ECO LECTURE EIGHT 1 OKAY. TODAY WE WANT TO GO AHEAD AND CONTINUE OUR DISCUSSION OF SUPPLY AND DEMAND. THAT'S THE LAST TOPIC THAT WE'LL

ECO 155 750 LECTURE EIGHT 1 OKAY. TODAY WE WANT TO GO AHEAD AND CONTINUE OUR DISCUSSION OF SUPPLY AND DEMAND. THAT'S THE LAST TOPIC THAT WE'LL HAVE ON THE EXAM IS SUPPLY AND DEMAND. WE'VE ALREADY TALKED ABOUT THE PRODUCTION POSSIBILITIES FRONTIER. AND SUPPLY AND DEMAND, WE'LL USE CONSIDERABLE MORE TIME TALKING ABOUT THAT. IF YOU'LL REMEMBER, WE JUST DEVELOPED A BASIC SUPPLY AND DEMAND MODEL LAST TIME. QUANTITY OF X -- WHATEVER X IS. IT MAKES ABSOLUTELY NO DIFFERENCE WHETHER WE'RE TALKING ABOUT BASKETBALL TICKETS OR NEW CARS, OR JUST WHATEVER, EVERYTHING IN-BETWEEN. HERE'S THE PRICE ON THE VERTICAL AXIS. BY THE WAY, YOU ALWAYS WANT TO BE -- WHEN YOU'RE DRAWING THESE CURVES, ALWAYS LABEL YOUR AXIS SO YOU KNOW WHAT IS BEING MEASURED ON YOUR DIAGRAM, OKAY? IF YOU'LL REMEMBER, WE SAID THE LAW OF DEMAND TELLS US THAT AS THE PRICE OF A PRODUCT GOES UP, PEOPLE BUY SMALLER QUANTITIES OF IT. AS THE PRICE OF A PRODUCT GOES DOWN, PEOPLE BUY LARGER QUANTITIES. WE CAN SEE THAT INVERSE RELATIONSHIP RIGHT HERE: HIGHER PRICE -- LET'S SHOW THAT. HIGHER PRICE, SMALLER QUANTITY DEMANDED. WE'RE MOVING UP THE CURVE. IF THE PRICE GOES DOWN, QUANTITY DEMANDED GOES UP. WE HAD THE LAW OF SUPPLY. THE LAW OF SUPPLY SAYS THERE'S A POSITIVE RELATIONSHIP BETWEEN PRICE AND QUANTITY SUPPLIED. IF THE PRICE OF THE PRODUCT GOES UP, MORE IS OFFERED FOR SALE. AND WHY

ECO 155 750 LECTURE EIGHT 2 IS THAT? AND THE ANSWER IS, WELL, BECAUSE THERE'S A BIGGER PROFIT AT HIGHER PRICES. IF THERE'S A HIGHER PRICE, THE SUPPLIER EARNS A BIGGER PROFIT. SO THE SUPPLIER SAYS, "WOW, I WANT TO DO THAT. I WANT TO SELL THIS STUFF NOW THAT I EARN SUCH A BIG PROFIT. BEFORE I DIDN'T CARE SO MUCH BECAUSE THERE WASN'T MUCH PROFIT. BUT NOW THERE'S A BIG PROFIT; NOW I CARE." AND THEN WE TALKED ABOUT THE PRICE, HOW THAT AT ANY PRICE YOU WOULD START OFF WITH, HIGH OR LOW, UNLESS YOU HIT THIS EXACT PRICE WHERE THE SUPPLY AND DEMAND CURVES INTERSECT, ANY PRICE HIGHER THAN THAT WOULD CREATE A SURPLUS OF THE PRODUCT. QUANTITY SUPPLIED WOULD BE GREATER THAN QUANTITY DEMANDED AT A HIGHER PRICE. AND SO THE SURPLUS WOULD CAUSE THE PRICE TO GO DOWN. THERE'D BE SALES -- THAT'S GENERALLY WHAT THEY'RE CALLED IN THE RETAIL TRADE. COMPANIES WOULD PUT THEIR PRODUCT ON SALE. AND SO THE PRICE WOULD GO DOWN TOWARD THIS WHAT WE CALLED THE EQUILIBRIUM PRICE, PEQ EQUILIBRIUM. OKAY. IF WE STARTED OFF WITH A PRICE THAT'S BELOW THE EQUILIBRIUM, THERE WOULD BE A LARGER QUANTITY DEMANDED THAN THE QUANTITY SUPPLIED, SO THERE WOULD BE A SHORTAGE OF THE PRODUCT AND THAT WOULD PUSH THE PRICE UP TOWARD THE EQUILIBRIUM PRICE. AND SO IT MAKES NO DIFFERENCE WHERE THE PRICE STARTS. THERE ARE AUTOMATIC FORCES THAT TAKE PLACE IN THE MARKETPLACE THAT WOULD MOVE US TO THAT EQUILIBRIUM PRICE.

ECO 155 750 LECTURE EIGHT 3 AND THEN, OF COURSE, THIS IS THE EQUILIBRIUM QUANTITY WHERE THE SUPPLY AND DEMAND CURVES INTERSECT. THIS IS THE POINT WHERE THE MARKET'S ALWAYS MOVING TOWARD. ALWAYS. WE'RE NOT ALWAYS THERE, BUT WE'RE ALWAYS MOVING TO THAT POINT. BECAUSE IF WE ARE AT SOME DIFFERENT PRICE OR DIFFERENT QUANTITY, THERE'S SOMETHING LIKE A SALE OR WHATEVER THAT RETAILERS ARE GONNA RUN, AND THAT WILL BRING THE PRICE TOWARD THE EQUILIBRIUM. NOW, WHAT I MENTIONED TO YOU IS THIS: THAT AS LONG AS THE SUPPLY AND DEMAND CURVES STAY IN THAT POSITION, DO NOT MOVE, THEN THE MARKET STAYS AT THIS POINT THAT WE SEE RIGHT HERE. WHATEVER THE PRICE WOULD BE, TWO DOLLARS, WHATEVER THE NUMBER OF UNITS ARE, ONE HUNDRED UNITS OR WHATEVER, WE WILL STAY AT THIS POINT INDEFINITELY AS LONG AS THE SUPPLY AND DEMAND CURVES STAY WHERE THEY ARE. IN THE REAL WORLD, THOUGH, SUPPLY AND DEMAND CURVES DON'T STAY WHERE THEY ARE RIGHT THERE. IN THE REAL WORLD, THEY MOVE SOMETIMES ON A DAILY BASIS. SOMETIMES ON A MINUTE-BY-MINUTE BASIS. AND SO THAT'S REALLY WHAT THE ACTION IS. WE'VE JUST GOT THIS UP HERE TO SHOW US A STARTING POINT. BUT THE REAL ACTION IN THE MARKETPLACE IS WHEN THE CURVES SHIFT. AND WE WANT TO TALK ABOUT THOSE CURVES SHIFTING TODAY, WHAT CAUSES IT, AND SO FORTH. LET ME KIND OF MOVE OVER HERE. WE'LL COME BACK TO THIS DIAGRAM IN A LITTLE WHILE. BUT LET ME COME OVER AND TALK ABOUT

ECO 155 750 LECTURE EIGHT 4 SHIFTS IN DEMAND. SO WE'VE GOT A PRICE OF ONE DOLLAR, A HUNDRED UNITS IS HOW MANY UNITS PEOPLE WANT TO BUY. IF THE DEMAND CURVE SHIFTED, HERE'S WHAT WE WOULD SEE. WE WOULD SEE THE CURVE, FOR EXAMPLE, TO THE RIGHT AT D2. AND NOW, AT THE SAME PRICE AS BEFORE, IF THE PRICE STAYED AT ONE DOLLAR, PEOPLE NO LONGER WANT A HUNDRED UNITS. NOW THEY WANT A HUNDRED AND FIFTY UNITS. SO A RIGHTWARD SHIFT IN THE DEMAND CURVE CORRESPONDS TO A GREATER QUANTITY PEOPLE WANT TO PURCHASE AT ANY GIVEN PRICE, RIGHT? AT THE PRICE OF ONE DOLLAR, THEY WANT FIFTY UNITS MORE. AT A PRICE OF TWO DOLLARS, THEY WOULD WANT MORE. AT A PRICE OF FIFTY CENTS, PEOPLE WOULD WANT MORE THAN BEFORE. THAT'S A RIGHTWARD SHIFT IN THE CURVE. AND, BY THE WAY, WE COULD ALSO SAY THIS CURVE IS SHIFTED UPWARD. BUT I'M NOT USING THAT TERMINOLOGY AND I THINK IT'S BEST IF YOU DON'T USE THAT TERMINOLOGY, AND I'LL TELL YOU WHY IN A FEW MINUTES. BUT IT'S BEST TO SEE AN INCREASE IN DEMAND AS NOT A DEMAND CURVE THAT SHIFTS UP BUT A DEMAND CURVE THAT SHIFTS TO THE RIGHT. GREATER QUANTITY AT ANY GIVEN PRICE THAN PREVIOUSLY. BY THAT I MEAN, PEOPLE WANT A GREATER QUANTITY AT ANY GIVEN PRICE THAN THEY DID PREVIOUSLY. OKAY. SO THERE'S A SHIFT IN DEMAND. LET ME COME OVER HERE AND DRAW YOU ANOTHER DEMAND CURVE, AND THEN I'LL GO BACK TO THAT ONE IN JUST A SECOND. LET'S SUPPOSE AGAIN THAT THE PRICE OF THE PRODUCT IS A DOLLAR, PEOPLE WANT TO

ECO 155 750 LECTURE EIGHT 5 BUY A HUNDRED UNITS. LET'S SUPPOSE THE PRICE OF THE PRODUCT GOES UP TO TWO DOLLARS AND NOW PEOPLE WANT TO BUY, I DON'T KNOW, SEVENTY-FIVE UNITS. OKAY. NOW, HERE'S WHAT WE'RE SEEING DOWN HERE, IS THE PRICE OF THE PRODUCT WENT UP AND PEOPLE WANT TO BUY FEWER UNITS. THE TERM WE USE HERE IS WE SAY THERE'S A CHANGE IN QUANTITY DEMANDED. AND NOW ALL I'M DOING IS TRYING TO FAMILIARIZE YOU WITH THIS TERMINOLOGY. BECAUSE OVER HERE I'M TALKING ABOUT A SHIFT IN DEMAND OR A CHANGE IN DEMAND. AND IN THIS OTHER CASE, THE CHANGE IN DEMAND OR SHIFT IN DEMAND, THE WHOLE CURVE MOVES. THE CURVE SHIFTS OVER. IT MOVES, THE CURVE DOES. BUT IN THIS CASE THAT WE TALKED ABOUT HERE LAST, WE HAVE A PRICE CHANGE -- CHANGE IN PRICE -- AND THAT CHANGE IN PRICE IS WHAT CAUSED THE CONSUMER TO BUY FEWER UNITS OF THE PRODUCT. PRICE WENT UP, QUANTITY DEMANDED WENT DOWN. AND SO HERE WE DO NOT USE THE TERM THERE'S BEEN A CHANGE IN DEMAND. WE USE THE TERM THERE'S BEEN A CHANGE IN QUANTITY DEMANDED. AND YOU MIGHT THINK, "AH, WHAT'S THE BIG DEAL?" WE'LL COME BACK AND TALK ABOUT THE BIG DEAL LATER ON. BUT RIGHT NOW, JUST FAMILIARIZE YOURSELF WITH THE TERMINOLOGY. IF THE CURVE SHIFTS, WE SAY CHANGE IN DEMAND. IF WE MOVE ALONG THE CURVE FROM ONE POINT TO ANOTHER, FROM POINT A TO POINT B, THAT IS ONLY CAUSED BY ONE THING. THE PRICE CHANGES. THAT'S WHAT GETS THE BALL ROLLING HERE, AND NOW CONSUMERS WANT FEWER

ECO 155 750 LECTURE EIGHT 6 UNITS, DOWN FROM THE HUNDRED TO SEVENTY-FIVE. BUT WE DON'T SAY, "OH, LOOK. THERE'S BEEN A CHANGE IN DEMAND." WHAT WE SAY IS, "THERE'S BEEN A CHANGE IN QUANTITY DEMANDED." OKAY. SO IF YOU GO BACK AND LOOK -- WHEN WE TALKED ABOUT LAW OF DEMAND, I WROTE A DEFINITION UP ON THE BOARD, LAW OF DEMAND, AND YOU HAVE THIS IN YOUR NOTES, AND WHAT IT SAYS IS SOMETHING LIKE THIS: IF THE PRICE OF A PRODUCT GOES UP OR RISES, QUANTITY DEMANDED GOES DOWN. AND I WAS USING THAT TERMINOLOGY BEFORE ABOUT QUANTITY DEMANDED. YOU SHOULD FAMILIARIZE YOURSELF WITH THIS, PARTLY BECAUSE THAT'S A GOOD THING TO PUT ON A TEST IS DO YOU KNOW THE DIFFERENCE BETWEEN CHANGE IN DEMAND AND CHANGE IN QUANTITY DEMANDED. THERE'S ONLY ONE THING THAT CAUSES A CHANGE IN QUANTITY DEMANDED, AND THAT ONLY ONE THING IS IF THE PRICE WOULD CHANGE. EVERYTHING ELSE THAT AFFECTS PEOPLE'S CONSUMPTION LEVEL, EVERYTHING ELSE BESIDES PRICE, WILL CAUSE THIS CURVE TO SHIFT. AND THEN EVERYTHING ELSE THAT WOULD AFFECT CONSUMPTION OTHER THAN A PRICE CHANGE, EVERYTHING ELSE -- WE WOULD CALL THAT, "OH, THERE'S BEEN A CHANGE IN DEMAND." OKAY. SO JUST TO HAVE THAT TERMINOLOGY OUT THERE. AS I SAY, WE'LL COME BACK IN A LITTLE WHILE AND TALK ABOUT WHY THIS IS THAT WE MAKE SUCH A BIG DISTINCTION BETWEEN DEMAND AND QUANTITY DEMANDED. AND BY THE WAY, I'LL MENTION IT AND THEN WE'LL

ECO 155 750 LECTURE EIGHT 7 COME BACK TO IT. THE SAME THING'S TRUE AS WELL WITH THE SUPPLY CURVE. WE TALK ABOUT A SHIFT IN SUPPLY AND THEN A CHANGE IN QUANTITY SUPPLIED, AND IT'S THE SAME KIND OF A DEAL. WE'LL SEE THAT IN JUST A FEW MINUTES. WHAT CAUSES A CHANGE IN DEMAND? I'LL PUT A DELTA SIGN UP HERE. WE'LL USE THOSE SEVERAL TIMES. THIS JUST MEANS THE CHANGE IN, THE DELTA SIGN DOES. PROBABLY A LOT OF YOU HAVE USED THAT TERMINOLOGY BEFORE. IT'S COMMON IN MATHEMATICS AND ENGINEERING AND PHYSICS, AND DIFFERENT THINGS LIKE THAT. CHANGE IN DEMAND. WELL, WHAT CAN CAUSE THE DEMAND CURVE TO CHANGE? THAT IS, WHAT CAN CAUSE THE DEMAND CURVE TO SHIFT? OKAY. JUST GO THROUGH HERE. HOW ABOUT, NUMBER ONE, CHANGES IN CONSUMER INCOME. DOES THAT MAKE SENSE TO YOU? IF YOU BECOME WEALTHIER, IF YOUR INCOME GOES UP, YOU'RE MORE LIKELY TO BUY A NICE BIG CAR THAN IF YOUR INCOME WAS LOW, RIGHT? OR A BIGGER HOUSE OR HOW ABOUT MORE FOOD? DO YOU THINK YOU'D BUY MORE FOOD IF YOUR INCOME WENT UP? MAYBE NOT MORE; MAYBE IT'D BE DIFFERENT FOOD. NOT SO MANY MCDONALD'S HAMBURGERS AND MAYBE MORE T-BONE STEAKS. I DON'T EVEN KNOW; WHATEVER IT IS YOU LIKE. OKAY. SO IN THIS PARTICULAR CASE, IF CONSUMER INCOME WENT UP, NOW PEOPLE ARE LIKELY TO BUY MORE OF THE PRODUCT AT ANY GIVEN PRICE. LIKE IF THE PRICE OF THE PRODUCT WAS A DOLLAR AND YOU WERE BUYING A HUNDRED UNITS OF THAT PRODUCT, AND ALL OF A SUDDEN YOUR INCOME

ECO 155 750 LECTURE EIGHT 8 WENT UP FROM, LET'S SAY, TWENTY THOUSAND DOLLARS A YEAR TO FORTY THOUSAND DOLLARS A YEAR, YOU MAY NOW BE BUYING MORE OF THAT SAME PRODUCT. EVEN THOUGH THE PRICE IS THE SAME, YOU'RE BUYING MORE AND THAT WOULD BE AN INCREASE IN DEMAND. SO WHAT WE'LL SAY HERE IS FOR NORMAL GOODS -- A) NORMAL GOODS -- WHAT WE HAVE IS THIS SITUATION: AN INCREASE IN INCOME PRODUCES OR RESULTS IN AN INCREASE IN DEMAND. AND BY INCREASE IN DEMAND, I MEAN A RIGHTWARD SHIFT IN THE DEMAND CURVE. THIS TERM RIGHT HERE, I DON'T MEAN IN THIS SORT OF INFORMAL WAY THAT EVERYBODY HAS USED THE TERM NORMAL. "OH, YOU KNOW, I NORMALLY DO THIS OR THAT." I DON'T MEAN TO USE THE TERM NORMAL IN THAT SENSE. WHAT WE'RE TALKING ABOUT HERE IS A TECHNICAL TERM. NORMAL GOODS IN ECONOMICS ARE GOODS WHERE THERE'S THIS POSITIVE RELATIONSHIP BETWEEN CONSUMER INCOME AND DEMAND. THE NORMAL GOOD CASE IS A HIGHER INCOME, A GREATER DEMAND. OKAY. AND SO, FOR EXAMPLE, JUST TO KIND OF COME BACK AND PUT THIS IN. MAYBE HERE, D1, THIS IS WHERE CONSUMER INCOME IS TEN THOUSAND DOLLARS AND D2 WOULD BE WHERE CONSUMER INCOME IS TWENTY THOUSAND DOLLARS. THE DEMAND CURVE SHIFTS TO THE RIGHT. OKAY. LET'S TALK ABOUT THIS SECOND CASE, B. OH, I DON'T WANT TO GO ON TO THE SECOND CASE QUITE YET. IT ALSO WORKS IN REVERSE. THAT IS TO SAY, LET'S SAY CONSUMER INCOME STARTED OFF AT TWENTY THOUSAND DOLLARS AND WENT DOWN TO TEN. THEN IF YOU START OFF AT TWENTY

ECO 155 750 LECTURE EIGHT 9 THOUSAND DOLLARS AND INCOME GOES TO TEN THOUSAND, THEN THE DEMAND CURVE SHIFTS TO THE LEFT. SO THERE'S -- I COULD HAVE DONE -- OR I GUESS I SHOULD COME BACK AND SAY ALSO IF INCOME GOES DOWN, DEMAND GOES DOWN. THAT IS TO SAY, THE DEMAND CURVE SHIFTS TO THE LEFT. OKAY. BUT EVEN NOW, THERE'S STILL A POSITIVE RELATIONSHIP BETWEEN INCOME AND DEMAND. IF INCOME GOES DOWN, DEMAND GOES DOWN AND THEY'RE MOVING IN THE SAME DIRECTION. THAT'S A POSITIVE RELATIONSHIP. OKAY. B) INFERIOR GOODS. AGAIN, I DO NOT MEAN THIS TERM, INFERIOR GOODS, TO BE IN THE SORT OF EVERYDAY LANGUAGE THAT PEOPLE NORMALLY USE THIS TERM. I DON'T MEAN BY AN INFERIOR GOOD ONE IS THAT, YOU KNOW, SHODDY CONSTRUCTION OR FALLS APART QUICKLY OR HAS NO WARRANTY. I MEAN BY AN INFERIOR GOOD A TECHNICAL TERM. IT JUST MEANS THAT IF CONSUMER INCOME GOES UP, THEN THAT RESULTS IN A DECREASE IN DEMAND. CONSUMER INCOME AND DEMAND GO IN AN OPPOSITE DIRECTION NOW. THERE'S AN INVERSE RELATIONSHIP BETWEEN CONSUMER INCOME AND DEMAND. COULD ALSO REVERSE THOSE ARROWS. IF CONSUMER INCOME WENT DOWN, THEN THE DEMAND WOULD GO UP. NOW, INFERIOR GOODS -- JUST TO THINK ABOUT THIS IN SORT OF GENERAL TERMS. AN INFERIOR GOOD, THAT'S SOMETHING THAT WE -- WE WANT MORE OF THOSE. NOT NECESSARILY WANT MORE, BUT THAT'S WHAT WE'RE GONNA BUY. WE'RE GONNA BUY MORE INFERIOR GOODS IF OUR INCOME IS LOWER.

ECO 155 750 LECTURE EIGHT 10 LET ME GIVE YOU AN EXAMPLE. SUPPOSE THAT YOUR INCOME WENT DOWN -- AND YOU MAY THINK, "BOY, IT COULDN'T GO DOWN MUCH MORE." BUT SUPPOSE YOUR INCOME WENT DOWN AND DOWN AND DOWN AND CONTINUED GOING DOWN. THEN AFTER AWHILE YOU MIGHT BE EATING STUFF LIKE POTATOES, YOU KNOW, BECAUSE THEY'RE KIND OF BULKY AND NOT VERY EXPENSIVE AND THEY ALSO STAY IN LINE. AND SO INCOME GOES DOWN, DOWN, DOWN. MAYBE YOUR CONSUMPTION OF POTATOES GOES UP, UP, UP. NOW, T-BONE STEAKS, THAT'S A THING OF THE PAST. SHRIMP, NO LONGER. CASHEW CHICKEN, CAN'T AFFORD IT IF YOUR INCOME KEEPS GOING DOWN. BUT POTATOES? MORE OF 'EM. MMMMM, POTATOES. YOU WOULDN'T SAY "MMMMM"; YOU'D JUST SAY "POTATOES," BUT YOU'D EAT THE POTATOES. ALL RIGHT? SO IN THIS PARTICULAR CASE, A LOWER INCOME -- NOW I'M USING THIS -- THESE ARROWS THAT ARE POINTING DOWN -- A LOWER INCOME WOULD RESULT IN A GREATER DEMAND FOR POTATOES. LET ME DRAW THIS AGAIN, AND I DON'T HAVE TO CHANGE THINGS VERY MUCH. LET'S SAY YOUR INCOME STARTED OFF AT TWENTY THOUSAND DOLLARS. AND WHEN THE PRICE OF X IS A DOLLAR, YOU'RE BUYING A HUNDRED UNITS. AND THEN IF YOUR INCOME WENT DOWN TO TEN THOUSAND DOLLARS, NOW YOU WANT TO BUY MORE UNITS. AND THIS WOULD BE THE INFERIOR GOOD CASE, WHAT WE'RE SHOWING HERE. AND POTATOES -- MAYBE X WOULD BE POTATOES. THAT WOULD BE AN EXAMPLE, PERHAPS. EACH PERSON'S DIFFERENT. MAYBE FOR YOU, AS YOUR INCOME GOES

ECO 155 750 LECTURE EIGHT 11 UP, YOU SAY, "OOOH, I LIKE THOSE POTATOES. I COULDN'T GET ENOUGH OF 'EM BEFORE. BUT NOW THAT MY INCOME IS HIGHER, MORE POTATOES. MMMM, POTATOES." MAYBE THAT'S THE WAY YOU ARE. AND THERE'S ABSOLUTELY NOTHING WRONG WITH THAT. WHAT IS AN INFERIOR GOOD FOR ONE PERSON IS NOT AN INFERIOR GOOD FOR ANOTHER. THIS HAS GOT ABSOLUTELY NOTHING TO DO WITH THE QUALITY OF THE PRODUCT. IT'S JUST THE RELATIONSHIP BETWEEN CONSUMER INCOME AND CONSUMPTION LEVEL. SOME THINGS -- HOW ABOUT BEER? I'VE HEARD IT SAID, DON'T KNOW IF IT'S TRUE, BUT I'VE HEARD IT SAID THAT WHEN THE ECONOMY'S NOT DOING VERY WELL, PEOPLE'S INCOMES ARE DOWN, THERE'S A LOT OF LAYOFFS, PEOPLE KIND OF STAYING HOME A LOT SINCE THEY'RE LAID OFF, DRINKING BEER. THAT WOULDN'T BE A BAD IDEA ON ANY DAY, RIGHT? ANYWAY -- NAH, I WAS JUST KIDDING. IF THAT WERE TRUE, IF THE ECONOMY'S DOING BAD AND INCOMES ARE GOING DOWN AND PEOPLE ARE OUT OF WORK AND THEY'RE DRINKING MORE BEER, THEN BEER WOULD BE AN INFERIOR GOOD IN THAT PARTICULAR CASE. AND AGAIN, I DON'T MEAN THAT THE BEER DOESN'T TASTE GOOD; I JUST MEAN THAT WOULD BE SOMETHING THAT WE WOULD CONSUME MORE OF AT LOWER -- YEAH, LOWER INCOMES. AND VICE VERSA. IF YOUR INCOME GOES UP, THEN YOU START SAYING, "OH, I DON'T -- I'M NOT GONNA EAT SO MANY POTATOES AS BEFORE. I'M TIRED OF THOSE." OKAY. SO ANYWAY, NORMAL GOODS, INFERIOR GOODS. THAT'S ONE OF THE

ECO 155 750 LECTURE EIGHT 12 THINGS THAT SHIFTS THE DEMAND CURVE FOR A PRODUCT. SOME DAY YOU MAY BE MANAGING A COMPANY OR MAKING DECISIONS FOR A COMPANY ABOUT PRICING YOUR PRODUCT OR WHATEVER, AND THEN IT MAKES A DIFFERENCE WHAT KIND OF PRODUCTS YOU'RE SELLING. ARE YOU SELLING A NORMAL GOOD OR ARE YOU SELLING AN INFERIOR GOOD? IF YOU'RE SELLING AN INFERIOR GOOD AND THERE'S A RECESSION, YOU MIGHT SAY, "HEY, THERE'S A RECESSION. PEOPLE ARE OUT OF WORK, THEIR INCOMES ARE DOWN, THEY'RE GONNA BUY MORE OF OUR PRODUCT NOW. LET'S RAISE THE PRICE A LITTLE BIT." AND THEN YOU WOULD DO SOMETHING THAT PEOPLE WOULD SAY, "OH, MAN. I DON'T KNOW ABOUT THAT." AND YOU'RE SAYING, "I KNOW WHAT I'M DOING. THERE'S A GREATER DEMAND FOR OUR PRODUCT SO LET'S RAISE THE PRICE A LITTLE BIT. OR AT LEAST NOT CUT THE PRICE THE WAY THAT MAYBE SOME OTHER PRICES ARE BEING CUT." OKAY. SO ANYWAY, THESE ARE THINGS THAT ARE TAKING PLACE ALL THE TIME. I'M TELLING YOU -- OR I TOLD YOU AWHILE AGO THAT THE DEMAND AND SUPPLY CURVES ARE CONSTANTLY SHIFTING. ONE OF THE REASONS THEY'RE CONSTANTLY SHIFTING IS, CONSUMER INCOMES ARE CHANGING. AND BY THE WAY, IT'S NOT JUST CONSUMER INCOMES. THE AVERAGE CONSUMER INCOME COULD BE CONSTANT. I COULD DRAW A LINE RIGHT DOWN THE CENTER OF THE CLASS. AND LET'S SAY EVERYBODY ON THIS SIDE OF THIS CLASS, ON THE LEFT-HAND SIDE OF THE CLASS, YOUR INCOME GOES DOWN BY TEN DOLLARS PER

ECO 155 750 LECTURE EIGHT 13 PERSON AND EVERYBODY ON THE RIGHT-HAND SIDE OF THE CLASS, YOUR INCOME GOES UP BY TEN DOLLARS PER PERSON. NOW, THE AVERAGE INCOME WOULDN'T CHANGE, ASSUMING THAT THERE'S THE SAME NUMBER OF PEOPLE ON EACH SIDE OF THE CLASS. THE AVERAGE INCOME WOULD NOT CHANGE. BUT THE INCOME OF SOME PEOPLE WOULD GO DOWN AND THE INCOME OF OTHER PEOPLE WOULD GO UP. AND SO THE THINGS THAT PEOPLE OVER ON THIS SIDE OF THE CLASS -- THE THINGS THEY NORMALLY BUY, THERE WOULD BE LESS DEMAND FOR THEIR NORMAL GOODS. THERE WOULD BE A GREATER DEMAND FOR THEIR INFERIOR GOODS, WHICH COULD BE TOTALLY DIFFERENT GOODS THAN ARE NORMAL, AND INFERIOR GOODS FOR THE OTHER SIDE OF THE CLASS. EVERYBODY'S NOT THE SAME; EVERYBODY DOESN'T CONSUME THE SAME THINGS. SO THE POINT IS IS THAT -- AND SOMETIMES WE SEE SHIFTS IN DEMAND THAT ARE TAKING PLACE, NOT BECAUSE THE AVERAGE INCOME OF ALL AMERICANS IS CHANGING BUT THE INCOME OF CERTAIN GROUPS ARE CHANGING. AND THOSE GROUPS ARE THE ONES WHOSE DEMANDS ARE SHIFTING, OKAY? SO ANYWAY, CHANGES IN CONSUMER INCOME. A SECOND THING THAT AFFECTS THE POSITION OF THE DEMAND CURVE IS THE TOTAL NUMBER OF CONSUMERS. I SHOULD SAY CHANGES IN. SORRY. IT'S NOT THE NUMBER OF CONSUMERS THAT AFFECTS -- THAT SHIFTS THE DEMAND CURVE; IT'S THE CHANGES IN THE TOTAL NUMBER OF CONSUMERS. MORE CONSUMERS OR FEWER.

ECO 155 750 LECTURE EIGHT 14 LET'S START OFF WITH THE DEMAND CURVE IN THIS POSITION, D1, AND MAYBE THE POPULATION OF -- GOSH, I DON'T KNOW -- THE POPULATION OF SPRINGFIELD IS A HUNDRED THOUSAND TO BEGIN WITH. THERE'S A TOTAL DEMAND FOR CAR WASHES, ONE DOLLAR CAR WASHES. MAYBE A HUNDRED CAR WASHES A DAY ARE DEMANDED AT ONE DOLLAR. AND THEN WHEN THE POPULATION GROWS TO, I DON'T KNOW, A HUNDRED AND FORTY THOUSAND -- I PUT A DOLLAR SIGN THERE, DIDN'T I? -- A HUNDRED AND FORTY THOUSAND PEOPLE, NOW MAYBE THE DEMAND FOR CAR WASHES -- MAYBE THERE'S A HUNDRED AND FIFTY CAR WASHES DEMANDED PER DAY EVEN THOUGH THE PRICE IS THE SAME. THERE'S JUST MORE CONSUMERS, MORE CARS, MORE CAR WASHES. I MADE THIS PURPOSELY NOT A HUNDRED AND THEN A HUNDRED AND FIFTY THOUSAND PEOPLE BECAUSE I DIDN'T WANT THE PERCENTAGE CHANGE TO BE THE SAME. THERE'S NO RULE THAT SAYS IF THE POPULATION GROWS BY FORTY PERCENT, THAT CONSUMPTION LEVEL HAS TO GO UP BY FIFTY PERCENT. IT DEPENDS ON HOW THAT POPULATION'S GROWING. IT MAY BE -- IN THIS PARTICULAR CASE, WHAT IT LOOKS TO ME LIKE, IS THE TOTAL POPULATION GROUP, FORTY PERCENT, BUT THE NUMBER OF CAR WASHES PEOPLE WANT, THAT GREW FIFTY PERCENT, AND SO MAYBE OUR POPULATION GROWTH WAS OLDER PEOPLE. AND I DON'T MEAN TO SAY, YOU KNOW, ANCIENT OR RETIRED. I JUST MEAN PEOPLE WHO ARE EIGHTEEN, TWENTY YEARS OLD AND ABOVE. AND SO WE GET POPULATION GROWTH BUT MAYBE EVERY SINGLE

ECO 155 750 LECTURE EIGHT 15 NEW PERSON COMES IN WITH A CAR. AND SO FORTY PERCENT POPULATION GROWTH, WE GET FIFTY PERCENT INCREASE IN THE DEMAND FOR CAR WASHES. ON THE OTHER HAND, IF WE HAD FORTY PERCENT POPULATION GROWTH AND ALL OF THOSE EXTRA FORTY PERCENT ARE BABIES, MAYBE THERE'D BE NO MORE CARS. SO WHAT WE'RE REALLY TALKING IS, NOT THE POPULATION HERE THAT WE'RE INTERESTED IN BUT THE CHANGE IN THE NUMBER OF CONSUMERS THAT ARE INTERESTED IN THIS PRODUCT X. IT WOULD WORK IN REVERSE. USUALLY -- FOR SURE THE POPULATION OF THE UNITED STATES HAS NOT GONE DOWN OVER THE YEARS. BUT IN CERTAIN CITIES OR COMMUNITIES, OR COUNTIES, WHATEVER, THE POPULATION COULD GO DOWN. IF THE POPULATION WENT DOWN, WE WOULD SAY FEWER CONSUMERS IN THE TYPICAL CASE. FEWER CONSUMERS, LESS DEMAND. AND THEN THIS CURVE WOULD BE SHIFTING TO THE LEFT RATHER THAN TO THE RIGHT. PRETTY STRAIGHTFORWARD, ISN'T IT? NUMBER THREE, CHANGES IN THE PRICE OF RELATED GOODS. THERE'S TWO KINDS OF GOODS THAT ARE RELATED GOODS, COMPLEMENTS AND SUBSTITUTES. IF YOU'LL NOTICE IN THAT WORD "COMPLEMENTS," C-O-M-P-L-E -- IT'S NOT P-L-I. A COMPLIMENT WOULD BE SOMETHING LIKE, "I SURE DO LIKE THIS CLASS." THAT WOULD BE A COMPLIMENT. IT WOULDN'T BE TRUTHFUL, I KNOW, BUT IT WOULD BE A COMPLIMENT. C-O-M-P-L-E, COMPLEMENT, THAT IS A SLIGHTLY DIFFERENT SPELLING AND MEANS SOMETHING SLIGHTLY DIFFERENT. IT'S NOT LIKE "OH, I SURE DO LIKE THIS

ECO 155 750 LECTURE EIGHT 16 CLASS." BUT COMPLEMENTS ARE GOODS THAT ARE CONSUMED TOGETHER. OKAY. NOW, WHAT DO I MEAN, "GOODS THAT ARE CONSUMED TOGETHER"? WE WERE TALKING HERE ABOUT THE GOOD X AND WE'RE INTERESTED IN THE DEMAND FOR GOOD X. BUT WHAT I'M SAYING IS, THERE'S A PRICE OF A RELATED GOOD. MAYBE A RELATED GOOD WOULD BE GOOD Y OR GOOD Z. AND I'M SAYING THERE CAN BE A CHANGE IN THE PRICE OF GOOD Y OR A CHANGE IN THE PRICE OF GOOD Z. A DIFFERENT GOOD -- NOT X, BUT A RELATED GOOD, AND THAT COULD AFFECT OUR CONSUMPTION OF X. NOW, COMPLEMENTS. LET'S SAY THAT X AND Y ARE COMPLEMENTS, X AND Y. EXAMPLES? HOW ABOUT THIS ONE. HERE'S GASOLINE FOR YOUR CAR -- THAT'S GOOD X. THAT'S THE ONE THAT WE'RE INTERESTED IN THE DEMAND FOR. GASOLINE FOR YOUR CAR. AND HOW ABOUT THIS ONE? GOOD Y WOULD BE TIRES FOR YOUR CAR. ARE THOSE CONSUMED TOGETHER? YEAH. YOU GET OUT AND DRIVE UP AND DOWN THE HIGHWAY, AND YOU'RE BURNING UP GASOLINE BUT YOU'RE ALSO BURNING UP THE RUBBER ON YOUR TIRES, OR WHATEVER IT IS THAT YOUR TIRES ARE MADE OUT OF. THOSE ARE CONSUMED TOGETHER. SO WHAT WOULD HAPPEN? LET'S SAY THE PRICE OF TIRES GOES -- RIGHT NOW LET'S SAY TIRES COST, I DON'T KNOW, TWENTY-FIVE DOLLARS A TIRE. LET'S SAY THEY WENT UP TO A HUNDRED DOLLARS A TIRE. THEN PEOPLE WOULD SAY, "MAN, TIRES SURE ARE EXPENSIVE. I DON'T WANT TO BUY TIRES." AND THEN WHEN THEY SAY "I DON'T WANT TO BUY TIRES," THEY

ECO 155 750 LECTURE EIGHT 17 SAY, "AND I KNOW I'M GONNA HAVE TO BUY TIRES IF I GET OUT HERE AND WEAR 'EM OUT, SO I'M NOT GONNA DRIVE QUITE AS MUCH." AND I DON'T MEAN TO SAY YOU'LL STOP DRIVING, BUT JUST NOT QUITE AS MUCH. "IF THERE'S SOME OCCASION WHERE I DON'T REALLY NEED TO MAKE THAT TRIP, THEN I WON'T MAKE THE TRIP 'CAUSE I DON'T WANT TO WEAR OUT THOSE TIRES." SO INCREASE IN THE PRICE OF TIRES, INCREASE IN THE PRICE OF GOOD Y -- I'M GONNA GET MY DEMAND CURVE READY FOR THIS PICTURE HERE. AN INCREASE IN THE PRICE OF GOOD Y. SO NOW WE DON'T DRIVE AS MUCH. AND NOW THAT WE DON'T DRIVE AS MUCH, WE DON'T DEMAND AS MUCH GASOLINE EITHER. SO THERE'S A DECREASE IN THE DEMAND FOR GOOD X, THE GASOLINE. INCREASE IN THE PRICE OF Y, DECREASE IN THE DEMAND FOR X. THAT'S WHEN THEY'RE COMPLEMENTARY GOODS. LET ME GIVE YOU ANOTHER EXAMPLE. SUPPOSE THAT WE RAISE TUITION AT SMS, AND THAT WOULDN'T BE LIKE A FAIRY TALE KIND OF A DEAL. THAT'S HAPPENED BEFORE. OKAY. SUPPOSE THAT WE RAISE THE TUITION AT SMS. A COMPLEMENTARY GOOD TO TAKING A CLASS IS BOOKS. IF THE TUITION AT SMS GOES UP, FEWER PEOPLE GO AND THE DEMAND FOR BOOKS GOES DOWN. SAME KIND OF A DEAL. TUITION AT SMS GOES UP, THE DEMAND FOR THE COMPLEMENTARY GOOD, THE BOOKS, THAT WOULD DECREASE. HOW ABOUT HAM AND EGGS? MAYBE YOU LIKE TO EAT HAM AND EGGS FOR BREAKFAST. IF YOU EAT HAM AND EGGS FOR BREAKFAST, IF THE PRICE

ECO 155 750 LECTURE EIGHT 18 OF HAM GOES UP THEN YOU SAY, "I'M NOT GONNA BUY QUITE AS MUCH HAM AS BEFORE." AND NOW THAT YOU'RE NOT BUYING AS MUCH HAM AS BEFORE, HIGHER PRICE FOR HAM, THEN YOU SAY, "I'M NOT GONNA BUY AS MANY EGGS AS BEFORE, EITHER, BECAUSE I EAT HAM AND EGGS TOGETHER. AND I ALSO STOP EATING THEM TOGETHER." GOODS THAT ARE CONSUMED TOGETHER. AND SO THE IMPORTANT THING HERE IS, MAYBE YOU'RE SELLING SOMETHING LIKE GASOLINE. AND I'M NOT SAYING TODAY, BUT IN THE FUTURE. MAYBE YOU'RE SELLING SOMETHING LIKE GASOLINE. OR TIRES. EITHER WAY. YOU NEED TO KNOW WHAT THE COMPLEMENTS ARE FOR YOUR PRODUCT. BECAUSE IF THERE'S A CHANGE IN THE PRICE OF THOSE COMPLEMENTS, THAT WILL AFFECT THE DEMAND FOR YOUR PRODUCT. NOW, THE OTHER WAY AROUND -- I HAD MY X AS GASOLINE BEFORE. BUT BACK IN THE 1970S THE PRICE OF OIL WENT WAY UP, OIL AND GASOLINE WENT WAY UP. AND WHAT HAPPENED IS, THE DEMAND FOR TIRES WENT DOWN AND THE DEMAND FOR CARS WENT DOWN. AS PEOPLE SAY, "OH, MAN. GASOLINE'S EXPENSIVE. I WON'T DRIVE AS MUCH" -- THIS IS BACK IN THE '70S -- THEN THEY ALSO SAID, "NOW THAT I'M NOT DRIVING AS MUCH, I DON'T WEAR OUT MY CAR. I DON'T NEED TO BUY A NEW CAR AS FREQUENTLY. NOW THAT I DON'T DRIVE AS MUCH AND DON'T WEAR OUT THE TIRES, I DON'T NEED TO BUY THE TIRES AS FREQUENTLY." SO WHAT WE HAD THERE WAS AN INCREASE IN THE PRICE OF GASOLINE AFFECTING THE DEMAND FOR COMPLEMENTARY GOODS, CAUSING THAT DEMAND TO GO DOWN. THIS IS ALL AROUND US AND, LIKE I SAY, SOME OF YOU WILL

ECO 155 750 LECTURE EIGHT 19 UNDOUBTEDLY EITHER OWN YOUR OWN BUSINESS OR BE MANAGERS FOR OTHER BUSINESSES SOMEDAY, AND YOU'LL NEED TO TAKE INTO ACCOUNT THESE RELATED GOODS. IT MAY NOT BE A GOOD THAT YOU'RE SELLING. YOU KNOW, IF YOU'RE SELLING TIRES YOU'RE THINKING, "HEY, TIRES. THAT'S WHAT I'M IN. I'M NOT IN GAS." BUT STILL, WHAT HAPPENS TO THE PRICE OF GASOLINE WILL AFFECT YOU. OKAY. IT WORKS IN THE OPPOSITE DIRECTION ALSO. SINCE THE 1970S WHAT'S HAPPENED BASICALLY IS, THE PRICE OF OIL AND GASOLINE HAS COME DOWN. SO IF THERE'S A DECREASE IN THE PRICE OF OIL AND GASOLINE, THERE WILL BE AN INCREASE IN THE DEMAND FOR THE COMPLEMENTARY GOODS. SO THERE'S A GREATER DEMAND FOR CARS RIGHT NOW THAN THERE WOULD'VE BEEN HAD GASOLINE PRICES BEEN HIGHER. THERE'S A GREATER DEMAND FOR TIRES RIGHT NOW THAN THERE WOULD'VE BEEN IF GASOLINE PRICES WOULD'VE BEEN HIGHER, AND SO FORTH. QUESTIONS ABOUT THIS? THINK ABOUT THIS IN TERMS OF -- NOT SO MUCH JUST HOW CAN I USE THIS ON THE TEST DAY, BUT HOW CAN I USE THIS IN THE FUTURE FOR SOMETHING THAT I'M SELLING. OKAY. SUBSTITUTES. THESE ARE GOODS THAT REPLACE EACH OTHER. LET'S SAY X AND Z. THOSE WOULD BE SUBSTITUTE GOODS, X AND Z WOULD, IF GOOD X AND GOOD Z ARE REPLACEMENTS FOR EACH OTHER. AND LET'S ALSO SAY IT THIS WAY. THEY PROVIDE THE SAME SERVICES AND THEY SATISFY THE SAME WANTS. AND I'M JUST STATING THIS IN DIFFERENT WAYS SO THAT THERE'S NO CONFUSION ABOUT WHAT I'M TALKING ABOUT.

ECO 155 750 LECTURE EIGHT 20 SUBSTITUTE GOODS SATISFY THE SAME -- PROVIDE THE SAME SERVICES. THEY'RE REPLACEMENTS FOR EACH OTHER. FOR EXAMPLE, A FORD AND A CHEVROLET, RIGHT? THEY'RE BOTH OF 'EM CARS, THEY BOTH OF 'EM TAKE YOU FROM POINT A TO POINT B, THEY BOTH HAVE THE AIR CONDITIONING, THE POWER STEERING, AND SO FORTH. THEY'RE SUBSTITUTE PRODUCTS. AND I AM SAYING TO YOU THAT A CHANGE IN THE PRICE OF ONE OF THOSE PRODUCTS WILL AFFECT A DEMAND FOR THE OTHER. LET'S START OFF WITH AN EXAMPLE AND LET'S SAY THAT WE'RE LOOKING AT THE QUANTITY OF X -- THAT WOULD BE FORDS, FORD CARS. LET'S SAY THE PRICE OF FORDS IS, I DON'T KNOW, TWENTY THOUSAND DOLLARS. I'LL SAY TWENTY K, YOU KNOW, LIKE THE BIG BOYS DO. AND MAYBE THEY SELL -- I DON'T EVEN KNOW HOW MANY FORDS GET SOLD A YEAR -- THREE MILLION. DID YOU SAY FIVE MILLION? OH, I THOUGHT YOU GAVE ME FIVE FINGERS THERE. COULD BE FIVE. I DON'T KNOW. ANYWAY, LET'S SAY SOMETHING HAPPENS AND NOW THERE'S A -- LET'S SAY GENERAL MOTORS LOWERS THE PRICE OF ITS CARS. MAYBE GENERAL MOTORS HAS BEEN CHARGING -- I DON'T EVEN CARE, BUT EIGHTEEN THOUSAND DOLLARS PER CAR AND THEN THEY GO DOWN TO FIFTEEN THOUSAND DOLLARS. SO THERE'S A DECREASE IN THE PRICE OF Z. Z IS THE SUBSTITUTE GOOD -- THAT'S THE GENERAL MOTORS CAR. GM. THE PRICE GOES DOWN. WHAT DO PEOPLE SAY NOW? THE PRICE OF GENERAL MOTORS CARS

ECO 155 750 LECTURE EIGHT 21 GOES DOWN. PEOPLE SAY, "OH, MAN." QUANTITY DEMANDED GOES UP. WE'RE NOT SHOWING THE -- I'LL MOVE OVER HERE AND SHOW IT IN A SMALL SPOT. HERE'S THE QUANTITY OF GM CARS, HERE'S DOLLARS, THE DEMAND CURVE. MAYBE GENERAL MOTORS IS SELLING FIVE MILLION CARS AT EIGHTEEN THOUSAND, EIGHTEEN K. AND IF THE PRICE GOES DOWN TO FIFTEEN THOUSAND, MAYBE GENERAL MOTORS NOW SELLS, I DON'T KNOW, SIX MILLION CARS. LOWER PRICE, GREATER QUANTITY DEMANDED. THAT'S A MOVEMENT ALONG, FROM ONE POINT TO ANOTHER, ON THE DEMAND CURVE FOR GENERAL MOTORS CARS. CHANGE IN QUANTITY DEMANDED. BUT THE POINT IS, IS THAT WHEN THE PRICE OF GENERAL MOTORS CARS GOES DOWN, PEOPLE BUY MORE OF THOSE GM CARS. AND THEN THEY SAY, "HEY, NOW THAT I GOT A NEW GENERAL MOTORS CAR, I DON'T NEED A NEW FORD OR CHRYSLER OR WHATEVER. DON'T NEED THOSE OTHER CARS; BOUGHT THE GM CAR." SO THERE'S A DECREASE IN THE DEMAND FOR THE SUBSTITUTE GOOD, WHICH WE'RE INTERESTED IN HERE AND THIS IS THE FORDS. LET'S DRAW THAT NEW DEMAND CURVE AND IT WILL LIE TO THE LEFT, D2. SO IF FORD KEEPS IT PRICE AT THE SAME OLD TWENTY THOUSAND DOLLARS, NOW IT'S DOWN TO SELLING MAYBE TWO POINT FOUR MILLION CARS. I JUST MADE UP THAT QUANTITY. IT MAKES ABSOLUTELY NO DIFFERENCE HOW MANY FEWER. I DIDN'T WANT TO HAVE IT WHERE IT WAS, WELL, GENERAL MOTORS GAINED A MILLION IN SALES SO FORD LOST A MILLION. THAT'S NOT NECESSARILY TRUE. GENERAL MOTORS LOWERED ITS

ECO 155 750 LECTURE EIGHT 22 PRICE, IT GAINED A MILLION IN SALES, BUT IT DIDN'T TAKE 'EM ALL AWAY FROM FORDS. SOME OF THE PEOPLE THAT ARE BUYING THESE GENERAL MOTORS CARS ARE JUST PEOPLE WHO WERE NOT GONNA BUY CARS AT ALL BEFORE AND NOW THEY SAY, "WOW, THREE THOUSAND DOLLARS CHEAPER," SO THEY DO BUY AND SO THE MARKET'S GROWN. ANYWAY, THAT'S NOT REALLY THE POINT THAT WE'RE TRYING TO MAKE HERE. THE POINT IS, THAT A CHANGE IN THE PRICE OF GOOD Z, WHATEVER THAT WOULD BE, A DECREASE IN THE PRICE OF GOOD Z, IT WOULD INCREASE THE DEMAND FOR THE SUBSTITUTE GOOD. SO DO YOU THINK THAT THEY LIKE IT OVER AT FORD IF GENERAL MOTORS CUTS THEIR PRICE? IF GENERAL MOTORS CUTS THEIR PRICE, IT HURTS FORD. SMALLER DEMAND, THE DEMAND CURVE SHIFTS TO THE LEFT. THIS IS BAD FOR FORD'S PROFITS. IT WORKS IN THE OPPOSITE DIRECTION. IF GENERAL MOTORS WOULD RAISE ITS PRICE, THE DEMAND FOR FORD CARS WOULD GO UP. SO AGAIN -- AND BY THE WAY, THESE SUBSTITUTES -- OR ANOTHER TERM, SOMETIMES WE'D SAY COMPETITORS. IF YOU ARE RUNNING A BUSINESS SOMEDAY AND YOU'RE THINKING ABOUT THE DEMAND FOR YOUR PRODUCT, WHAT YOU NEED TO BE DOING IS THINKING ABOUT WHAT ARE YOUR COMPETITORS DOING WITH THEIR PRICES? IF THE COMPETITORS WHO SELL SUBSTITUTES FOR YOUR PRODUCT, IF THEY'RE RAISING THEIR PRICES, THEN YOU'RE THINKING, "OH, THAT IS SO GOOD. THEY'RE RAISING THEIR PRICES. I HAVE MORE CUSTOMERS NOW." IF THEY'RE LOWERING THEIR

ECO 155 750 LECTURE EIGHT 23 PRICES, YOU START THINKING, "WELL, IF THEY'RE LOWERING THEIR PRICES, THEY'LL HAVE MORE CUSTOMERS. SOME OF THOSE CUSTOMERS THEY GET WILL BE FROM ME. THAT HURTS ME." AND WHAT'LL YOU DO? WELL, HERE'S WHAT YOU WOULD DO -- AND WE'LL COME BACK TO IT LATER. BUT IF THE DEMAND FOR YOUR PRODUCT GOES DOWN BECAUSE YOUR COMPETITOR CUT PRICE, THEN THERE'S A GOOD CHANCE YOU'RE GONNA LOWER YOUR PRICE AS WELL. THINK ABOUT THESE KINDS OF THINGS IN TERMS OF HOW WOULD YOU APPLY THEM IN A REAL WORLD SITUATION. HOW ABOUT THE UNIVERSITY, CHANGE IN THE PRICE OF RELATED GOODS? WE SELL A PRODUCT HERE, EDUCATION, BUT THERE ARE RELATED GOODS OUT THERE. FOR EXAMPLE, OTHER COLLEGES AND UNIVERSITIES. SUPPOSE THAT WE KEEP OUR PRICE THE SAME BUT OTHER COLLEGES AND UNIVERSITIES RAISE THEIR PRICES. STUDENTS AT OTHER COLLEGES AND UNIVERSITIES WOULD SAY, "WELL, BOY. IT GOT A LITTLE MORE EXPENSIVE HERE. I NOTICE THAT SMS DIDN'T RAISE THEIR TUITION." AND SO THEN THERE WOULD BE SOME PEOPLE MIGRATE FROM THOSE OTHER COLLEGES AND UNIVERSITIES TO HERE. SO THIS IS ALL AROUND US. YOU DON'T HAVE TO GO VERY FAR IN ORDER TO SEE THIS. YOU MIGHT SEE ONE GAS STATION LOWER ITS PRICE AND THEN YOU SEE THE GAS STATION ACROSS THE STREET LOWER ITS PRICE THE SAME DAY. WAS THAT JUST SOME ACCIDENT? NO, IT WASN'T AN ACCIDENT. THE FIRST GAS STATION LOWERED PRICE, STARTED TAKING

ECO 155 750 LECTURE EIGHT 24 CUSTOMERS AWAY FROM THE GAS STATION ACROSS THE STREET. SO THE GAS STATION ACROSS THE STREET SAID, "HEY, DEMAND IS DOWN FOR OUR PRODUCT. AND IN THE FACE OF LOWER DEMAND, WE OUGHT TO LOWER OUR PRICE, REDUCE OUR PRICE." SO THE PRICES OF GOODS ARE RELATED TO EACH OTHER. IT'S NOT JUST THAT YOU SET YOUR PRICE AND THAT'S THE END OF IT. YOU HAVE TO PAY ATTENTION TO WHAT OTHER PRICES ARE IN YOUR MARKET, YOUR MARKET BEING EITHER YOUR COMPETITORS OR YOUR MARKET ALSO INCLUDES -- OR YOUR MARKET IS INFLUENCED BY THE PRICES OF COMPLEMENTARY PRODUCTS. AND BY THE WAY, THERE'S ANOTHER CATEGORY OF GOODS. I'VE TALKED ABOUT COMPLEMENTARY GOODS THAT ARE CONSUMED TOGETHER, SUBSTITUTE GOODS THAT TAKE EACH OTHER'S PLACE OR PERFORM THE SAME FUNCTION. OTHER GOODS THAT ARE NEITHER COMPLEMENTS NOR SUBSTITUTES, THOSE ARE JUST INDEPENDENT GOODS. THEY JUST HAVE NOTHING TO DO WITH IT. FOR EXAMPLE, THE PRICE OF GOING TO SMS TO COLLEGE AND THE PRICE OF POTATOES, THOSE ARE JUST TWO DIFFERENT PRODUCTS. THEY'RE NOT COMPLEMENTS, THEY'RE NOT SUBSTITUTES. AND SO IF THE PRICE OF POTATOES CHANGES, THAT DOESN'T AFFECT THE DEMAND FOR GOING TO SMS. JUST INDEPENDENT GOODS. AND I DIDN'T TALK ABOUT THOSE THERE AND THAT'S BECAUSE THE DEMAND CURVE DOES NOT SHIFT. OKAY. QUESTIONS ABOUT THIS? LET'S TALK ABOUT NUMBER FOUR, CHANGES IN EXPECTED FUTURE

ECO 155 750 LECTURE EIGHT 25 PRICES. AND WHEN I SAY FUTURE PRICES -- OF GOOD X, THE GOOD WE'RE TALKING ABOUT HERE. WE'LL START OFF WITH THE PRICE OF ONE DOLLAR AND LET'S SAY CONSUMERS ARE BUYING A HUNDRED UNITS. AND THEN SUPPOSE THERE'S SOME KIND OF AN ANNOUNCEMENT THAT COMES ALONG, SOMETHING LIKE THIS: "HEY, YOU KNOW, NEXT WEEK THE PRICE OF GOOD X IS GONNA GO UP. IT'S NOT GONNA CONTINUE TO BE A DOLLAR. IT'LL BE TWO DOLLARS NEXT WEEK." NOW, HERE'S HOW PEOPLE WILL REACT TO THAT. AND YOU KNOW HOW PEOPLE REACT BUT -- IT'S KIND OF OBVIOUS, ISN'T IT? IF THE PRICE OF GOOD X IS GONNA GO UP FROM A DOLLAR TO TWO DOLLARS NEXT WEEK, THEN WHAT PEOPLE DO IS THEY SAY, "YOU KNOW, MAYBE I OUGHT TO GO OUT AND BUY GOOD X TODAY RATHER THAN WAIT UNTIL NEXT WEEK AND BUY IT WHEN THE PRICE IS TWICE AS HIGH." AND SO WHAT WILL HAPPEN IS THIS DEMAND CURVE WILL SHIFT TO THE RIGHT, TO D2, WHERE PEOPLE ARE GONNA BUY MORE UNITS RIGHT NOW -- LET'S SAY A HUNDRED AND EIGHTY UNITS. THEY'RE GONNA BUY MORE UNITS RIGHT NOW THAN THEY WERE BEFORE, AND THE REASON IS BECAUSE THEY THINK NEXT WEEK'S PRICE WILL BE HIGHER. SO HERE'S WHERE NEXT WEEK'S PRICE, P NEXT WEEK EQUALS ONE DOLLAR. THAT'S WHERE PEOPLE DID NOT THINK THERE'D BE ANY PRICE CHANGE AND HERE'S WHERE THEY THINK THE PRICE NEXT WEEK WILL BE TWO DOLLARS. THE PRICE TODAY IS STILL ONE DOLLAR BUT THEY THINK NEXT WEEK IT'S GONNA BE MORE EXPENSIVE. "LET'S GO OUT AND BUY IT

ECO 155 750 LECTURE EIGHT 26 RIGHT NOW." SO IF THEY THINK THERE'S AN INCREASE IN EXPECTED FUTURE PRICE, THEN THAT WILL MEAN THAT THERE'S AN INCREASE IN DEMAND TODAY. TODAY'S DEMAND. NOT NEXT WEEK'S DEMAND, BUT TODAY'S DEMAND. YOU KNOW, THERE'S ACTUALLY GONNA BE A REDUCED DEMAND NEXT WEEK, ISN'T THERE? PEOPLE GO OUT AND BUY MORE OF THIS PRODUCT RIGHT NOW, AND NOW THEY'VE SORT OF GOT AN INVENTORY OF IT, AND THEN THEY DON'T BUY SO MUCH NEXT WEEK. FOR EXAMPLE, LET'S CONSIDER GASOLINE AGAIN. THE PRICE OF GASOLINE, LET'S SAY, IS A DOLLAR A GALLON RIGHT NOW. MAYBE YOU'RE DRIVING AROUND AND YOU'VE GOT FIVE OR TEN GALLONS OF GAS IN YOUR CAR. YOU'RE JUST KIND OF DRIVING AROUND, MINDING YOUR OWN BUSINESS. ALL OF A SUDDEN SOMEBODY SAYS TO YOU, "HEY, THE PRICE OF GASOLINE IS GOING UP TO TWO DOLLARS NEXT WEEK." THEN WHAT YOU SAY IS, "WOW. I'M NOT GONNA WAIT TILL NEXT WEEK TO FILL MY CAR UP." YOU GO FILL IT UP TODAY AND NOW YOU'RE DRIVING AROUND WITH TWENTY GALLONS OF GAS IN YOUR TANK. YOU'VE GOT A BIGGER INVENTORY. MAYBE YOU CAN GO FOR ANOTHER WEEK OR TWO WITHOUT HAVING TO PAY THAT HIGHER PRICE FOR GASOLINE. IF YOU EXPECT THE PRICE TO GO DOWN IN THE FUTURE -- LET'S SAY SOMEBODY SAYS TO YOU, "HEY, YOU KNOW, GASOLINE IS ONLY GONNA BE FIFTY CENTS NEXT WEEK. I HEARD THE PRICE IS GOING DOWN." THEN WHAT YOU'RE THINKING IS, "BOY, I'M GLAD I HEARD THAT BECAUSE I WAS THINKING ABOUT GOING OUT AND BUYING A LITTLE BIT OF GAS THIS WEEKEND. I'LL

ECO 155 750 LECTURE EIGHT 27 WAIT UNTIL NEXT WEEK WHEN THE PRICE IS ONLY FIFTY CENTS AND I'LL FILL UP THEN." AND SO IF WE EXPECT THE PRICE TO GO DOWN IN THE FUTURE, THEN TODAY'S DEMAND GOES DOWN. AND THAT DEMAND CURVE SHIFTS TO THE LEFT RATHER THAN TO THE RIGHT. ANY PART OF THIS THAT DOESN'T MAKE SENSE TO YOU? IT'S KIND OF OBVIOUS AND I HATE TO HAVE TO SORT OF GO THROUGH 'EM LIKE THIS, ONE BY ONE, BUT JUST TO MAKE SURE IT'S CLEAR TO EVERYBODY. DOES THIS HAPPEN VERY OFTEN WHERE WE HAVE THESE EXPECTATIONS OF FUTURE PRICES? NOT A GOOD DEAL. BUT THINGS SOMETIMES LIKE GASOLINE OR WHATEVER, YEAH, SOMETIMES WE'LL GET THE WORD ON THIS STUFF. DURING INFLATIONARY PERIODS -- WHICH IS NOT TOO MUCH OF A PROBLEM RIGHT NOW. BUT DURING INFLATIONARY PERIODS WHEN PRICES ARE GOING UP, PEOPLE COME TO THINK THAT WAY. IT'S LIKE, "MAN, PRICES ARE GOING UP. I MEAN, EVERY WEEK THEY'RE HIGHER THAN THEY WERE THE WEEK BEFORE." AND SO PEOPLE START ACCELERATING THEIR PURCHASES ON A WEEKLY BASIS. AND SO WHAT HAPPENS IS, THIS DOESN'T INCREASE THE TOTAL DEMAND FOR GASOLINE IN A PERSON'S LIFETIME. THIS INFLUENCE IS WHEN DO YOU BUY THE GASOLINE? OKAY. ANY QUESTIONS ABOUT THIS? LET'S GO ON AND TALK ABOUT WHAT CAUSES THE SUPPLY CURVE TO SHIFT. AS BEFORE, LET'S BE REAL CLEAR WHAT WE MEAN BY A CHANGE IN SUPPLY OR A SHIFT IN SUPPLY. START OFF WITH THE PRICE OF A GOOD AT A CERTAIN LEVEL, TWO DOLLARS, AND SUPPLIERS ARE SELLING -- OR

ECO 155 750 LECTURE EIGHT 28 OFFERING FOR SALE MAYBE TWO HUNDRED UNITS. IF THERE'S A CHANGE IN THE PRICE OF THE GOOD, IF THERE'S A CHANGE IN PRICE -- LET'S SUPPOSE THE GOOD GOES UP TO THREE DOLLARS IN PRICE, THEN WE SEE A GREATER QUANTITY SUPPLIED. BUT HERE'S A MOVEMENT ALONG THE CURVE. THIS IS NOT A CHANGE IN SUPPLY. IT'S NOT A SHIFT IN THE SUPPLY GROUP, A HIGHER PRICE CORRESPONDS TO A LARGER QUANTITY SUPPLIED, BUT THAT'S A MOVEMENT ALONG THE SUPPLY CURVE. SO THIS IS A CHANGE IN QUANTITY SUPPLIED. WHAT WE WANT TO TALK ABOUT IS, SOMETHING THAT AFFECTS THE SUPPLY DECISIONS OF COMPANIES THAT ARE SELLING THINGS BUT NOT A CHANGE IN PRICE. SOMETHING ELSE, NOT A CHANGE IN PRICE. SO WHAT WE'LL DO -- AND OUR DISCUSSION HERE IS, WE'LL KEEP THAT PRICE CONSTANT AT TWO DOLLARS. IT DOES NOT CHANGE. AND WHAT WE WANT TO TALK ABOUT NOW IS, THINGS THAT AFFECT THE SUPPLY OF THE PRODUCT OTHER THAN THE PRICE. HERE'S AN EASY ONE: CHANGE IN SUPPLY OR A SHIFT IN THE SUPPLY CURVE. AN EASY ONE IS -- HOW ABOUT THIS: A CHANGE IN THE NUMBER OF SUPPLIERS. THAT'S ABOUT THE EASIEST ONE, ISN'T IT? LET'S SAY THAT WHAT WE HAVE TO BEGIN WITH IS ONE HUNDRED FIRMS IN A BUSINESS -- FIRM. THERE'S A HUNDRED FIRMS SUPPLYING THIS PRODUCT. WHEN THE PRICE IS TWO DOLLARS, THOSE FIRMS SUPPLIED TWO HUNDRED UNITS, WHATEVER THE PRODUCT IS. NOW, ONE MORE FIRM ENTERS THE INDUSTRY. WE HAVE FIRM NUMBER ONE HUNDRED AND ONE STARTS UP IN BUSINESS

ECO 155 750 LECTURE EIGHT 29 AND I'M SAYING THAT THIS SUPPLY CURVE WILL SHIFT TO THE RIGHT, TO S2, ONE HUNDRED AND ONE FIRMS. AND NOW, EVEN THOUGH THE PRICE IS TOTALLY UNCHANGED, STILL AT TWO DOLLARS, NOW WE'RE GETTING SOMETHING LIKE TWO HUNDRED AND THREE UNITS. THE CURVE SHIFTED TO THE RIGHT. NOW, THIS IS A GOOD TIME FOR ME TO EXPLAIN TO YOU WHY I WANTED YOU TO TALK ABOUT SHIFTING TO THE RIGHT VERSUS UP AND DOWN. AWHILE AGO WHEN WE TALKED ABOUT THE DEMAND CURVE INCREASING, I SAID TALK ABOUT AN INCREASE IN DEMAND IS A RIGHTWARD SHIFT IN DEMAND, NOT AN UPWARD SHIFT IN DEMAND. HERE'S WHY. NOW WE'VE INCREASED THE SUPPLY. WE'VE SHIFTED THE CURVE TO THE RIGHT, BUT YOU NOTICE THIS CURVE DID NOT SHIFT UP. IT SHIFTED DOWN. I MEAN, IF YOU WANT TO TALK ABOUT THE DIRECTION OF THE SHIFT, THE SUPPLY CURVE SHIFTED DOWN WHEN IT'S SHIFTING TO THE RIGHT. SO IF YOU GET INTO THE HABIT OF SAYING THE DEMAND CURVE SHIFTS UP WHEN THERE'S AN INCREASE IN DEMAND, THEN YOU HAVE TO SAY THE SUPPLY CURVE SHIFTED DOWN WHEN THERE'S AN INCREASE IN DEMAND. THAT'S CONFUSING. THE THING THAT'S NOT CONFUSING IS, AN INCREASE IN DEMAND IS A RIGHTWARD SHIFT IN DEMAND. AN INCREASE IN SUPPLY IS A RIGHTWARD SHIFT IN SUPPLY. OKAY. SO GET INTO THAT HABIT OF LOOKING AT WHAT'S HAPPENING ON THE QUANTITY AXIS. ANYWAY, IF THERE'S A LARGER NUMBER OF SUPPLIERS, THE SUPPLY CURVE SHIFTS TO THE RIGHT. LET'S SAY THERE'S A SMALLER

ECO 155 750 LECTURE EIGHT 30 NUMBER OF SUPPLIERS. THEN THE SUPPLY CURVE WOULD SHIFT TO THE LEFT. HERE'S A SUPPLY CURVE WITH NINETY-NINE FIRMS. AND THAT IS WHERE WE'RE GONNA END THE DAY. WE'LL GO AHEAD AND TALK ABOUT MORE OF THESE THINGS THAT CAN CHANGE OR SHIFT THE SUPPLY CURVE NEXT TIME. SO LONG.