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Unit 2 Supply Demand
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Demand Basics

• Demand Schedule and Demand Curve

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Demand Basics

• Demand versus Quantity Demanded
• Demand- quantities consumers are willing and able
  to buy at various prices
• Quantity Demanded- quantity consumers are willing
  and able to buy at a given price

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Demand Basics

• Demand versus Quantity Demanded
• Demand- the whole curve
• Quantity Demanded- a point on the curve

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Demand Basics

• Demand versus Quantity Demanded
• Change in Demand- the whole curve shifts
• Change in Quantity Demanded- move from one point
  on the curve to another

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Demand Basics

• Changes in Demand
• Consumer Income
• Normal v. Inferior Goods
• Population
• Preference/Taste
• Price of Other Goods
• Compliments
• Substitutes
• Expectation of Change in Price

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Why Demand Slopes Downward?

• Income Effect
• Substitute Effect
• Diminishing Marginal Utility

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Why Demand Slopes Downward?

• Income Effect
• Higher price Lower purchasing power
• Lower price Higher purchasing power
• ability to buy

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Why Demand Slopes Downward?

• Substitute Effect- think opportunity cost
• Higher price Lower relative price of
  substitutes
• Lower price Higher relative price of
  substitutes

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Why?

• 1st pizza for full price (11.00), get a 2nd for
  5?

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Why?

• Buy one pair at regular price and get the second
  pair half off?
• BOGO Days!

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Why Demand Slopes Downward?

• Diminishing Marginal Utility

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Why Demand Slopes Downward?

• Diminishing Marginal Utility
• MU satisfaction quantified in dollars of an
  additional unit of consumption
• Marginal Utility ALWAYS decreases with
  additional consumption

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Why Demand Slopes Downward?

• Diminishing Marginal Utility/Benefit
• Cost-Benefit Analysis
• How many slices will you consume?
• MUMC
• MBMC

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Individual Market Demand Curve

• Horizontal sum of individual demand curves

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Supply Basics

• Supply Schedule and Supply Curve

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Supply Basics

• Supply versus Quantity Supplied
• Supply - quantities producers are willing and
  able to sell at various prices
• Quantity Supplied- quantity producers are willing
  and able to sell at a given price

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Supply Basics

• Supply versus Quantity Supplied
• Supply - the whole curve
• Quantity Supplied- a point on the curve

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Supply Basics

• Change in Supply - the whole curve shifts
• Change in Quantity Supplied- move from one
  point on the curve to another

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Supply Basics- Changes

• of Producers
• Technology
• Price of Inputs
• Substitutes of Production
• Compliments of Production
• Taxes and Subsidies
• Other Regulations

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Individual Market Supply Curve

• Horizontal sum of individual supply curves

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What if they both shift?

• Equilibrium Price?
• Equilibrium Quantity?
• One change is certain
• The other is ambiguous

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What if they both shift?

• Coffee
• New Rebecca Black Song
• New Fertilizer

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What if they both shift?

• Same Shift- know Q
• Opposite Shift- know P

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Equilibrium Price Market Clearing Price
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Lets Review

• Shifts
• Double Shifts
• Ceilings and Floors
• Shortage and Surplus
• ------------------------------------------
• Quantifying Shortage and Surplus
• Other Effects of Ceilings and Floors

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PED
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PED

• Relationship between change in price and
  change in quantity

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PED

• Perfectly Inelastic 0
• Unit Elastic 1
• Perfectly Elastic

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PED

• Perfectly Inelastic 0
• Unit Elastic 1
• Perfectly Elastic

• Inelastic lt1
• Unit Elastic 1
• Elastic gt 1

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If the market price is above equilibrium price
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If the market price is below equilibrium price
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S D for Non-Smart Phones (inferior good)

• Decrease in unemployment

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S D for Non-Smart Phones (inferior good)

• Increase in the price of Smart Phones

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S D for Non-Smart Phones (inferior good)

• Govt subsidy for the production of smart phones

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Price ControlsEffects beyond Surpluses and
Shortages
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Price ControlsEffects beyond Surpluses and
Shortages

• BOTH reduce the quantity of a good bought and sold

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Price Ceilings

• Shortages
• Inefficiencies
• Black Markets

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Price Ceilings- Inefficiencies

• Misallocation of Resources
• Need and willingness to pay
• Wasted Resources
• Time and money spent overcoming the shortage
• Inefficiently Low Quality

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Price Ceilings- Black Markets

• Illegal Markets
• Prices ABOVE equilibrium
• Prices account for additional cost in the form of
  risk

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How to stop Canal Street Sales?
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Price Ceilings Non-Binding

• Set above equilibrium
• Market prices will remain below the ceiling

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Price Floors Non-Binding

• Set below equilibrium
• Market prices will remain above the floor

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Price Floors

• Surpluses
• Inefficiencies
• Black Markets

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Price Floors- Inefficiencies

• Misallocation of Resources
• Those willing to sell at the lowest price do not
  always succeed
• Wasted Resources
• Inefficiently High Quality

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Price Floors- Black Markets

• Illegal Markets
• Prices below equilibrium
• Prices account for the relatively low number of
  consumers willing to break the law