ECON 201 1st Edition Lecture 10Outline of Last Lecture I. Example Problem: Demand Curve ShiftersII. Review: Shift vs. Movement Along a CurveIII. Supplya. Definition of supplyb. Definition of quantity suppliedc. Definition of law of supplyd. Definition of supply schedulee. Definition of supply curveIV. Market Supply vs. Individual SupplyV. Supply Curve ShiftersVI. Example Supply and Demand ProblemOutline of Current Lecture I. Exam RemindersII. Equilibriuma. Definition of equilibriumb. Definition of stable equilibrium modelIII. Analyzing the Events Affecting the MarketIV. Analyzing Multiple Events Affecting a MarketV. Example of Effects of Multiple Events on a MarketCurrent LectureI. Exam RemindersJust a reminder, our exam for this class is Wednesday, February 4th. For the exam, you need a full-size scan-tron, a #2 pencil, and a non-programmable calculator (TI-83 and TI-84 are prohibited).II. EquilibriumNow that we have reviewed supply and demand separately and graphed supply and demand curves, we can graph them together on one plot to find equilibrium. Equilibrium is the point on the curve where anyone who is willing and able to buy will buy, and anyone who is willing and able to sell will sell. At this price, there is no one who will not get to participate in the interaction if they don’t want to. This is expressed as Qs = Qd. An example graph of the supply 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.and demand curve is shown below. The supply is the blue dotted line while the demand is the red dotted line. The point at which the two intersect is the equilibrium. When Qs = Qd, the equilibrium price and the equilibrium quantity will equal. This graph displaying the equilibrium of the supply and demand curve is known as the stable equilibrium model.III.Analyzing the Events Affecting the MarketTo determine the effects of any event in a market, you can use the three steps below.1. Decide whether the curve shifts the S-curve, the D-curve, or both. 2. Decide in which direction the curve shifts.3. Use the supply-demand diagram to see how the shift changes equilibrium price and quantity.To better understand this system, we will review a practice example. In the hybrid car market, there is a sudden increase in the price of gas. What is the effect on the market?1. An increase in the price of gas represents a shift in demand. Gas is a substitute good, as a driver will either have a hybrid car or a gasoline powered car. Remember with substitute goods, if the price of one increases, the demand for the other increases.2. If the demand of hybrid cars is increasing, this will result in a positive shift to the right. 3. This results in an increase in the equilibrium price and an increase in the equilibrium quantity of hybrid cars. This is evident in the graph below. The blue dotted line still represents the supply line and the red dotted line still represents the demand line. Now, the additional green dotted line shows the shift in the demand curve to the right. Note that as the price rises, the producers supply a larger quantity, even though the supply curve has not shifted. It is essential to remember to distinguish between a shift in the curve and a movement along the curve for the exam!Supply and Demand CurvesQuantityPriceIV. Analyzing Multiple Events Affecting a MarketOftentimes, in a real world market, there will not be just one change that is causing a shift in thesupply and demand curves. A product may have a technological improvement (affecting the supply curve) and at the same time there may be an increase in income (affecting the demand curve). It is important to understand how multiple events can affect one market, and to distinguish each event as affecting either the supply curve or the demand curve. In this way, onecan see the overall outcome that those factors have on the market. The four graphs below demonstrate how a supply increase, supply decrease, demand increase, and demand decrease affect the equilibrium price and the equilibrium quantity. In the first example below, an increasein the supply curve, it is evident that as supply increases equilibrium quantity increases but equilibrium price decreases.Increase in Demand CurveSLinear (S)D1Linear (D1)D2Linear (D2)QuantityPriceIncrease in Supply CurveDLinear (D)S1Linear (S1)S2Linear (S2)QuantityPriceWith a supply decrease, the equilibrium quantity decreases while the equilibrium price increases.With a demand increase, both the equilibrium quantity and the equilibrium price increase.Decrease in Supply CurveDLinear (D)S1Linear (S1)S2Linear (S2)QuantityPriceIncrease in Demand CurveSLinear (S)D1Linear (D1)D2Linear (D2)QuantityPriceWith a demand decrease, both the equilibrium quantity and the equilibrium price decrease.V. Example of Effects of Multiple Events on a MarketIn the music industry, say that there is a decrease in the demand of music downloads. Also, say that there is a decrease in the cost of production, resulting in an increase in supply. What are the effects on the equilibrium price and equilibrium quantity? What will the final supply and demand curve look like? Well, if the demand is decreased, we can use the information from the graph above to say that there will be a decrease in equilibrium quantity and equilibrium price. In addition, if the supply is increased, we can see that there will be a decrease in equilibrium price and an increase in equilibrium quantity. What is the resulting effect? In both cases, the equilibrium price drops. Though we don’t know any values, we can say for a certainty that the equilibrium price will be lower than it was to start with. This is definitive. As for the equilibrium quantity, it decreases due to demand and increases due to supply. Without any numeric values to determine how much the equilibrium quantity rose and fell, there is no way of knowing the ultimate effect on equilibrium quantity. It is ambiguous. Decrease in Demand CurveSLinear (S)D1Linear (D1)D2Linear