February 2, 2011The Demand CurveLaw of Demand: there is an inverse (negative) relationship between the price of a good and the quantity that buyers are willing to purchaseResults in a downward sloping curve* See chart!As price increases, quantity demanded decreases!The height of the demand curve at any quantity shows the maximum price that consumers are willing to pay for an additional unitWhen consumers have more of the good, they value it less (Law of Diminishing Marginal Utility)Consumer SurplusConsumer surplus: the difference between the maximum amount consumers would be willing to pay and the amount that they actually payThe area below the demand curve but above the pricePrices fall consumer surplus increases in sizePrices rise consumer surplus decreases in sizei.e. Willing to pay $20, but in reality only pay $10 consumer surplus= $10Willing to PayPrice = $51.$20CS: $152.$15CS: $103.$10CS: $5Total CS: $30*See chart!Demand vs. Quantity DemandedChange in quantity demanded: A movement along the curveCaused by: a change in the price of that goodIncrease in quantity demanded: movement down on the curve (to the right) because price is lowerDecrease in quantity demanded: movement up the curve (to the left) because price is higher* See chart!Change in Demand: A shift of the curveCaused by: a change in anything that affects demand other than the price of the good (i.e. 21st birthday at a club influence how many shots you buy). Not buying good because of prices!Increase in demand: curve shifts rightDecrease in demand: curve shifts left* See chart!Shifters of Demand1. Change in consumer income (how much money you have)Normal goods: Income increases Demand increasesInferior goods (things you buy because they’re cheap but not because you love them): Income increases Demand decreases. This is because you can afford the better stuff nowWhat makes a good normal or inferior depends on preference2. Change in number of consumers# of consumers increases Demand increasesMore people to buy things3. Change in the price of a related goodSubstitutions (Beef and chicken)Price of substitution increases Demand for original good increasesPrice of chicken increases Demand for beef increasesCompliments (Milk and Cereal)Price of compliment increases Demand decreasesPrice of milk increases Demand for cereal decreases4. Change in expectationsExpected change in price (sale is coming up)Price in future increases Demand right now increasesExpected change in income (getting a raise in two weeks)Income in future increasesDemand (spending money now) increases5. Change in consumer tastes and preferencesConsumer popularity increases Demand increasesi.e. Michel Phelps posters after 8 gold medals vs. when he was caught with weedExamplesWhat would happen to the demand for beef if the price of chicken increased? Demand would increaseWhat would happen to your demand for steak (normal good) if your income decreased? Demand would decreaseWhat would happen to the demand for milk if the price of milk fell? NOTHING! PRICE EFFECTS QUALITY DEMANDED, NOT DEMAND!The Supply CurveLaw of supply: there is a direct (positive) relationship between the price of a good and the amount that suppliers are willing to produceResults in an upward sloping curve*See chart!As price increases, quantity supplied increases!The height of the supply curve indicates the minimum price necessary to induce producers to supply an additional unitProducer SurplusProducer surplus: the difference between the minimum price suppliers are willing to accept and the price they actually receiveThe area above the supply curve but below pricePrice falls: Surplus decreasesPrice rises: Surplus increasesConsumerEdward: $4000Consumer Surplus: $1000Price$3000Producer Surplus: $1000ProducerViviane: $2000Supply vs. Quantity SuppliedChange in quantity supplied: a movement along the curveCaused by a change in the price of that good:Increase in quantity supplied: Movement up the curve (to the right)Decrease in quantity supplied: movement down the curve (to the left)*See chart!Change in supply: a shift of the curveCaused by a change in anything that affects supply other than the price of the goodIncrease in supply: curve shifts rightDecrease in supply: curve shifts left*See chartShifters of Supply1. A change in resource (anything used to make the good) pricei.e. increase in the price of steel=less cars are madePrice of resource increasesSupply decreases2. A change in technologyi.e. Printing press (can make more books more efficiently)Technology increaseSupply increaseChanges in nature and politicsi.e. Crop freezeNature/Politics? Depends on the change4. Change in taxesi.e. Yacht taxTaxes increaseSupply decreasesElasticityInelastic: Changes in quantity are not sensitive to changes in price (inelastic curves are steeper/more vertical)Elastic: Changes in quantity are sensitive to changes in price (elastic curves are flatter/more horizontal)*See charts!Market Equilibrium *See all charts!Market equilibrium: A state in which conflicting forces of supply and demand are in balanceOccurs when supply curve intersects demand curveIn market equilibrium:All trades that generate more benefit then costs are undertakenNo trades where costs exceed benefits are undertakenThe combined area of consumer and producer surplus is maximizedMarket equilibrium is economically efficient: no excess supply or excess demandExcess supply: quantity supplied > quantity demandedExcess demand: quantity demanded > quality suppliedFebruary 14, 2011Changes in DemandDemand changes:Price moves in same directionQuantity: moves in same directioni.e. Demand increasesPrice increasesQuantity increasesi.e. Demand decreasesPrice decreasesQuantity decreasesChanges in SupplySupply changes:Price: moves in opposite directionQuantity: moves in same directioni.e. Supply increasesPrice decreasesQuantity increasesi.e. Supply decreasesPrice increasesQuantity decreasesChanges in Both *Look at graphs1)Demand increases:Quantity increasesPrice increasesSupply increases:Quantity increasesPrice decreasesResultQuantity increasesPrice ?2)Demand decreases:Quantity decreasesPrice decreasesSupply decreases:Quantity decreasesPrice increasesResultQuantity decreasesPrice ?3)Demand increasesQuantity increasesPrice increasesSupply decreasesQuantity decreasesPrice increasesResultQuantity ?Price increases4)Demand decreases:Quantity decreasesPrice decreasesSupply increases:Quantity increasesPrice