Lecture 7Outline of Last LectureI. Example of Economic AnalysisII. Supply and DemandA. Definition of DemandB. Definition of PriceC. Definition of Quantity DemandedD. Definition of Law of DemandIII. Demand ScheduleA. Demand CurveIV. Supply ScheduleA. Supply CurveV. Market Equilibrium GraphOutline of Current Lecture I. Demand SurplusA. Definition of SurplusB. Changes in PricesII. Demand ShortageA. Definition of ShortageIII. Other Economic ChangesA. The New Demand CurveB. Demand Curve ShiftsIV. Supply Curve ShiftsCurrent Lecture350 400 450 500 550 600 650 700 750 800 85000.511.522.5Supply and Demand GraphsupplydemandQuantity of Gas (millions of gallons)Price (dollars) AGEC 217 1nd EditionThe above graph is the same as the one from the previous lecture. It give the supply and demand for millions of gallons of gas at given prices. It also gives the market equilibrium, when supply equals demand, which is at a price of $1.40 and 600 millions of gallons of gas. Suppose the price of gas is not at the market equilibrium though. Let us say the price is equal to $2.20. If we refer to the graph above, we can see that at this price the quantity demanded is 400 million gallons. The supply of gas is 700 million gallons at this price. This leads to a surplus. A surplus happens when the quantity supplied is greater than the quantity demanded. When this happens, the price will start to fall. This causes the quantity demanded to rise and the excess supplies of good can be sold. This will happen until the market equilibrium is reached again. As long as the price of the product is greater than the market equilibrium price, there will be pressure on the supplier to lower the price. This is because the supplier can sell the goods at a higher price. Suppose the price of gas is instead $1.00. Looking at the graph, you can see that at that price the quantity demanded is 800 million gallons. Only 500 million gallons are being supplied. This situation describes a shortage. A shortage happens when the quantity demanded is greater that the quantity that is supplied. Eventually the price of the product will start to rise, until the market equilibrium is reached again. As long as the price is less than the equilibrium price, some consumers will “bid up” the price. In general, the market equilibrium is stable. This method is also allocatively efficient. The people who want to consume a good at thatprice are there and satisfied. What if something else besides the price changes? Suppose your income increases, but the price of a given good stays the same. As illustrated below, the demand curve will shift. You’re likely to buy more of the good at the same price. The quantity demanded will increase at all prices.Price D2 D1 QuantityListed below are examples are what causes shifts, like above, in the demand curve.1. Changes in income2. Taste and Preferences, such as seasonal consumption3. Population4. Future expectations5. Price of related goodsListed below are examples of what causes shifts in the supply curve.1. Changes in technology2. Weather and natural disasters3. Price of inputs4.
View Full Document
Unlocking...