ECON 203 1st Edition Lecture 5 Outline of Last Lecture I. Marginal CostII. Decision Rulea. Use of the decision ruleIII. First Law of SupplyIV. Ceteris Paribus Conditions for SupplyOutline of Current Lecture I. CompetitionII. MarketIII. EquilibriumIV. Comparative Statisticsa. Examples with explanationsCurrent LectureI. Competition a. Demanders compete with other demanders. Suppliers compete with other suppliers. Demanders like low prices for what they buy, but their competition with one another to consume stuff drives prices up.b. Suppliers like high prices for what they sell, but their competition with one another to sell their products (supply) drives prices downThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.II. Market a. process or location in which equilibrium is established and the otherwise inconsistent aspirations of demanders and suppliers are reconciled.Suppose somehow that we are at PH. At this price, QS1 > QD1. This is called an excess quantity supplied (sometimes called a surplus, but think excess quantity supplied). Suppliers would like to supply more than demanders want to purchase. Suppliers will not be able to sell all of their goods at this high price. They will lower their prices; that is, there is downward pressure on price. This continues until the equilibrium price is reached.Suppose somehow that we are at PL. At this price, QD2 > QS2. This is called an excess quantity demanded (sometimes called a shortage). At this low price, many consumers want to buy the product, but suppliers won’t be willing to produce as much as the consumers desire. This will cause upward pressure on price.PE and QE are the equilibrium price and quantity. This occurs where the supply curve intersects the demand curve. The quantity demanded and the quantity supplied are equal in equilibrium.III. Equilibrium a. an outcome or state that will tend to persist unless disturbed by a change in one or more of the ceteris paribus conditions. It is also the state in which the aspirations of suppliers are consistent with each other and the state of the world.b. At PE, Demanders want to purchase QE. At PE, Suppliers want to supply QE. Everyone who is willing to pay PE can buy the goods they want. Everyone who is willing to supply goods at PE is supplying what they want.c. Once we are at equilibrium, we will stay at equilibrium, until a ceteris paribus condition is changed. However, every time we change a ceteris paribus condition, there will be a new equilibrium.IV. Comparative Statisticsa. Compare the equilibrium before and after a change in one or more ceterisparibus conditions.1. Start in initial equilibrium (draw an initial S & D curve to start) 2. Change one or more of the ceteris paribus conditions 3. Examine the impact on demand or supply (shift the appropriate curve) 4. Examine new equilibrium (compare)b. Examples:Suppose we are looking at the market for oranges. The initial equilibrium is (P0, Q0). There is an increase in income. Oranges are a normal good. This causes the demand curve to shift to the right. At the original price, P0, there will be an excess quantity demanded, putting upward pressure on the price. The new equilibrium will be (P1, Q1). Both price and quantity will increase.Now, suppose unusually cold weather occurs in Florida, destroying some of the orange crop. This causes a reduction in the supply of oranges. The initial equilibrium is (P0, QO). The new equilibrium is (P1, Q1). The price will increase and the quantity will decrease.Now suppose there are two goods, butter and popcorn, which are compliments. If there is an increase in supply for butter, what happens to the popcorn market? First, the initial equilibrium in both markets are labeled (P0, Q0). The increase in supply in the butter market results in a lower price and higher quantity (P1, Q1). Since butter is a complement for popcorn, and butter is cheaper, the demand for popcorn will increase (recall that one of the ceteris paribus conditions for the demand for popcorn is that the prices of related goods remain constants. By lowering the price of a compliment, this shifts out the demand for popcorn). The new equilibrium in the popcorn market is (P1, Q1).Suppose we are looking at the market for prostitution. Suddenly, AIDS is developed. What happens to the prostitution market. Again, the initial equilibrium is (P0, QO). AIDS decreases the demand for prostitution, as well as decreases the supply of prostitution. The new equilibrium is (P1, Q1).As it is drawn, the price does not appear to have change. However, the change in price is ambiguous. This can be seen two ways. First, take the two changes one ata time.V. The other way this can be shown is to use supply and demand shifts of different magnitudes. Draw this with a large demand curve shift and a small supply curve shift. Check your answer. Now draw it again with a large supply curve shift and a small demand curve shift. Compare. You should see that in one case the price rises, while in the other case, the price falls.VI. In general, if you simultaneously change both a ceteris paribus condition for both supply and for demand, the direction in the change of price or change in quantity will be