Econ 201 1st Edition Lecture 5Outline of Last Lecture I. Benefits of SpecializationII. Comparative Advantagea. TradeIII. Absolute AdvantageIV. PracticeOutline of Current Lecture I. Competitive MarketII. Demand CurveIII. Supply CurveIV. Movements and Shifts Along a CurveCurrent LectureSupply and Demand-Competitive Markets abide by the following assumptions:1. A sufficient number of buyers and sellers of the good exist.2. The good is homogeneous.3. Information is perfect. (people know the quality of the product, what is should cost, and what to expect)4. No barriers to entry or exit are present.-What does a competitive market mean?-There are many buyers and sellers-They all have the same good or service-No one can influence the price-Supply and Demand model is a model of how a competitive market behaves.Constructing the Demand Curve-Class activity: How much would you pay for a chocolate bar? (willingness to pay) The options are $1, $3, $5, or $8. The professor asked the class to raise their hands at which one they would be willing to pay.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.Results: Nobody would buy an $8 bar, one person would buy a $5 bar, 30 would buy it for $3, and 50 would pay $1.-Quantity demanded: the actual quantity that buyers are willing (and able) to purchase at a particular price.-Demand schedule: shows how much of a good or service consumers will want to buy at different prices.-Demand: represents the behavior of buyers.-Demand curve: a graph of the demand schedule.-A change in quantity demanded  movement along the demand curve-A change in demand  shifting the demand curveShifts of the Demand Curve-An increase in demand is a rightward shift- Greater willingness to pay for the same quantity- Greater quantity demanded at the same price-A decrease in demand is a leftward shift- Lower willingness to pay for the same quantity- Less quantity demanded at the same price-Important shift factors of the demand curve:-income-the prices of other goods-tastes-expectations-number of buyers1. Changes in Income-The effect of changes in income on demand depends on the nature of the good in question.- A normal good: Demand increases when income increases (and vice versa).- An inferior good: Demand decreases when income increases (and vice versa).-Activity: is the item a normal good (N) or inferior good (I)?- Canned ‘Spam’: I- Smart phone: N- Ramen noodles: I- Lobster: N- Beer: I (although the class argued that it depends)- Champagne: N2. Changes in Price of Related GoodsSubstitutes-Example: substituting margarine for butter, or a less expensive toothpaste for Colgate toothpaste.-Example: What will happen to the demand for margarine if the price of butter declines?Answer: There will be a decrease in demand-Example: What will happen to the demand for travel in Hawaii if the (perceived) safety cost oftraveling to Mexico increases?Answer: The demand to go to Hawaii increasesComplements-Consumers often have to buy goods together.Example: gasoline and SUVs.-Question: What will happen to the demand for energy costly cars if the price of gasoline increases?Answer: The demand for the cars will decrease.3. Changes in Taste-Tastes and preferences are subjective and vary among consumers.Example: the demand for boots increases in OctoberExample: the runway trend report says that orange is the new black, so the demand for orange clothing increases4. Changes in Expectations-You learn that your long-lost, 100-year-old great aunt will leave you a million dollars when she dies. What will happen to your demand now for a number of different goods?Answer: it will increase because you expect to be rich really soon5. Changes in the Number of Consumers-As the population of an economy changes, the number of buyers of a particular good also changes (thereby changing its demand).Example: When birth rates drop in Russia, the demand for diapers also decreases.Review Questions1. If store-brand soup prices are cut, what will be the effect in the market for Campbell’s soup?Answer: the demand will decrease2. What will happen in the market for arrows if the price of bows increases?Answer: the demand will decrease3. When the price of petroleum goes up, the demand for natural gas ______, the demand for coal ______, and the demand for solar power ______. (Assume these goods are substitutes for petroleum.)Answer: a. increases; increases; increases4. Which of the following will cause an increase in the demand for autos?Answer: c. Gasoline prices drop by 50% when OPEC nations increase production.Supply-Supply represents the behavior of sellers.-The quantity supplied is the quantity that producers are willing and able to sell at a particular price.-A supply curve shows the quantity supplied at various prices.-A change in quantity supplied  movement along the supply curve-A change in supply  shifting the supply curve-An increase in supply means a rightward shift of the supply curve.- A decrease in supply means a leftward shift of the supply curve.Some important demand shift factors include:- input prices- technology- expectations- the number of producers1. Changes in Price of InputsWhat will happen to the supply of white t-shirts if the price of cotton increases?Answer: the supply decreases2. Changes of TechnologyWhat will happen to the supply of Fiat cars if the car company has a technological breakthrough that improves its production process?Answer: The supply increases3. Changes in ExpectationsWhat will happen to the supply of rice now if sellers expect its price to rise in the future?Answer: The supply will decrease because the producer saves it for later when it will be worth more.4. WeatherWhat will happen to the supply of oranges if Florida is hit by a hurricane?Answer: The supply decreasesQuestions1. What will happen in the market for blue jeans if the wages of blue jean workers increase?Decrease in supply2. What will happen in the market for coffee if the price of coffee decreases?Increase in supply3. What will occur in the market for apples if a technological innovation decreases their cost of production?Increase in