ECON 1123 1st Edition Lecture 4 Outline From Previous Lecture I The Circular Flow of Income A Resource Markets B Output Markets II Price Determination in Competitive Markets A Demand B Supply III Demand Determinants of Demand Review but with some new things added IV Demand Curves V Determinants of Supply A Price of the output or resource B Prices of the resources used to produce the output C Technology D Number of Sellers E Sellers expectation about future prices Outline Lecture 4 I Supply A Graphical View II Demand Supply and Price Determination in Competitive Markets III Changes in Demand and Supply A Increases in buyer s incomes B Stronger Buyer s tastes C Buyer s expect higher future prices and or higher future incomes D More buyers in the market E Higher prices for substitutes These 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 F Lower Price for Compliments IV Relationship Between individual Demand and Market Demand Lecture 4 Notes V Supply A Graphical View When drawing a supply diagram the vertical axis will have the price per unit labeled as Q1 The horizontal axis will have your quantity over time labeled as Q T Note When drawing diagrams in this class you must always label the axis The supply schedule will most always increase to the right and the demand schedule decreases to the right This means that the graph of these together should make an X shape The point where the two schedules intersect is called the equilibrium point This will give us both the equilibrium price and the equilibrium quantity This point is usually where we stay unless there is some type of law that permits us If the price is decreased lower than the equilibrium point there are more people out there willing to buy at the new low price but fewer people willing to sell This excess demand is what causes shortages Note Sellers want to sell things at the highest possible price buyers want to buy things at the lowest possible price These may seem like conflicts of interest but these conflicts are reconciled when we reach the equilibrium price VI Demand Supply and Price Determination in Competitive Markets In Competitive Markets non equilibrium prices and quantities are temporary and self correcting if there are no artificial controls on price Note In 1776 There was a book written by Adam Smith called Wealth of Nations He proposed an idea of invisible hands that in competitive markets are always there to lead us to the equilibrium point This thought still applies to economics today The only time the invisible hands do not work is when there is some type of control on price Such as a Legal Price Ceiling where the maximum price is set by law and one cannot charge over it This leads to a gap in how much buyers want to buy and how much sellers want to sell This typically leads to shortages and problems with the quality of the product VII Changes in Demand and Supply These changes are shown by shifts in the demand and or supply schedule Increases in demand can be due to any one or any combination of these factors G Increases in buyer s incomes H Stronger Buyer s tastes I Buyer s expect higher future prices and or higher future incomes J More buyers in the market K Higher prices for substitutes L Lower Price for Compliments Note Demand shifts to the right if there is an increase in demand This creates more quantity of the product at the same price VIII Relationship between Individual Demand and Market Demand Note An individual cannot do anything about the set price of something They are pricetakers An individual demand schedule will look just like a regular demand schedule only the horizontal axis is labeled with a lowercase q t and the demand will be labeled with a lowercase d These are to show that it is an individual rather than a firm In the case that there are three individuals in a market the quantity that all three are willing to buy at the set price of the good is the full quantity demanded for the firm This would be a capital Q