EC 111 1st Edition Lecture 4PREVIOUS LECTUREI. DemandII. Demand Curve ShiftersIII. SupplyIV. Supply Curve ShiftersV. Supply and Demand TogetherCURRENT LECTUREI. Surplus and ShortageII. Three Steps To Analyzing Changes In EquilibriumIII. Terms For Shift Vs. Movement Along CurveIV. Calculating Percent ChangesSURPLUS AND SHORTAGE- Surplus (excess supply): when a quantity is greater than quantity demandedo Caused by the price being too high- Facing a surplus sellers try to increase sales by cutting the price. This causes quantity demanded to rise and quantity supplied to fall.- Prices continue to fall until market reaches equilibrium- Equilibrium is where the market clears- Shortage (excess demand): when quantity demanded is greater than quantity suppliedo Caused by prices being too low- Facing a shortage sellers raise the price, causing quantity demanded to fall and quantity suppliedto rise- Prices continue to rise until market reaches equilibrium- If there are no barriers the market will reach equilibrium ALWAYSTHREE STEPS TO ANALYZING CHANGES IN EQUILIBRIUM1. Decide whether event shifts supply curve or demand curve or both2. Decide in which direction curve shifts3. Use supply-demand diagram to see how the shift changes equilibrium for price and quantity- An increase in gas causes a rightward shift in demand for hybrid cars because price of gas affects demand for hybrids. This is due to tastes and preferences. Supply curve does not change 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.because price in gas does not affect the cost of making cars. High gas prices makes hybrids more attractive relative to other cars. Equilibrium price of a hybrid goes up and equilibrium quantity goes up.- Notice: when price rises producers supply a larger quantity of hybrids even though the supply curve does not shift (we move along the supply curve)- A new technology that reduces the cost of producing hybrid cars causes the supply curve to shift to the right. It makes production more profitable at any given price. The shift causes price to fall and quantity to rise- Gas prices rise AND a new technology reduces production costs for hybrids. Supply curve shifts right and demand curve shifts right. Quantity rises, but the effect on price is ambiguous or uncertain- When supply and demand are shifting in the same directions, price will be ambiguous. Quantity must change- When supply and demand are shifting in opposite directions, quantity will be ambiguous. Price must change- A fall in the price of frozen yogurt causes the demand for ice cream to go down. Shifts the demand curve for ice cream to the left. Frozen yogurt is a substitute of ice cream. Quantity and price of ice cream goes down- A large increase in the supply of milk causes the supply curve for ice cream to shift to the left. Milk is an input for ice cream. Quantity goes up and price goes down- The price in frozen yogurt falls and the supply of milk increases. Demand shifts to the left and supply shifts to the right. Price falls and quantity is ambiguousTERMS FOR SHIFT VS. MOVEMENT ALONG CURVE- Change in Supply: a shift in the supply curve. Occurs when a non-price determinant changes (liketechnology)- Change in the Quantity Supplied: a movement along a fixed supply curve. Occurs when price changes- Change in Demand: a shift in the demand curve. Occurs when a non-price determinant of demand changes (like income or number of buyers)- Change in the Quantity Demanded: a movement along the demand curve. Occurs when price changesELASTICITY AND ITS APPLICATION- You cannot assume that raising your price will increase your revenue. You must find your elasticity to find this out- Elasticity measures how much one variable responds to changes in another variableo One type of elasticity measures how much demand for your product will fall if you raise your price- Elasticity: a numerical measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants- Price Elasticity of Demand: measures how much quantity demanded responds to a change in priceo Calculated as: (% change in Quantity Demanded)/(% change in Price)o It measures the price-sensitivity of buyers’ demand- Want vs. need and location are very important to price elasticity of demand- Along a demand curve, price and quantity move in opposite directions, which would make price elasticity negative. We will drop the negative sign and report all price elasticities as positive numbersCALCULATING PERCENT CHANGES- Calculating Percentage Changes: standard method of computing the percentage change: [(end value-start value)/start value]*100%o The standard method gives different answers depending on where you start. o We can not use this for calculating elasticities - Midpoint Method: we use this instead of the standard percent changes. The midpoint is the number halfway between the start and end values (it is the average). Doesn’t matter which valueyou use as the start or the end-works both wayso [(end value- start value)/midpoint]*100%o You do not have to multiply by 100 if you don’t want