# Econ 200 Lecture 4 April 12, 2016

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1 Econ 200 Lecture 4 April 12, Learning Catalytics Session Change in Demand 2. Supply and the Law of Supply 3. Changes in Supply 4. Equilibrium Putting Supply and Demand Together 5. Impact of Curve Shifting on Equilibrium 1

2 Administrative Details 2 HW 2 is available and due Monday, April 18 th at 11:59 pm Writing assignment 1 due Friday, April 22 nd at midnight See sample posted on class website

3 Increase and Decrease in Demand A change in something other than price: àshift in demand A shift to the right (D 1 to D 2 ) is an increase in demand. A shift to the left (D 1 to D 3 ) is a decrease in demand. Shifting the demand curve 3

4 Shifts of the Demand Curve As the demand curve shifts, the quantity demanded changes at every possible price. P 1 Q 2 Q 1 Q 3 Shifting the demand curve 4

5 Change in Income of consumers 5 Normal good: A good for which the demand increases as income rises, and decreases as income falls. Effect of increase in income, if good is normal Inferior good: A good for which the demand decreases as income rises, and increases as income falls. Effect of increase in income, if good is inferior

6 Change in the Price of Related Goods 6 Substitutes: Goods and services that can be used for the same purpose. Effect on demand for Big Macs, if price of Whopper increases Complements: Goods and services that are used together. Effect on demand for Big Macs, if price of McDonald s fries increases Other sources: Change in tastes, change in demographics

7 7 Change in Demand vs. Change in Quantity Demanded A change in the price of the product causes a movement along the demand curve. This is a change in quantity demanded. Any other change causes the entire demand curve to shift. This is a change in demand. A change in demand versus a change in quantity demanded

8 Supply Schedules and Supply Curves Supply schedule: A table that shows the relationship between the price of a product and the quantity of the product supplied. Quantity supplied: The amount of a good or service that a firm is willing and able to supply at a given price. 8

9 Supply Schedules and Supply Curves 9 Supply curve: A curve that shows the relationship between the price of a product and the quantity of the product supplied.

10 The Law of Supply 10 The law of supply: The rule that, holding everything else constant, increases in price cause increases in the quantity supplied, and decreases in price cause decreases in the quantity supplied. Implication: supply curves slope upward.

11 Increase and Decrease in Supply 11 A change in something other than price that affects supply causes the entire supply curve to shift. A shift to the right (S 1 to S 3 ) is an increase in supply. A shift to the left (S 1 to S 2 ) is a decrease in supply. Shifting the supply curve

12 Shifts of the Supply Curve 12 As the supply curve shifts, the quantity supplied will change, even if the price doesn t change. The quantity supplied changes at every possible price. P 1 Q 2 Q 1 Shifting the supply curve Q 3

13 Changes in Prices of Inputs 13 Inputs are things used in the production of a good or service. An increase in the price of an input decreases the profitability of selling the good, causing a decrease in supply. Effect of an increase in the price of input goods A decrease in the price of an input increases the profitability of selling the good, causing an increase in supply. Effect of a decrease in the price of input goods

14 Technological Change 14 A firm may experience a positive or negative change in its ability to produce a given level of output with a given quantity of inputs. This is a technological change. Effect of a positive change in technology Changes raise or lower firms costs, hence their supply of the good. Effect of a negative change in technology

15 Prices of Substitutes, and Number of Firms Many firms can produce and sell more than one product. Example: An Illinois farmer can plant corn or soybeans. If the price of soybeans rises, he will plant (supply) less corn. Effect on the supply of corn, of an increase in the price of soybeans More firms in the market will result in more product available at a given price (greater supply). Fewer firms supply decreases. Effect of a increase in the number of firms 15

16 Change in Supply vs. Change in Quantity Supplied 16 A change in the price of the product being examined causes a movement along the supply curve. This is a change in quantity supplied. Any other change affecting supply causes the entire supply curve to shift. A change in supply versus a change in quantity supplied This is a change in supply.

17 17 Consider the market for airlines and assume that it is a perfectly competitive market. Assume the U.S. domestic market is currently at equilibrium with a total of 642 million ticketed passengers per year at a price of \$375 per ticket. Show with an arrow, the effect on demand or supply in the airlines market, if a study claims that increased exposure to radiation from flying has large negative health effects.

18 18 Show with an arrow, the effect on demand or supply in the airlines market, if a study claims that increased exposure to radiation from flying has large negative health effects. The study will decrease demand for airline flights.

19 Which of the following best describes the law of supply? a. An increase in price causes an increase in the quantity supplied, and a decrease in price cause decrease in the quantity supplied, all else held equal. b. A change in price causes a shift of the supply curve, all else held equal. c. Supply shifts are caused not by a single variable but most likely by a number of different variables. d. All of the above. 19

20 20 Which of the following best describes the law of supply? a. An increase in price causes an increase in the quantity supplied, and a decrease in price cause decrease in the quantity supplied, all else held equal.

21 Market Equilibrium 21 At a price of \$200, Q s =Q d =10 million This is a market equilibrium: a situation in which quantity demanded equals quantity supplied. A market equilibrium with many buyers and sellers is a competitive market equilibrium. Market equilibrium

22 Market Equilibrium Price and Quantity 22 In this market: The equilibrium price of a smartphone is \$200, and The equilibrium quantity of a smartphone is 10 million smartphones per week. Since buyers and sellers want to trade the same quantity at the price of \$200, we do not expect the price to change. Market equilibrium

23 A Surplus in the Market for Smartphones At a price of \$250, Qd= 9 million But Qs=11 million This gives a surplus of 2 million smartphones: a situation in which quantity supplied is greater than quantity demanded. The effect of surpluses and shortages on the market price What happens? 23

24 A Shortage in the Market for Smartphones At a price of \$100, Qd=12 million But Qs=8 million This gives a shortage of 4 million smartphones: a situation in which quantity demanded is greater than quantity supplied. What happens? The effect of surpluses and shortages on the market price 24

25 Demand and Supply Both Count 25 Price is determined by the interaction of buyers and sellers. Neither group can dictate price in a competitive market (i.e. one with many buyers and sellers). However changes in supply and/or demand will affect the price and quantity traded.

26 A Surplus in the Market for Smartphones At a price of \$250, Qd= 9 million But Qs=11 million This gives a surplus of 2 million smartphones: a situation in which quantity supplied is greater than quantity demanded. The effect of surpluses and shortages on the market price 26

27 A Shortage in the Market for Smartphones At a price of \$100, Qd=12 million But Qs=8 million This gives a shortage of 4 million smartphones: a situation in which quantity demanded is greater than quantity supplied. The effect of surpluses and shortages on the market price 27

28 Market Equilibrium 28 At a price of \$200, buyers want to buy exactly as much as sellers want to sell. This is a market equilibrium: a situation in which quantity demanded equals quantity supplied.

29 The Effect of Shifts in Supply on Equilibrium 29 Amazon enters the smartphone market: More smartphones are supplied at any given price an increase in supply from S 1 to S 2. àequilibrium price falls from P 1 to P 2. àequilibrium quantity rises from Q 1 to Q 2. The effect of an increase in supply on equilibrium

30 The Effect of Shifts in Demand on Equilibrium 30 Suppose incomes increase? Smartphones are a normal good, so demand shifts to the right (D 1 to D 2 ). à Equilibrium price rises (P 1 to P 2 ). àequilibrium quantity rises (Q 1 to Q 2 ). The effect of an increase in demand on equilibrium

31 How Much Will Price and Quantity Change? 31 By how much will price fall? By how much will quantity rise? For now, we cant predict that. The effect of an increase in supply on equilibrium

32 Shifts in Demand and Supply over Time 32 What happens in the long run? As new firms enter the market for smartphones and incomes increase, we expect: The supply of smartphones will shift to the right, and The demand for smartphones will shift to the right. Shifts in demand and supply over time: demand shifting more than supply

33 Supply Shifting More Than Demand 33 This panel shows supply shifting more than demand: quantity rises, but equilibrium price falls. The effect on equilibrium price is ambiguous. It is possible, but unlikely, that the equilibrium price will remain unchanged.

34 Demand Shifting More Than Supply 34 What does our model predict? S à ( P and Q ) D à ( P and Q ) So we can be sure equilibrium quantity will rise; but the effect on equilibrium price is not clear.

35 35 Use the following equations for the supply and demand of hockey sticks to find the equilibrium quantity Q*. P=50 4QD P=10+4QS

36 36 Use the following equations for the supply and demand of hockey sticks to find the equilibrium quantity Q*. P=50 4Q D =10+4Q S 40=8Q* Q*=5 P*=30

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