ECO2030 1st Edition Lecture 9 Outline of Last Lecture I Demand curve shifters Outline of Current Lecture II Demand and supply III Supply curve shifters IV Terms and definitions Current Lecture Supply and demand Costs go up as you expand output this is hard for us to understand as consumers because we are used to bulk discounts however expanding output can mean building new buildings hiring new people buying new stuff Supply curve shifters something other than price Supply curve a shift to the right means it is an increase in supply because you are producing more at the same price at every point on the curve Input prices wages prices of raw materials a fall in input prices makes production more profitable at each output price so firms supply a larger quantity at each price which shifts the curve to the right Technology determines how much inputs are required to produce a unit of output a cost saving technology improvement has the same effect as a fall in input prices shifts the supply curve to the right of Sellers an increase in the number of sellers will increase the quantity supplied at each price supply curve shifts to the right a decrease shifts it left Expectations in general sellers may adjust supply when their expectations of future prices change e g events in the middle east lead to expectations of higher oil prices in response owners of texas oilfields reduce supply no save some inventory to sell later at a higher price supply curve shifts left Examples What happens to the supply curve of tax software if A Retailers cut the price of the software B A technological advance allows retailers to produce the software more cheaply C Professional tax return preparers raise their price A Since this is price related the supply curve does not shift however it will move along the curve line if the price goes down the quantity goes down B This is a technological advancement therefore it is a supply curve shifter technological advancement is almost always a positive thing meaning the curve shifts right The curve moves right because they can produce more software at the same price C This actually shifts the demand curve to the right not the supply curve This is because as Tax preparers charge more there will be an increased demand for do it yourself options Tax software Supply and demand together Equilibrium where price has reached the level where quantity supplied equals the quantity demanded Equilibrium price the price that equates the quantity demanded Price is always driven to the equilibrium price Surplus when the quantity supplied is greater than the number demanded FAcing a surplus sellers try to increase sales by cutting prices thinking at the margin This causes quantity demand to rise and quantity supply to fall this drives the price down to equilibrium Shortage excess demand facing a shortage sellers raise prices to reduce excess demand causing quantity demand to fall and quantity supply rise this reduces shortage prices will continue to rise until market reaches equilibrium Three steps to determine the effects of any event 1 Determine whether the event shifts the S curve D curve or both Remember if it is price related it will move up or down the curve not shift it 2 Decide which direction the curve shifts 3 Use the supply and demand curve to determine how the changes shift equilibrium P and Q hybrid car example What happens to hybrid cars if the price of gas increases Since an increase in gas prices increases the demand for hybrid cars the demand curve shifts to the right Notice how this shift does not shift the supply curve However since the demand curve shifted the price increased and so does the quantity this makes a movement along the supply curve instead of a shift
View Full Document
Unlocking...