1Supply and Demand Lecture 3 outline (note, this is Chapter 4 in the text).Th d d The demand curve The supply curve Factors causing shifts of the demand curve and shifts of the supply curve. Market equilibrium Demand and supply shifts and equilibrium pricesThe Demand Curve2 The demand curve… Graphically shows how much of a good consumers are willing to buy (holding their incomes, preferences, and other things constant) at different prices.The demand curve shows the relationship between The demand curve shows the relationship between price and quantity demanded, holding other things constant. Economists frequently use the Latinism “ceteris paribus,” which means “other things equal”.The “Law” of Demand3Higher price for a good, other things equal, leads people to demand a smaller quantity of the good.Shifts in Demand4 The “other things equal” assumption is extremely important. If other things are not held constant, demand will shift. Factors causing demand to shift includeCh h f l d dChanges in the prices of related goods. Substitutes and complements Changes in income Normal goods and inferior goods Changes in tastes, and Changes in expectations.2Shifts in Demand: Examples5PriceCauses: income rises (if the good is a normal good); price of a complement goes down (substitute goes up); people like the good more; or theyQuantitylike the good more; or they expect it to become more valuableIncome falls, or prices or tastes changeDA Pitfall: Confusing Movements Along vs. Shifts in Demand6 Price changes cause movements along a demand curve. Other factors will cause shifts in demand. Increase in the price of peanuts will cause a reduction (shift) in the demand for jelly. Discovery that peanut M&Ms increase lifespan would reduce demand for Butterfingers. Increases in income will (generally) reduce demand for Kraft dinners (or Ramen noodles). Increases in the expected value of a college degree would increase demand for college.Movements Along vs. Shifts in the Demand Curve7PA shift of the demand curve…Q… is not the same thing as a movement along the D curveDD’The Supply Curve8 The supply curve shows the amount of good or service suppliers will be willing and able to sell at a particular time at a particular price, ceteris parabus. The supply curve is upward sloping because, all else being equal, as the price of a good rises, people are willing to sell a greater quantity of the good.3The Supply Curve9What Causes Shifts in the Supply Curve?10 Changes in input prices. An input is a good that is used to produce another good. An increase in the price of steel will lower the supply of automobiles. Changes in technology.Better engineering can increase the supply of computers. More Better engineering can increase the supply of computers. More computers will be supplied at a given price. Changes in expectations. Changing diet fads will reduce the supply of products like “low carbohydrate bread and pasta.”Movement Along and Shifts in the Supply Curve11PA shift of the supply curve…Q… is not the same thing as a movement along the supply curve.SS’Market Equilibrium12 A competitive market is in equilibrium when price has moved to a level at which quantity demand equals quantity supplied of that good. Competitive markets have many buyers and sellers and none is large enough to individually affect the price.none is large enough to individually affect the price. Why do markets reach an equilibrium? If prices are too high, there is excess supply (a surplus) and people will lower prices. If prices are too low, there is excess demand (a shortage) and people will raise prices.4Market Equilibrium13An Example Demand is Q = 64-5P Supply is P=4+2Q Solve for the equilibrium, graph your result.14P(0,12.8)(5,14)SEquilibrium D: Q=64-5P S:Q=-2+.5P, set D=S Implies 64-5P=-2+.5P 5.5P=66, implies P=12 and Q=4Q(64,0)D(0,4)(4,12)Prices Above Equilibrium Result in a Surplus15PSSurplusQDQuantity suppliedQuantity demandedEquilibriumPrice Below Its Equilibrium Level Creates a Shortage165Analyze the (short run) Market for Diet Dr. Pepper if the Surgeon General Says It Promotes Weight Loss17PriceSAn increase in demand…P’… leads to a movement along the supply curve to a hi h ilib i i dQuantityDD’PQQ’higher equilibrium price and quantityAnalyze the Orange Market if Florida has a Wisconsin Winter18PriceSS’A decrease in supply…P’ldQuantityDPP’QQ’… leads to a movement along the demand curve to a higher equilibrium price and lower quantitySimultaneous Shifts of the Demand and Supply Curves: Two Examples Bad weather in Florida, and fruit causes hair loss Manufacturing efficiencies and virusesPSS’P SS’19DQ of orangesD’Q falls, P ? (up here)Q of computersDD’SQ ? (up here), P
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