Transcript Lecture 5

Demand, Supply & Market
Equilibrium
Lecture 5
Dr. Jennifer P. Wissink
©2016 John M. Abowd and Jennifer P. Wissink, all rights reserved.
February 10, 2016
Announcements: 1120 S2016
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i>clicker Stuff
– If ever the REEF polling collapses anyone using the software please send
email to REEF Support [email protected] ASAP and bug the heck
out of them.
– When I give you a “free” day like for the 1st lecture I will NEVER post it up to
My Grades on Bb. But what you do – at this point – is add 1 to what ever
your total happens to be. (Like in golf….) I will call this the current i>clicker
“add-on”. It will change as the semester progresses. As of today it is 1. That
should work the best.

MEL Stuff
– To see your mistakes and the correct answers to the graded quizzes once the
quiz is PAST DUE, you do the following on MEL… (note if you never did the
quiz you can also use this method to at least have a look at the quiz you
missed)
» Results
» Then on the individual quiz that is now past due you should see Review
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Winter Break! Safe Travels and ENJOY! See you back on
Wednesday next week! Don’t forget to “Submit” MEL Quiz #02 on
time!!
Note Of Caution
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Information on comparative advantage is often given in many other
forms - pay careful attention to the information you are given.
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Three ways to present the same kind of information
1 yd. of cloth
1 barrel of wine
England
2 hours
40 hours
Portugal
1 hour
10 hours
England
Portugal
1 hour of labor in cloth .5 yd. of cloth
1 yd. of cloth
1 hour of labor in wine 1/40 bl. of wine 1/10 a bl. of wine
maximum cloth
maximum wine
England
40yds
2bls
Portugal
80yds
8bls
The Beauty of the PPF
Simple Model Of A “Free Market”
Economy

What is a market?
– A collection of buyers
and sellers organized
for the purpose of
exchanging goods and
services for money.
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Markets can be
global, national,
regional, or local
depending upon the
item being bought
and sold.
What is a free market
economy?
A Market Is Perfectly Competitive ...
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When there are many buyers and sellers.
When each item traded in the market is identical to all
the others.
When firms can freely enter and exit the market.
When all buyers and sellers have full and symmetric
information.
So...
– The law of one price prevails.
– No single buyer or seller can cause the price to move up or
down.
– In this case, we say that the buyers and sellers are “price
takers.”
– Use supply and demand.
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Do “Perfectly Competitive” Markets exist?
Market Model Of Demand & Supply
The Market For Portable Speakers
Demand Concepts
 The
demand function for X:
QxD = f(PX, Ps, Pc, I, T&P, Pop)
Where:
Qx = the number/quantity of units demanded
PX = X’s price
Ps = the price(s) of substitutes
Pc = the price(s) of complements
I=income
T&P=tastes and preferences
Pop=population in market or market size
The Demand Curve (Verbal)

The demand curve, a.k.a. demand, describes the relation between a
good’s price and the maximum quantity that buyers are willing and
able to buy at that price, ceteris paribus.
– Ceteris paribus means holding all the other demand function variables
constant at some given level.
– QXD = f(PX) given Ps, Pc, I, T&P, Pop

The “Law of Demand”
– the relationship between a good’s price and the quantity demanded of that
good is negative.
– Example: suppose the price of the good falls from $25 to $10, and the
quantity demanded rises from 15 to 30.
– This is referred to as a “change in quantity demanded” and in this case an
“increase in quantity demanded.”

“Own-price” changes cause movements along a given demand curve.
The Demand Curve (Graph)
 QXD = f(PX)
– Note:
Law of Demand
implies a negative
or downward
slope to the
graph.
– Note: In the
graph we have
switched the
axes.

At P = $25,
the quantity
demanded = 15.

At Q = 15,
the demand
price = $25.
Price
Demand
25
15
Quantity
Movements vs. Shifts
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
QXD = f(PX)
given Ps, Pc, I, T&P, Pop
A movement along the
demand curve for X would
be caused by a change in
Px.
– Remember this is
referred to as an
increase or decrease in
quantity demanded!

Price
Demand
25
A shift of the entire
demand curve would be
caused by a change in
one of the “ceteris
paribus” demand
variables.
– This would be referred to
as an increase or
decrease in demand.
15
Quantity
i>clicker question
Given the demand for X, an increase in its own-price will
A.
B.
C.
D.
increase demand.
decrease demand.
increase quantity demanded.
decrease quantity demanded.
Price
Demand
Quantity
Movements vs. Shifts: Getting It Right Summary
 Recall: QXD = f(PX) given Ps, Pc, I, T&P, Pop
ΔPx
Movement along demand curve, Px and QDx move in
opposite directions.
ΔPS
Shift of Demand. Ps and Demand move in the same direction.
ΔPc
Shift of Demand. Pc and Demand move in opposite directions.
ΔI
Shift of Demand. Relationship depends on if X is a normal
good (same direction) or if X is an inferior good (opposite
directions).
ΔT&P
Shift of Demand. T&P and Demand move in the same
direction.
ΔPop
Shift of Demand. Pop and Demand move in the same
direction.
The Demand Curve (Equation)
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
A linear demand curve:
QXD = 40 – PX
– So, 15 = 40 – 25
– Law of Demand?
– YES.
Beware: the graph we draw is the
inverse of the equation we write
(most times).
P
D
25
15
Q
The Demand Curve (Equation)
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
Another example
QD = 100 – 2P
P
Q
i>clicker question
Which one of the following would NOT generate a shift in the demand curve for portable
speakers?
A.
B.
C.
D.
E.
A change in the price of music downloads.
A change in the price of headphones.
A change in the income of college-aged people.
A change in the perceived “coolness” factor of portable speakers.
A change in the price of plastic used to make portable speakers.
The Supply Function
 The
supply function for X:
QXS = g(PX, Pfop, Poc, S&T, N)
Where:
QXS = maximum quantity that sellers are willing and able
to sell
PX = X’s price
Pfop = the prices of factors of production
Poc = the opportunity costs
S&T = science and technology
N = number of firms in the market
The Supply Curve (Verbal)

The supply curve, a.k.a. supply, describes the relation between a
good’s price and the maximum quantity that sellers are willing and
able to put on the market for sale at that price, ceteris paribus.
– Ceteris paribus means holding all the other supply function variables
constant at some given level.
– QXS = g(PX) given Pfop, Poc, S&T, N

The “The Law of Supply”
– the relationship between a good’s price and the quantity supplied of the
good is positive.
» higher prices generate higher quantities supplied
» lower price generate lower quantities supplied
– Example: Suppose PX falls from $25 to $10, then the quantity supplied
might fall from, say, QX=31 to QX=16.
– This is referred to as a “change in quantity supplied” and in this case a
“decrease in quantity supplied.”

“Own-price” changes  movements along a given supply curve, i.e.,
changes in quantity supplied.
The Supply Curve (Graph)

QXS = g(PX)
– Note: Law of Supply
implies a positive or
upward slope to the
graph.
– Note: In the graph we
switched the axes...
again.
Price
Supply
25
31
Quantity
Movements vs. Shifts

QXS = g(PX)
given Pfop, Poc, S&T, N
Price

A movement along the
supply curve for X would be
caused by a change in Px.
– Remember this is referred
to as
an increase or decrease in
quantity supplied.

Supply
25
A shift of the entire supply
curve would be caused by a
change in one of the “ceteris
paribus” supply variables.
– This would be referred to as
an increase or decrease in
supply.
31 Quantity
Movements vs. Shifts: Getting It Right

Recall: QXS = g(PX) given Pfop, Poc, S&T, N
ΔPx
ΔPfop
ΔPoc
ΔS&T
ΔN