Economics 1: Principles of EconomicsMonday, April 16, 2012Lecture 5Review:-Law of Demand (*there are no exceptions to the Law of Demand*)-Supply- typically has an upward slope- change in supply versus change in QSPreview:-DemandMarket-Supply- equilibrium price and quantity- market forces- consumer surplus and producer surplusConsumer Behavior- -Demand P Demand Curve Q/tProducer Behavior- -Supply P Supply Curve Q/tEconomics 1: Principles of EconomicsMonday, April 16, 2012Lecture 5Combine Demand and Supply- -Market$ Supply Curve 3.50 (P*) 2.75 (P^) 2.25 QD QS Demand Curve QS Q* QD Q/tMore consumers than suppliers tend to drive prices up.Buyers are driving up prices to compete with other buyers.Sellers compete against other sellers.It is not that buyers compete with sellers!!!There are lower prices when there are more suppliers than consumers.Start off at equilibrium, but one curve changes/shifts:P* = equilibrium priceat P*, QD=QS=Q*If P < P*, QD > QS; shortage, competing among buyers; prices increase to P*If P > P*, QD < QS; surplus, competing among sellers; price decreases to P*Economics 1: Principles of EconomicsMonday, April 16, 2012Lecture 5Supply curve$P^Demand Curve*Demand CurveQ* Q^Q/tBAIM 4 STEP SURE-FIRE METHOD FOR EQUILIBRIUM CHANGES WHEN CURVES SHIFT:1. Don't thinka. What was the market like before there were any changes?b. Draw graph in equilibrium2. What changed?a. Does this cause supply to change or demand to change?3. At the original price, is there now a shortage or a surplus?4. Mind your P's and Q'sa. What is the new equilibrium price?When looking at another graph for furniture:$ Supply Curve P* --fire ruining supplies needed for making furnitureDemand Curve Q^ Q* Q/tCreation of new technology such as computers:P*P^Economics 1: Principles of EconomicsMonday, April 16, 2012Lecture 5Supply Curve$P* $ increase in technologyDemand CurveQD Q^ QSQ/tConsumer Behavior --Demand$10 willingness to pay $109 willingness to pay $98 willingness to pay $8 1 2 3 Q/tSupply Curve$21Q/tMarket:produce something worth $10; gave up something worth $1 = net gain of $9P^Economics 1: Principles of EconomicsMonday, April 16, 2012Lecture 5$ Supply curve101 Demand curveQ/tNet gain to society (NGS) (gains from trade) is area A,B,CA P* BCConsumer surplus would be the triangle A, B, P*- difference between the P* and the amount consumer's valueProducer surplus would be the triangle B, C, P*- difference between the P* and the amount the supplier is willing and able to sell the good
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