ECON 251 1st Edition Lecture 4 Outline of Last Lecture I. TermsII. Production Possibilities FrontierIII. Individual PPFsIV. Economy-Wide PPFsV. Shifts in PPFsVI. Law of DemandOutline of Current Lecture I. TermsII. Shifts in DemandIII. Factors that Change DemandIV. SupplyV. Changes in SupplyVI. Supply and Demand TogetherCurrent LectureI. TermsNormal Goods: goods where the demand rises when income rises and visa-versaInferior Goods: goods where the demand rises when income fallsSubstitutes in Consumption: goods that are used in place of one anotherComplements in Consumption: goods that are used in combination with each otherSubstitutes in Production: goods that can be produced with the same resourcesComplements in Production: goods that are produced together (by-products)Surplus: when there is more quantity supplied than the quantity demandedShortage: when there is more quantity demanded than the quantity suppliedEquilibrium: when the quantity demanded equals the quantity suppliedSupply: the maximum quantity a seller is willing and able to sell at various pricesLaw of Supply: the positive relationship between price and quantity suppliedQs: Quantity suppliedII. Shifts in DemandIncrease in Demand = Shifts the curve to the rightThese 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.- More quantity for a particular price- Different than an increase in quantity when the price decreasesDecrease in Demand= Shifts the curve to the leftIII. Factors that Change Demand1. Incomea. Normal goods. Example: eating outb. Inferior goods. Example: ramen noodles (it’s not that ramen noodles are bad, it’s just that when you have more money, you choose other options)2. Change in prices of “related goods”a. Substitutes in consumption. Example: as the price of Oreos increases, the demand of thin mints increasesb. Complements in consumption. Example: as the price of milk increases, the demand of Oreos decreases (because you obviously can’t eat Oreos without milk!)c. Example: as the price for gas increases, the demand for hybrid cars. This means that gas and hybrid cars are substitutes of consumption because as the price of one increases, the demand of the other also increases (even though hybrids still use some gas)3. Chang in expectationsa. When people expect the price to rise, the CURRENT demand increasesb. When people expect the price to fall, the CURRENT demand decreasesc. When people expect their income to rise, the demand of normal goods increasesand the demand for inferior goods decreases4. Change in the number of buyers- If the number of buyers increases, the demand increases5. Tastes and preferencesa. Example: the effects of advertisementIV. SupplyAs price increases, the quantity supply also increases.Price Quantity Supplied0 02 03 24 45 66 8Qs = 2P – 4OR P = 1/2Qs + 2 (y = mx + b)- Where P reflects the marginal costV. Changes in SupplyAn increase in supply shifts the supply curve to the right.A decrease in supply shifts the supply curve to the left.1. Change in input pricesa. Increase in the cost of supply causes a decrease in supply2. Change in prices of “related goods” in productiona. Substitutes in productioni. As the price of cupcakes increases, the supply of thin mints decreases b. Complements in productioni. As the price of beef increases, the supply of leather decreases3. Changes in expectationsa. If people expect the price to rise, the CURRENT supply decreasesb. If people expect the price to fall, the CURRENT supply increases4. Change in the number of sellersa. If the number of sellers increase, the supply increases5. Change in technologya. If production increases, so does the supplyVI. Supply and Demand TogetherD: Qd = -1/2P + 6 (P = -2Qd + 12)S: Qs = 2P – 4 (P = 1/2Qs + 2)P = $6:Qd = 3Qs = 8Surplus, which causes the price to decreaseP = $3:Qd = 4.5Qs = 2Shortage, which causes the price to increaseWhen the Qd and Qs equal, this is called equilibrium (when P has no tendency to change)Qd = Qs-1/2P + 6 = 2P – 4-P + 12 = 4P – 8P = 4Q =