Lecture Outline – Demand and Supply1. The Demand Curve•Shows the quantity that consumers are willing and able to buy at different prices in a given period of time•Shows the quantity demanded at different prices· What is the relationship between price and the quantity demanded?-Inverse relationship. As price increases demand decreases. price on the y-axis, quantity on the x-axis· How do you read a demand curve horizontally? Vertically?-Demand curve is read horizontally. How much are consumers willing andable to buy. Vertical reading shows value of a particular unit of something.o Explain why each point on the demand curve represents the marginal value of a particular unit. On a demand curve, each point is a tradeoff- you either pay a little bit more or get a little bit less· What is consumer surplus (CS) and how is it measured?o Gain that a consumer gets from making an exchange. CS= Value that the con-sumer receives - price that the consumer pays. CS=Value - Price Use CS to explain the buyer’s decision to participate in a market.· If the cup of coffee is worth $5 to someone, they will not pay more than that for any cup. IF the coffee costs less than $5, she will participate in the market· What is the difference between an increase in demand and an increase in the quantity demanded?o If the demand curve shifts up or right, this is an increase in demand.1o Increase in quantity demanded is just a shift along the demand curve.o A shift in the demand curve is caused by a change in something other than the price of the good/service. Change in demand=shift of the demand curveo IF the demand curve shifts up/right, there is an increase in demand. Shift to the right=at each and every price, consumers are willing to buy more units. Shift up = People will pay more for a given unit.o Decrease in demand = demand curve shifts down or to the left. Shift down = people are not willing to pay the same price for a unit. Shift left = consumers are not willing to buy as many units for the given price.· Using the horizontal reading method, what does an increase/decrease in demand tell us?o Consumers will buy more or less unites at the same given price· Using the vertical reading method, what does an increase/decrease in demand tell us?o Consumers will pay more or less for the given unit.· Name each of the demand shifters and give an example of each.o Income will cause the demand curve to shift.o Population (increase in numbers or the type of demographics)o Price of Substitutes (tea v. coffee)o Price of Compliments (computers &software, PB&J, etc...)o Tastes o Expectations Differentiate between a normal and inferior good· Normal good = we will buy more of when income increases (Ex. Shrimp) Demand will shift to the right2· Increase in income + normal good = Demand increases· Inferior good: income increases +inferior good = demand decreases (for inferior good). Demand will shift to the left (ex. Ramen Noodles) Demand will decreaseo How does a change in the price of a substitute affect demand?  As price of one falls, demand for the other falls. Decrease in the price of tea will cause the demand curve for coffee to decrease (shift in-ward). If the price of tea increased, demand for coffee would increase (shift outward).o How does a change in the price of a complement affect demand? Increase in price of jelly, quantity of jelly will decrease. This change will affect PB: since they are compliments, demand for PB will de-crease. When the price of a compliment increases, the demand for the good of interest decreases. If price of compliment decreases, demand for the good if interest will increase.o Explain why a change in price does not shift the demand curve, but an “ex-pected price change” does shift the demand curve. If we expect the price of gas to increase, the demand will increase be-fore the expected increase. If the price is expected to decrease, con-sumers will wait for the price to drop before they invest. A price change causes movements along the demand curve.2. The Supply CurveShows the quantity that sellers are willing and able to provide at different prices in a given period of time. Upward slope curve- positive relationship3· What is the relationship between price and the quantity supplied?o Positive. Increase in price causes increase in quantity supplied (sellers are willing and able to provide more) · How do you read a supply curve horizontally? Vertically?o Horizontal: At a given price, the quantity of oil supplied is ... (Over and down)o Vertical: Seller is willing and able to provide a certain quantity for a certain amount of money. (up and over)o Explain why each point on the supply curve represents the marginal cost of a particular unit. Marginal Cost: extra cost of producing and selling a unit.· What is producer surplus (PS) and how is it measured?o PS: gain producer or seller gets from making an exchange. PS = Price - Mar-ginal Costo Use PS to explain the seller’s decision to participate in a market. If the price covers the marginal cost, the producer will sell the product.If the price = Marginal cost, assume the producer will sell.· What is the difference between an increase in supply and an increase in the quantity supplied?o Shift in the supply curve is caused by a change in something other than the price of the good/service.· Using the horizontal reading method, what does an increase/decrease in supply tell us?o An increase means the sellers are willing and able to provide a larger quantity.Shift Right4o Decrease: At a given price, the producer sells a smaller quantity. The produceris selling less. Shift Left· Using the vertical reading method, what does an increase/decrease in supply tell us?o Increase: For a given quantity, the seller is willing to sell at a lower price. Shift Downo Decrease: At a given quantity, the seller raises the price and is only willing to sell at a higher price. Shift up•Name each of the supply shifters and give an example of each.1. Technological change- can make it cheaper to produce a product. Lowers the MC of produc-tion2. Change in the price of inputs3. Taxes and Subsidies4. Entry or exit of sellers5. Changes in Opportunity Costs6. Expectations (price)o Explain why a technological change (or a change in input prices) will affect the marginal costs of production and cause the supply curve to shift. A positive technological change happens, marginal cost of production decreases and