short run.
§
○
FACTOR 5: Change in the Number of Producers
Similar to demand, the market supply curve is made up of several individual supply
curves
§
○
The market supply curve shows the quantity supplied or a good by all producers in the
market at every given price.
§
It is the horizontal sum of all the individual supply curves.
§
As we add more producers, the quantity supplied at every given price ___, and the
supply ____. Graphically, it becomes ___________.
§
CAREFUL!
Change in Supply
Caused by a change in one of the five factors.
§
Graphically, this is represented by a shift in the ENTIRE supply curve.
§
○
Change in Quantity Supplied
Occurs when the good's own price changes.
§
Graphically, this is represented by movement ALONG the supply curve.
§
○
We model an INCREASE in supply by shifting the supply curve to the _______.
○
We model an DECREASE in supply by shifting the supply curve to the _______.
○
•
Market Equilibrium
Equilibrium means that no one individual has the ability to make themselves better off by
doing something else.
○
•
Markets Move Towards Equilibrium
What happens when market price is above the equilibrium price? Below equilibrium price?
○
•
Changes in Market Equilibrium
What happens to market equilibrium when the demand curve shifts?
○
•
The INCREASE in demand causes prices to __________ and quantity to ____________.
§
What happens to market equilibrium when the demand curve shifts?
○
What happens to market equilibrium if both curves shifted simultaneously?
When both curves shift simultaneously, we can only determine the effect on P or Q,
NEVER both.
§
USEFUL TRICK:
Determine what the effect of each shift is separately, then combine to determine
the total effect.
□
§
Example:
Increase in Supply & Increase in Demand
□
§
○
Chapter 4
Consumer Surplus
The table below shoes the WTP for a Kennywood tickets.
○
Potential
Buyer
Willingness
to Pay
CS if
P=$45
Alice
$100
Bob
$85
Caroline
$60
David
$45
Evan
$40
Individual Consumer Surplus
Gain a single buyer gets from purchase
§
○
Total Consumer Surplus
Sum of all of the individual consumer surpluses
§
○
We can use the information on willingness to pay to construct a demand schedule and
graphically illustrate consumer to surplus.
On a graph, consumer surplus is everything BELOW THE DEMAND CURVE & ABOVE
THE PRICE.
§
○
•
Area of a Triangle
(Base*Height)/2
§
○
Consumer Surplus After a Price Change
•
What would happen if the price would have increased?
○
Producer Surplus
Potential
Seller
Cost
PS if
P=$40
Frank
$10
Gregory
$25
Hanna
$35
Ingrid
$45
Jacqueline
$55
○
Individual Producer Surplus
Gain a single seller gets from selling something
§
○
Total Producer Surplus
Sum of all of the individual producer surpluses
§
○
We can use the information on seller cost to construct a supply schedule and graphically
illustrate producer surplus.
On a graph, producer surplus is everything ABOVE THE SUPPLY CURVE & BELOW
THE PRICE.
§
○
•
Producer Surplus After a Price Change
What would happen to producer surplus after a price decrease?
○
•
All Together - Total Surplus
Total Surplus
Producer Surplus + Consumer Surplus
§
Illustrates one of the key economic principles: INCENTIVES
§
○
Markets are usually efficient.
This is when, in equilibrium, the Total Surplus is at a max.
§
○
EXAMPLE
Identify and calculate consumer surplus, producer surplus, and total surplus in the
following market.
§
○
•
Chapter 5
Price Controls
Policies that restrict how high or low a price can be
○
Price Ceiling
Dictates the MAX price sellers are allowed to charge for a good or service.
§
A common example is apartment rent laws in NYC.
§
○
Price Floor
Dictates the MIN price sellers are allowed to charge for a good or service.
§
A common example is minimum wage.
§
○
•
Modeling a Binding Price Ceiling
•
Deadweight Loss (DWL)
The loss in the total surplus whenever a policy or action distorts the quantity being
traded in a market away from the efficient Q.
§
○
Area of a Trapezoid
(Side1+ Side2)*Height / 2
§
○
Modeling a Binding Price Floor
•
What happens if a price floor is set above equilibrium price?
○
What happens if a price floor is set below equilibrium price?
○
Is the shift in demand or quantity
demanded? _________________
•
The two goods are ________________.
•
Is the shift in demand or quantity
demanded? _________________
•
Is the shift in demand or quantity
demanded? _________________
•
A market is in equilibrium when the
price in the market is such that
_________________ = ________________.
○
What would happen if a seller tried
to charge prices above what other
sellers were charging?
○
_________________________
What would happen if a buyer tried
to negotiate a price well below what
other buyers were paying?
○
_________________________
Consider the market for tennis shoes and
assume it is initially in equilibrium. An
increase in the popularity in running causes
the demand for tennis shoes to _____. As a
result, the _______ curve shifts to the______.
Initially, there is a ________ of tennis shoes.
This causes _____________________________.
○
Consider the market for chairs and
assume it is initially in equilibrium
○
Illustrate what would happen if the price
of wood INCREASED.
○
Total Effect:
Price ________
Quantity _____
Price ____, Quantity ___
Price ____, Quantity ____
Area ___ represents the original CS
before the price decrease.
○
Area ___ represents the increase in
CS to original buyers after the price
decreases.
○
Area ___ represents the increase in
CS gained by new buyers.
○
Area ___ represents the original PS
before the price increase.
○
Area ___ represents the increase in
PS to original sellers after the price
increase.
○
Area ___ represents the increase in
PS gained by new sellers entering.
○
Side effect of introducing a
binding price ceiling into an
efficient market:
Shortage
○
Inefficient Allocation
○
Wasted Resources (Time)
○
Low Quality
○
Black Markets
○
•
Side effect of introducing a binding
price floor into an efficient market:
Surplus
○
Inefficient Allocation of Products
○
Wasted Resources
○
Inefficiency of High Quality
○
Black Markets
○
•
Lecture 2
Sunday,*May*20,*2018
3:41*PM
Chapter 3
Supply & Demand
Competitive Markets
There are many buyers and sellers of the same good or service
§
No one buyer or seller's actions are able to influence the market price
§
○
Supply & Demand Model
You can identify what factors determine and affect the price and quantity of goods
being traded in a competitive market
§
○
•
Demand
QUESTION
How many cups of coffee would people buy if the price were $5? $4? $1?
§
Price
Quantity
Demanded
$5
1
$4
7
$3
15
$2
20
$1
25
○
Demand Schedule
Shows amount consumers are willing to buy at every price
§
○
Quantity Demanded
Amount consumers want to buy at a specific price
§
○
Demand Curve
Graphical representation of a demand schedule
§
○
Demand
The amount consumers want to purchase at EACH different price
§
This is the ENTIRE demand curve
§
○
Quantity Demanded
Amount consumers want to purchase for a specific curve
§
Graphically, this is ONE POINT on the demand curve
§
○
As the price of coffee decreases, the quantity demanded ____________.
Called the Law of Demand
All else equal, there is an INVERSE relationship between price and quantity
demanded.
As the price of a good ____, the quantity demanded ____.
®
As the price of a good ____, the quantity demanded ____.
®
□
§
○
•
Changes in Demand
All else equal means we are holding all other factors such as consumer income, tastes and
preferences, and the price of related goods constant.
○
What happens when one of these factors changes?
○
What happens to the demand for coffee during finals.
○
Price
Quantity
Demanded
(OLD)
Quantity
Demanded
(NEW)
$5
1
3
$4
7
12
$3
15
20
$2
20
24
$1
25
25
○
•
Factors that Demand Shift Demand
FACTOR 1: Change in Price of Related Goods
Two types of related goods
Compliments
□
Substitutes
□
§
Two goods are Compliments if:
INCREASE in the price of one good --> DECREASES the demand of the other good
□
These are goods that are typically consumed together
□
Example
You buy a coffee and bagel every morning. Bagel price goes up. You don't
want to drink coffee without eating your bagel. So you buy neither.
®
□
§
Two goods are Substitutes if:
INCREASE in the price of one good --> INCREASES the demand for the other good
□
These are goods that typically serve similar functions or are interchangeable
□
Example
Price of Coke increases, the demand for Pepsi increases
®
Price of coffee increases, the demand for tea goes up.
®
□
§
○
FACTOR 2: Change in Consumer Income
Normal Goods
Goods that when consumer income increases, the demand for them INCREASES
□
Example
Cars
®
House
®
□
§
Inferior Goods
Goods that when consumer income increases, the demand for them DECREASES
□
Example
Bus fair
®
Off-brand goods
®
□
§
○
FACTOR 3: Change in Tastes & Preferences
Examples
What is in in fashion
□
Change in food
□
Change in seasons
□
§
○
FACTOR 4: Change in Future Expectations
Examples
Extreme weather conditions
□
Investing in stock in a company that is starting to be good
□
Buying before Black Friday
□
§
○
FACTOR 5: Change in Number of Consumers
When we draw a Market Demand Curve, it is actually composed of several Individual
Demand Curves
§
○
•
The Market Demand Curve shows the quantity demanded for a good by all consumers
in the market at every given price.
§
It is the horizontal sum of all the individual demand curves.
§
As we add MORE consumers, the quantity demanded at every given price INCREASES
& the demand INCREASES.
§
CAREFUL!
Change in Demand
Caused by a change in one of the 5 factors listed.
□
Graphically, it is represented by a shift in the ENTIRE demand curve.
□
INCREASE in demand = shift the curve to the RIGHT
□
DECREASE in demand = shift the curve to the LEFT
□
§
Change in Quantity Demanded
Caused when the good's OWN price changes.
□
Graphically, represented by movement ALONG the demand curve.
Going from one point to another
®
□
§
○
PRACTICE PROBLEMS
Consider the market for popcorn. Illustrate what would happen if the price of DVDs
increased.
○
•
Once again, consider the market for popcorn. Illustrate what would happen if the price of
popcorn increased.
○
Assume popcorn is a normal good. Illustrate what would happen if consumer income
increased.
○
Which of the following would cause a DECREASE in demand for cars?
A decrease in the price of gasoline
A.
An increase in the price of cars
B.
An increase in the popularity of road trips
C.
An improvement in public transportation.
D.
○
Supply
Economists are also interested in modelling the behavior of sellers.
Much of this will look similar to what you saw when we were looking at consumers and
demanded.
§
○
Consider the following:
○
Price
Quantity
Supplied
$5
10
$4
8
$3
6
$2
4
$1
2
If the price is more, you will want to sell more
§
○
Supply Schedule
Graph that shows the amount of a good or service that will be supplied by sellers at
every given price
§
○
Quantity Supplied
Amount supplied at a SPECIFIC price
§
○
Supply Curve
Supply schedule represented graphically
§
○
Law of Supply
All else equal, there is a positive relationship between price and quantity supplied.
§
As the price of a good ____, the quantity supply____.
§
As the price of a good ____, the quantity supply ____.
§
○
•
Factors that Shift Supply
FACTOR 1: An input is any good or service used in production.
As input prices for a good INCREASE, supply _________ because ___________.
§
As input prices for a good DECREASE, supply _____________.
§
Example
Illustrate what happens to the supply of t-shirts if the price of cotton increases.
□
§
○
•
FACTOR 2: Change in Price of Related Goods
Two goods are Substitutes in Production if:
INCREASE in price of one good --> DECREASE the supply of the other good
□
These are goods that typically use the same resources
□
Producing one good prevents sellers from using resources to produce another.
□
Example:
Price for sandwiches goes up, you eat more bagels instead
®
□
§
Two goods are Compliments in Production if:
INCREASE in price of one good --> INCREASE the supply of the other good
□
Occurs if one good uses the product of the other
□
Example:
The price of beef increases, the price of leather increases
®
□
§
○
FACTOR 3: Technology
Improvements in technology should shift to the ________.
§
More efficient way to produce a good means that more of the good is being made,
supply goes ___.
§
Example:
Illustrate what effect the introduction of the assembly line had on the supply of
cars.
□
§
○
FACTOR 4: Expectations
If producers expect the price of a good to DROP in the future, supply will ____ in the
short run.
§
If producers expect the price of a good to INCREASE in the future, supply will ____ in
the short run.
§
○
FACTOR 5: Change in the Number of Producers
Similar to demand, the market supply curve is made up of several individual supply
curves
§
○
The market supply curve shows the quantity supplied or a good by all producers in the
market at every given price.
§
It is the horizontal sum of all the individual supply curves.
§
As we add more producers, the quantity supplied at every given price ___, and the
supply ____. Graphically, it becomes ___________.
§
CAREFUL!
Change in Supply
Caused by a change in one of the five factors.
§
Graphically, this is represented by a shift in the ENTIRE supply curve.
§
○
Change in Quantity Supplied
Occurs when the good's own price changes.
§
Graphically, this is represented by movement ALONG the supply curve.
§
○
We model an INCREASE in supply by shifting the supply curve to the _______.
○
We model an DECREASE in supply by shifting the supply curve to the _______.
○
•
Market Equilibrium
Equilibrium means that no one individual has the ability to make themselves better off by
doing something else.
○
•
Markets Move Towards Equilibrium
What happens when market price is above the equilibrium price? Below equilibrium price?
○
•
Changes in Market Equilibrium
What happens to market equilibrium when the demand curve shifts?
○
•
The INCREASE in demand causes prices to __________ and quantity to ____________.
§
What happens to market equilibrium when the demand curve shifts?
○
What happens to market equilibrium if both curves shifted simultaneously?
When both curves shift simultaneously, we can only determine the effect on P or Q,
NEVER both.
§
USEFUL TRICK:
Determine what the effect of each shift is separately, then combine to determine
the total effect.
□
§
Example:
Increase in Supply & Increase in Demand
□
§
○
Chapter 4
Consumer Surplus
The table below shoes the WTP for a Kennywood tickets.
○
Potential
Buyer
Willingness
to Pay
CS if
P=$45
Alice
$100
Bob
$85
Caroline
$60
David
$45
Evan
$40
Individual Consumer Surplus
Gain a single buyer gets from purchase
§
○
Total Consumer Surplus
Sum of all of the individual consumer surpluses
§
○
We can use the information on willingness to pay to construct a demand schedule and
graphically illustrate consumer to surplus.
On a graph, consumer surplus is everything BELOW THE DEMAND CURVE & ABOVE
THE PRICE.
§
○
•
Area of a Triangle
(Base*Height)/2
§
○
Consumer Surplus After a Price Change
•
What would happen if the price would have increased?
○
Producer Surplus
Potential
Seller
Cost
PS if
P=$40
Frank
$10
Gregory
$25
Hanna
$35
Ingrid
$45
Jacqueline
$55
○
Individual Producer Surplus
Gain a single seller gets from selling something
§
○
Total Producer Surplus
Sum of all of the individual producer surpluses
§
○
We can use the information on seller cost to construct a supply schedule and graphically
illustrate producer surplus.
On a graph, producer surplus is everything ABOVE THE SUPPLY CURVE & BELOW
THE PRICE.
§
○
•
Producer Surplus After a Price Change
What would happen to producer surplus after a price decrease?
○
•
All Together - Total Surplus
Total Surplus
Producer Surplus + Consumer Surplus
§
Illustrates one of the key economic principles: INCENTIVES
§
○
Markets are usually efficient.
This is when, in equilibrium, the Total Surplus is at a max.
§
○
EXAMPLE
Identify and calculate consumer surplus, producer surplus, and total surplus in the
following market.
§
○
•
Chapter 5
Price Controls
Policies that restrict how high or low a price can be
○
Price Ceiling
Dictates the MAX price sellers are allowed to charge for a good or service.
§
A common example is apartment rent laws in NYC.
§
○
Price Floor
Dictates the MIN price sellers are allowed to charge for a good or service.
§
A common example is minimum wage.
§
○
•
Modeling a Binding Price Ceiling
•
Deadweight Loss (DWL)
The loss in the total surplus whenever a policy or action distorts the quantity being
traded in a market away from the efficient Q.
§
○
Area of a Trapezoid
(Side1+ Side2)*Height / 2
§
○
Modeling a Binding Price Floor
•
What happens if a price floor is set above equilibrium price?
○
What happens if a price floor is set below equilibrium price?
○
Is the shift in demand or quantity
demanded? _________________
•
The two goods are ________________.
•
Is the shift in demand or quantity
demanded? _________________
•
Is the shift in demand or quantity
demanded? _________________
•
A market is in equilibrium when the
price in the market is such that
_________________ = ________________.
○
What would happen if a seller tried
to charge prices above what other
sellers were charging?
○
_________________________
What would happen if a buyer tried
to negotiate a price well below what
other buyers were paying?
○
_________________________
Consider the market for tennis shoes and
assume it is initially in equilibrium. An
increase in the popularity in running causes
the demand for tennis shoes to _____. As a
result, the _______ curve shifts to the______.
Initially, there is a ________ of tennis shoes.
This causes _____________________________.
○
Consider the market for chairs and
assume it is initially in equilibrium
○
Illustrate what would happen if the price
of wood INCREASED.
○
Total Effect:
Price ________
Quantity _____
Price ____, Quantity ___
Price ____, Quantity ____
Area ___ represents the original CS
before the price decrease.
○
Area ___ represents the increase in
CS to original buyers after the price
decreases.
○
Area ___ represents the increase in
CS gained by new buyers.
○
Area ___ represents the original PS
before the price increase.
○
Area ___ represents the increase in
PS to original sellers after the price
increase.
○
Area ___ represents the increase in
PS gained by new sellers entering.
○
Side effect of introducing a
binding price ceiling into an
efficient market:
Shortage
○
Inefficient Allocation
○
Wasted Resources (Time)
○
Low Quality
○
Black Markets
○
•
Side effect of introducing a binding
price floor into an efficient market:
Surplus
○
Inefficient Allocation of Products
○
Wasted Resources
○
Inefficiency of High Quality
○
Black Markets
○
•
Lecture 2
Sunday,*May*20,*2018
3:41*PM
Document Summary
There are many buyers and sellers of the same good or service. No one buyer or seller"s actions are able to influence the market price. You can identify what factors determine and affect the price and quantity of goods being traded in a competitive market. Shows amount consumers are willing to buy at every price. Amount consumers want to buy at a specific price. The amount consumers want to purchase at each different price. Amount consumers want to purchase for a specific curve. Graphically, this is one point on the demand curve. As the price of coffee decreases, the quantity demanded ____________. All else equal, there is an inverse relationship between price and quantity demanded. As the price of a good ____, the quantity demanded ____. All else equal means we are holding all other factors such as consumer income, tastes and preferences, and the price of related goods constant. What happens to the demand for coffee during finals.
