Microeconomics 2106Lecture 4Outline of Last Lecture I. Detailed Explanation of Production Possibility DiagramII. Relationship between PPF and opportunity CostsIII. Comparative and Absolute AdvantageOutline of Current Lecture - What is a competitive market and how is it described by the supply and demand model?- What is a demand curve? What is a supply curve?- What is the difference between movements along a curve and shifts of a curve?Current Lecture-Competitive Markets: Have many buyers and sellers of the same good or service, none of whom can influence the price.- The supply and demand model: is a model of how a competitive market behaves.-Five Key Elements: Demand Curve Supply Curve Demand and supply curve shifts  Market Equilibrium Changes in the market equilibriumDemand-Demand represents the behavior of buyers.-Demand Schedule: shows how much of a good or service consumers will want to buy at different prices.-Demand curve: shows the quantity demanded at various prices-Quantity demanded: the quantity that buyers are willing and able to purchase at a particular price.*Note: A “change in demand” is NOT the same as a “change in quantity demanded”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.-The Law of demand: a higher price for a good or service leads people to demand a smaller quantity. Thus, the higher the price, the lower the quantity demanded by consumers.Movements Along the Demand Curve 10 20 30 00246810121416The figure above shows a movement along the demand curve. A movement along the demand curve is a change in the quantity demanded of a good that is the result of a change in that good’s price.Shifts of the Demand CurveWhat Causes Changes in Demand? Changes in the Prices of Related Goods: - Substitutes-Two goods are substitutes if a fall in the price of one of the goods makes consumers less willing to buy the other good (or vice versa). For example, what happens to the demand for travel in Hawaii if safety cost of traveling to Mexico increases?- Complement- Two goods are complements if a fall in the price of one good makes people more willing to buy the other good (or vice versa). Consumers often have to buy goods together. For example, increase in price of gasoline will decrease demand for SUVs. Changes in Income: the effect of changes in income on demand depends on the nature of the good in question.- Normal goods- demand increases when income increases (vice versa)- Inferior goods- demand decreases when income increase (vice versa) Changes in Tastes: tastes and preferences are subjective and vary among consumers. Seasonal changes have predictable effects on demand. For example, what happens to demand for boots in October?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. An increase in demand means a rightward shif of the demand curve. At any given price, consumers demand a larger quantity than before.A decrease in demand means a lefward shif of the demand curve. At any given price, consumers demand a smaller quantity than before0 30 20 100246810121416 Changes in Expectations: If consumers have a choice about the timing of a purchase, they buy according to expectations. Buyers adjust current spending in anticipation of thedirection of future prices in order to obtain the lowest possible prices. Changes in the Number of Consumers: As the population of an economy changes, the number of buyers of a particular good also changes.Supply-Supply represents the behavior of sellers.-Supply Schedule: shows how much of a good or service would be supplied at different prices. -Supply curve: shows the quantity supplied at various prices-Quantity supplied: the quantity that sellers are willing and able to sell at a particular price.Movements Along a Supply Curve0 10 20 30051015202530354045Shifts of the Supply CurveA movement along the supply curve is a change in the quantity supplied of a good that is the result of a change in that good’s price 10 20 30 40051015202530354045What Causes Changes in Supply? Changes in input prices: A decrease in the price of an input (all else equal) increases profits and encourages more supply (and vice versa). For example, when the price of cotton drops, the supply of blue jeans increases. Changes in the Price of Related Goods or Services: Substitutes and Complements Change in Technology: New, better technology makes sellers willing to offer more at a given price or sell their quantity at a given price. Technological innovation lowers costs and increases supply. Changes in Expectations: Expectation of a higher price for a good in future decreases current supply of the good (and vice versa). Sellers will adjust their current offerings in anticipation of the direction of future prices in order to obtain the highest possible price. Changes in number of producers.An increase in supply means a rightward shif of the supply curve. At any given price, producers supply a larger quantity than before.A decrease in supply means a lefward shif of the supply curve. At any given price, producers supply a smaller quantity than