ECO2030 1st Edition Lecture 9Outline of Last Lecture I. Demand curve shiftersOutline of Current Lecture II. Demand and supply III. Supply curve shiftersIV. Terms and definitionsCurrent LectureSupply 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 whichshifts 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 ata higher price.○ supply curve shifts left. Examples: What happens to the supply curve of tax software if,A. Retailers cut the price of the softwareB. A technological advance allows retailers to produce the software more cheaplyC. Professional tax return preparers raise their priceA. Since this is price related the supplycurve does not shift, however it willmove along the curve/line (if the pricegoes down the quantity goes down).B. This is a technological advancement,therefore it is a supply curve shifter(technological advancement is almostalways a positive thing, meaning thecurve shifts right). The curve movesright because they can produce moresoftware at the same price. C. This actually shifts the demand curve tothe 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 thatequates the quantity demanded. ○ Price is always driven to theequilibrium price!● Surplus - when the quantity supplied isgreater than the number demanded. ○ FAcing a surplus sellers try toincrease sales by cutting prices(thinking at the margin). Thiscauses quantity demand to rise and quantity supply to fall, this drives the price down to equilibrium. ● Shortage - excess demand○ facing a shortage sellers raiseprices to reduce excess demand,causing quantity demand to fall andquantity supply rise, this reducesshortage, prices will continue to riseuntil market reaches equilibrium.Three steps to determine the effects of anyevent:1. Determine whether the event shifts the Scurve, D curve or both. (Remember, if it isprice related it will move up or down thecurve, not shift it).2. Decide which direction the curve shifts.3. Use the supply and demand curve todetermine how the changes shift equilibriumP and Q. hybrid car example: What happens to hybrid cars ifthe price of gas increases?Since an increase in gas pricesincreases the demand for hybrid cars, thedemand curve shifts to the right. Notice howthis shift does not shift the supply curve.However, since the demand curve shifted theprice increased and so does the quantity thismakes a movement along the supply curveinstead of a
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