Lecture 1: Supply and Demand · demanded and the price consumers are willing to pay, holding ......
Transcript of Lecture 1: Supply and Demand · demanded and the price consumers are willing to pay, holding ......
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Admin S and D M and M Demand Supply Eqbm Elasticity
Lecture 1: Supply and Demand
August 27, 2019
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Admin S and D M and M Demand Supply Eqbm Elasticity
Overview
Course Administration
Supply and Demand
Market and Models
Demand
Supply
Market Equilibrium
Elasticity
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Admin S and D M and M Demand Supply Eqbm Elasticity
Course Administration
1. Expectations• Call me Leah• Class should be hard, but not impossible• What we learn should be clearly applicable• Come prepared to give examples, as I will call on you• Understand that no class can satisfy all students• Is this the right class for you?• Math assessment
2. Review Syllabus
3. Introductions
4. Ripped from Headlines Assignment
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Admin S and D M and M Demand Supply Eqbm Elasticity
Course Administration
1. Expectations• Call me Leah• Class should be hard, but not impossible• What we learn should be clearly applicable• Come prepared to give examples, as I will call on you• Understand that no class can satisfy all students• Is this the right class for you?• Math assessment
2. Review Syllabus
3. Introductions
4. Ripped from Headlines Assignment
![Page 5: Lecture 1: Supply and Demand · demanded and the price consumers are willing to pay, holding ... demand for the main good? AdminS and DM and MDemandSupplyEqbmElasticity ... when price](https://reader033.fdocuments.in/reader033/viewer/2022041921/5e6bd935e8685078033ff110/html5/thumbnails/5.jpg)
Admin S and D M and M Demand Supply Eqbm Elasticity
Course Administration
1. Expectations• Call me Leah• Class should be hard, but not impossible• What we learn should be clearly applicable• Come prepared to give examples, as I will call on you• Understand that no class can satisfy all students• Is this the right class for you?• Math assessment
2. Review Syllabus
3. Introductions
4. Ripped from Headlines Assignment
![Page 6: Lecture 1: Supply and Demand · demanded and the price consumers are willing to pay, holding ... demand for the main good? AdminS and DM and MDemandSupplyEqbmElasticity ... when price](https://reader033.fdocuments.in/reader033/viewer/2022041921/5e6bd935e8685078033ff110/html5/thumbnails/6.jpg)
Admin S and D M and M Demand Supply Eqbm Elasticity
Course Administration
1. Expectations• Call me Leah• Class should be hard, but not impossible• What we learn should be clearly applicable• Come prepared to give examples, as I will call on you• Understand that no class can satisfy all students• Is this the right class for you?• Math assessment
2. Review Syllabus
3. Introductions
4. Ripped from Headlines Assignment
![Page 7: Lecture 1: Supply and Demand · demanded and the price consumers are willing to pay, holding ... demand for the main good? AdminS and DM and MDemandSupplyEqbmElasticity ... when price](https://reader033.fdocuments.in/reader033/viewer/2022041921/5e6bd935e8685078033ff110/html5/thumbnails/7.jpg)
Admin S and D M and M Demand Supply Eqbm Elasticity
Other Admin Details
• If you have a disability requiring accomodation, let me knowASAP
• Please bring a name tent to all future classes
• Problem Set 1 posted on handouts tab
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Admin S and D M and M Demand Supply Eqbm Elasticity
Chapters 1 and 2
1. Why Economics?
2. Supply and Demand• Markets and Models• Demand• Supply• Market Equilibrium• An elasticity preview; much more in Lecture 3
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Admin S and D M and M Demand Supply Eqbm Elasticity
Why Economics?
• An important language for policy makers
• A shared set of assumptions about how the world works
• Understand the assumptions and logic if you want tochallenge it
• Learn the power of models
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Admin S and D M and M Demand Supply Eqbm Elasticity
Markets and Models:
Supply and Demand
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Admin S and D M and M Demand Supply Eqbm Elasticity
What is a Market?
A set of many things
• type of product sold
• location
• point in time
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Admin S and D M and M Demand Supply Eqbm Elasticity
Markets Policy Aside: Antitrust
• Federal anti-trust policy prohibits monopolies and “excessive”market concentration
• Whether or not a market is concentrated depends on how youdefine the market
• Expedia / Orbitz propsed merger• Expedia owns Travelocity, wants to buy Orbitz• Hotel owners say market is online bookings, and merger would
give new company 75% of all online bookings• Expedia says market is hotel reservations, and merged
company will account for 17% of hotel bookings1
1Full story here and a different interesting example here.
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Admin S and D M and M Demand Supply Eqbm Elasticity
Key Assumptions of Supply and Demand Model
1. We restrict our focus to one single marketSupply ≡ total amount of a good that all producers arewilling to sellDemand ≡ total amount of a good that all consumers arewilling to buy
2. All goods bought and sold in the market are identical
3. All goods sold in the market sell for the same prices andeveryone has the same information about prices and quality
4. There are many buyers and sellers in the market
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Admin S and D M and M Demand Supply Eqbm Elasticity
Demand
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Admin S and D M and M Demand Supply Eqbm Elasticity
Demand Curves
We want a way to summarize everyone’s demand in the market
• Demand curve ≡ relationship between the quantity of a gooddemanded and the price consumers are willing to pay, holdingall else constant
• Demand curves almost always slope downward
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Admin S and D M and M Demand Supply Eqbm Elasticity
Picturing Demand for a Product You Know
P
P1
Q1 Q
Then, what if the price increases?
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Admin S and D M and M Demand Supply Eqbm Elasticity
Picturing Demand for a Product You Know
P
P1
Q1 Q
Then, what if the price increases?
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Admin S and D M and M Demand Supply Eqbm Elasticity
Quantity Demanded at an Increased Price
P
P1
Q1 Q
P2
Q2
What if the price had instead decreased?
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Admin S and D M and M Demand Supply Eqbm Elasticity
Quantity Demanded at an Increased Price
P
P1
Q1 Q
P2
Q2
What if the price had instead decreased?
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Admin S and D M and M Demand Supply Eqbm Elasticity
Quantity Demanded at a Decreased Price
P
P1
Q1 Q
P2
Q2 Q3
P3
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Admin S and D M and M Demand Supply Eqbm Elasticity
Think about a Q for any P
P
P1
Q1 Q
P2
Q2 Q3
P3
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Admin S and D M and M Demand Supply Eqbm Elasticity
The Textbook’s Demand Curve
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Admin S and D M and M Demand Supply Eqbm Elasticity
Demand Curve: Graph to Algebra
• If you can draw it in a graph, you can write an equation for it
• We can write the previous picture’s line asQD = 1000− 200P
• This is a function of Q in terms of P, which we can write ingeneral as Q = f (P)
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Admin S and D M and M Demand Supply Eqbm Elasticity
Inverse Demand Curve
QD = 1000− 200P is entirely the same as P = 5− QD/200
• This is a function of P in terms of Q, which we can writeP = g(Q) – call it the inverse demand curve
• The P = g(Q) version matches the previous graph
• You can read the negative slope (−1/200) from the equation
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Admin S and D M and M Demand Supply Eqbm Elasticity
Factors that Influence Demand
1. Price
2. Number of consumers
3. Consumer income or wealth
4. Consumer tastes
5. Prices of other goods
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Admin S and D M and M Demand Supply Eqbm Elasticity
Factors that Influence Demand
1. Price
2. Number of consumers
3. Consumer income or wealth
4. Consumer tastes
5. Prices of other goods
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Admin S and D M and M Demand Supply Eqbm Elasticity
How Do Other Goods Influence the Price of the GoodWe’re Considering?
• Substitute ≡ a good that could replace the good underconsideration
• Complement ≡ a good that you consume with the good underconsideration
If the price of a perfect substitute decreases, what happens to yourdemand for the main good?
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Admin S and D M and M Demand Supply Eqbm Elasticity
Demand Curve Shifts
• If we want to understand how the market demand changeswhen price changes, we move along the demand curve
• When there is a change in any other determinant of demand,the demand curve shifts
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Admin S and D M and M Demand Supply Eqbm Elasticity
What Could Make a Demand Curve Shift Inward?
P
Q
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Admin S and D M and M Demand Supply Eqbm Elasticity
Supply
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Admin S and D M and M Demand Supply Eqbm Elasticity
Factors that Influence Supply
• Price
• Suppliers’ costs of production
• Number of sellers
• Sellers’ outside options
So what does a supply curve look like? Upward sloping.
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Admin S and D M and M Demand Supply Eqbm Elasticity
Factors that Influence Supply
• Price
• Suppliers’ costs of production
• Number of sellers
• Sellers’ outside options
So what does a supply curve look like? Upward sloping.
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Admin S and D M and M Demand Supply Eqbm Elasticity
Factors that Influence Supply
• Price
• Suppliers’ costs of production
• Number of sellers
• Sellers’ outside options
So what does a supply curve look like?
Upward sloping.
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Admin S and D M and M Demand Supply Eqbm Elasticity
Factors that Influence Supply
• Price
• Suppliers’ costs of production
• Number of sellers
• Sellers’ outside options
So what does a supply curve look like? Upward sloping.
![Page 35: Lecture 1: Supply and Demand · demanded and the price consumers are willing to pay, holding ... demand for the main good? AdminS and DM and MDemandSupplyEqbmElasticity ... when price](https://reader033.fdocuments.in/reader033/viewer/2022041921/5e6bd935e8685078033ff110/html5/thumbnails/35.jpg)
Admin S and D M and M Demand Supply Eqbm Elasticity
Textbook’s Supply Curve
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Admin S and D M and M Demand Supply Eqbm Elasticity
An Equation for the Supply Curve
• Just like demand, we can write an equation for supply
• QS = 200P − 200
• this is Q = f (P)
• We can also write P = Q200 + 1
• this is P = g(Q)• entirely equivalent to first equation
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Admin S and D M and M Demand Supply Eqbm Elasticity
An Equation for the Supply Curve
• Just like demand, we can write an equation for supply
• QS = 200P − 200• this is Q = f (P)
• We can also write P = Q200 + 1
• this is P = g(Q)• entirely equivalent to first equation
![Page 38: Lecture 1: Supply and Demand · demanded and the price consumers are willing to pay, holding ... demand for the main good? AdminS and DM and MDemandSupplyEqbmElasticity ... when price](https://reader033.fdocuments.in/reader033/viewer/2022041921/5e6bd935e8685078033ff110/html5/thumbnails/38.jpg)
Admin S and D M and M Demand Supply Eqbm Elasticity
An Equation for the Supply Curve
• Just like demand, we can write an equation for supply
• QS = 200P − 200• this is Q = f (P)
• We can also write P = Q200 + 1
• this is P = g(Q)• entirely equivalent to first equation
![Page 39: Lecture 1: Supply and Demand · demanded and the price consumers are willing to pay, holding ... demand for the main good? AdminS and DM and MDemandSupplyEqbmElasticity ... when price](https://reader033.fdocuments.in/reader033/viewer/2022041921/5e6bd935e8685078033ff110/html5/thumbnails/39.jpg)
Admin S and D M and M Demand Supply Eqbm Elasticity
Shifts in the Supply Curve
• Does a price change shift the supply curve or move along thesupply curve?
• Do non-price changes cause shifts or moves along the supplycurve?
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Admin S and D M and M Demand Supply Eqbm Elasticity
Shifts in the Supply Curve
• Does a price change shift the supply curve or move along thesupply curve?
• Do non-price changes cause shifts or moves along the supplycurve?
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Admin S and D M and M Demand Supply Eqbm Elasticity
Market Equilibrium
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Admin S and D M and M Demand Supply Eqbm Elasticity
Defining Market Equilibrium
• Point at which consumers’ quantity demanded equalsproducers’ quantity supplied
• QD = QS
• Equilibrium price ≡ price at which quantity supplied equalsquantity demanded
• P such that QD = QS
• Getting to equilibrium is the work of Adam Smith’s invisiblehand
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Admin S and D M and M Demand Supply Eqbm Elasticity
Defining Market Equilibrium
• Point at which consumers’ quantity demanded equalsproducers’ quantity supplied
• QD = QS
• Equilibrium price ≡ price at which quantity supplied equalsquantity demanded
• P such that QD = QS
• Getting to equilibrium is the work of Adam Smith’s invisiblehand
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Admin S and D M and M Demand Supply Eqbm Elasticity
Equilibrium in a Graph
P
Q
D
S
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Admin S and D M and M Demand Supply Eqbm Elasticity
Equilibrium in a Graph
P
Q
D
S
P*
Q*
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Admin S and D M and M Demand Supply Eqbm Elasticity
Equilibrium in Algebra: Price
Using our tomato example
QD = QS
1000− 200P = 200P − 200
P = 3
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Admin S and D M and M Demand Supply Eqbm Elasticity
Equilibrium in Algebra: Price
Using our tomato example
QD = QS
1000− 200P = 200P − 200
P = 3
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Admin S and D M and M Demand Supply Eqbm Elasticity
Equilibrium in Algebra: Quantity
• Before putting pencil to paper, are QS and QD equal ordifferent?
They must be the same.
• How do you find them?
• Using our tomato example
QD = 1000− 200P = 1000− 200(3) = 400
QS = 200P − 200 = 200(3)− 200 = 400
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Admin S and D M and M Demand Supply Eqbm Elasticity
Equilibrium in Algebra: Quantity
• Before putting pencil to paper, are QS and QD equal ordifferent? They must be the same.
• How do you find them?
• Using our tomato example
QD = 1000− 200P = 1000− 200(3) = 400
QS = 200P − 200 = 200(3)− 200 = 400
![Page 50: Lecture 1: Supply and Demand · demanded and the price consumers are willing to pay, holding ... demand for the main good? AdminS and DM and MDemandSupplyEqbmElasticity ... when price](https://reader033.fdocuments.in/reader033/viewer/2022041921/5e6bd935e8685078033ff110/html5/thumbnails/50.jpg)
Admin S and D M and M Demand Supply Eqbm Elasticity
Getting to Equilibrium
That’s just the math. The magic is getting there!
• Suppose we are out of equilibrium and QD > QS
• Seems like a shortage• Price increases until we reach equilibrium
• Suppose we are out of equilibrium and QS > QD
• Seems like a surplus• Price falls until we reach equilibrium
Note that these are all movements along existing curves.
![Page 51: Lecture 1: Supply and Demand · demanded and the price consumers are willing to pay, holding ... demand for the main good? AdminS and DM and MDemandSupplyEqbmElasticity ... when price](https://reader033.fdocuments.in/reader033/viewer/2022041921/5e6bd935e8685078033ff110/html5/thumbnails/51.jpg)
Admin S and D M and M Demand Supply Eqbm Elasticity
Getting to Equilibrium
That’s just the math. The magic is getting there!
• Suppose we are out of equilibrium and QD > QS
• Seems like a shortage• Price increases until we reach equilibrium
• Suppose we are out of equilibrium and QS > QD
• Seems like a surplus• Price falls until we reach equilibrium
Note that these are all movements along existing curves.
![Page 52: Lecture 1: Supply and Demand · demanded and the price consumers are willing to pay, holding ... demand for the main good? AdminS and DM and MDemandSupplyEqbmElasticity ... when price](https://reader033.fdocuments.in/reader033/viewer/2022041921/5e6bd935e8685078033ff110/html5/thumbnails/52.jpg)
Admin S and D M and M Demand Supply Eqbm Elasticity
Getting to Equilibrium
That’s just the math. The magic is getting there!
• Suppose we are out of equilibrium and QD > QS
• Seems like a shortage• Price increases until we reach equilibrium
• Suppose we are out of equilibrium and QS > QD
• Seems like a surplus• Price falls until we reach equilibrium
Note that these are all movements along existing curves.
![Page 53: Lecture 1: Supply and Demand · demanded and the price consumers are willing to pay, holding ... demand for the main good? AdminS and DM and MDemandSupplyEqbmElasticity ... when price](https://reader033.fdocuments.in/reader033/viewer/2022041921/5e6bd935e8685078033ff110/html5/thumbnails/53.jpg)
Admin S and D M and M Demand Supply Eqbm Elasticity
Getting to Equilibrium
That’s just the math. The magic is getting there!
• Suppose we are out of equilibrium and QD > QS
• Seems like a shortage• Price increases until we reach equilibrium
• Suppose we are out of equilibrium and QS > QD
• Seems like a surplus• Price falls until we reach equilibrium
Note that these are all movements along existing curves.
![Page 54: Lecture 1: Supply and Demand · demanded and the price consumers are willing to pay, holding ... demand for the main good? AdminS and DM and MDemandSupplyEqbmElasticity ... when price](https://reader033.fdocuments.in/reader033/viewer/2022041921/5e6bd935e8685078033ff110/html5/thumbnails/54.jpg)
Admin S and D M and M Demand Supply Eqbm Elasticity
The Vanilla Market Finds New Equilibria
• a year ago organic vanilla cost $64/gallon
• now it costs $245/gallon
• what happened?
• consumers taste changed: people don’t want synthetic vanilla
• Nestle and Hershey’s and others switch to the real thing
• it’s a big pain to make vanilla – and it’s mostly only inMadagascar
• supply can respond only slowly
• prices are up, but should come down
![Page 55: Lecture 1: Supply and Demand · demanded and the price consumers are willing to pay, holding ... demand for the main good? AdminS and DM and MDemandSupplyEqbmElasticity ... when price](https://reader033.fdocuments.in/reader033/viewer/2022041921/5e6bd935e8685078033ff110/html5/thumbnails/55.jpg)
Admin S and D M and M Demand Supply Eqbm Elasticity
Impact of Shift in Demand
• Suppose that we learn that tomatoes ruin the fluoride on yourteeth
• What happens to the demand curve?
![Page 56: Lecture 1: Supply and Demand · demanded and the price consumers are willing to pay, holding ... demand for the main good? AdminS and DM and MDemandSupplyEqbmElasticity ... when price](https://reader033.fdocuments.in/reader033/viewer/2022041921/5e6bd935e8685078033ff110/html5/thumbnails/56.jpg)
Admin S and D M and M Demand Supply Eqbm Elasticity
Where Does Demand Curve Go?
P
Q
D
S
![Page 57: Lecture 1: Supply and Demand · demanded and the price consumers are willing to pay, holding ... demand for the main good? AdminS and DM and MDemandSupplyEqbmElasticity ... when price](https://reader033.fdocuments.in/reader033/viewer/2022041921/5e6bd935e8685078033ff110/html5/thumbnails/57.jpg)
Admin S and D M and M Demand Supply Eqbm Elasticity
Where Does Demand Curve Go?
P
Q
D
S
P*
Q*
![Page 58: Lecture 1: Supply and Demand · demanded and the price consumers are willing to pay, holding ... demand for the main good? AdminS and DM and MDemandSupplyEqbmElasticity ... when price](https://reader033.fdocuments.in/reader033/viewer/2022041921/5e6bd935e8685078033ff110/html5/thumbnails/58.jpg)
Admin S and D M and M Demand Supply Eqbm Elasticity
Where Does Demand Curve Go?
P
Q
D
S
Po*
Qo*
Pn*
Qn*
![Page 59: Lecture 1: Supply and Demand · demanded and the price consumers are willing to pay, holding ... demand for the main good? AdminS and DM and MDemandSupplyEqbmElasticity ... when price](https://reader033.fdocuments.in/reader033/viewer/2022041921/5e6bd935e8685078033ff110/html5/thumbnails/59.jpg)
Admin S and D M and M Demand Supply Eqbm Elasticity
What does this mean for equilibrium?New Demand Curve
• Assume that for any price, the quantity demanded oftomatoes falls by 500
• QD,original = 1000− 200P
QD,new =
QD,original − 500
= 1000− 200P − 500
= 500− 200P
![Page 60: Lecture 1: Supply and Demand · demanded and the price consumers are willing to pay, holding ... demand for the main good? AdminS and DM and MDemandSupplyEqbmElasticity ... when price](https://reader033.fdocuments.in/reader033/viewer/2022041921/5e6bd935e8685078033ff110/html5/thumbnails/60.jpg)
Admin S and D M and M Demand Supply Eqbm Elasticity
What does this mean for equilibrium?New Demand Curve
• Assume that for any price, the quantity demanded oftomatoes falls by 500
• QD,original = 1000− 200P
QD,new = QD,original − 500
= 1000− 200P − 500
= 500− 200P
![Page 61: Lecture 1: Supply and Demand · demanded and the price consumers are willing to pay, holding ... demand for the main good? AdminS and DM and MDemandSupplyEqbmElasticity ... when price](https://reader033.fdocuments.in/reader033/viewer/2022041921/5e6bd935e8685078033ff110/html5/thumbnails/61.jpg)
Admin S and D M and M Demand Supply Eqbm Elasticity
What does this mean for equilibrium?New Demand Curve
• Assume that for any price, the quantity demanded oftomatoes falls by 500
• QD,original = 1000− 200P
QD,new = QD,original − 500
= 1000− 200P − 500
= 500− 200P
![Page 62: Lecture 1: Supply and Demand · demanded and the price consumers are willing to pay, holding ... demand for the main good? AdminS and DM and MDemandSupplyEqbmElasticity ... when price](https://reader033.fdocuments.in/reader033/viewer/2022041921/5e6bd935e8685078033ff110/html5/thumbnails/62.jpg)
Admin S and D M and M Demand Supply Eqbm Elasticity
What does this mean for equilibrium?Find new equilibrium
• Again: QS = QD,new
• Some algebra... P2 = 1.75• And new equilibrium quantities?
• QD,new = 500− 200P = 500− 200(1.75) = 150• QS = 200P − 200 = 200(1.75)− 200 = 150
• We find• Price falls• Equilibrium quantity falls
![Page 63: Lecture 1: Supply and Demand · demanded and the price consumers are willing to pay, holding ... demand for the main good? AdminS and DM and MDemandSupplyEqbmElasticity ... when price](https://reader033.fdocuments.in/reader033/viewer/2022041921/5e6bd935e8685078033ff110/html5/thumbnails/63.jpg)
Admin S and D M and M Demand Supply Eqbm Elasticity
What does this mean for equilibrium?Find new equilibrium
• Again: QS = QD,new
• Some algebra... P2 = 1.75• And new equilibrium quantities?• QD,new = 500− 200P = 500− 200(1.75) = 150• QS = 200P − 200 = 200(1.75)− 200 = 150
• We find• Price falls• Equilibrium quantity falls
![Page 64: Lecture 1: Supply and Demand · demanded and the price consumers are willing to pay, holding ... demand for the main good? AdminS and DM and MDemandSupplyEqbmElasticity ... when price](https://reader033.fdocuments.in/reader033/viewer/2022041921/5e6bd935e8685078033ff110/html5/thumbnails/64.jpg)
Admin S and D M and M Demand Supply Eqbm Elasticity
Impact of Shift in Supply
• Suppose that the drought in California ends, and Californiacan now produce more tomatoes
• What happens to the supply curve?
![Page 65: Lecture 1: Supply and Demand · demanded and the price consumers are willing to pay, holding ... demand for the main good? AdminS and DM and MDemandSupplyEqbmElasticity ... when price](https://reader033.fdocuments.in/reader033/viewer/2022041921/5e6bd935e8685078033ff110/html5/thumbnails/65.jpg)
Admin S and D M and M Demand Supply Eqbm Elasticity
Where Does Supply Curve Go?
P
Q
D
S
![Page 66: Lecture 1: Supply and Demand · demanded and the price consumers are willing to pay, holding ... demand for the main good? AdminS and DM and MDemandSupplyEqbmElasticity ... when price](https://reader033.fdocuments.in/reader033/viewer/2022041921/5e6bd935e8685078033ff110/html5/thumbnails/66.jpg)
Admin S and D M and M Demand Supply Eqbm Elasticity
Where Does Supply Curve Go?
P
Q
D
S
P*
Q*
![Page 67: Lecture 1: Supply and Demand · demanded and the price consumers are willing to pay, holding ... demand for the main good? AdminS and DM and MDemandSupplyEqbmElasticity ... when price](https://reader033.fdocuments.in/reader033/viewer/2022041921/5e6bd935e8685078033ff110/html5/thumbnails/67.jpg)
Admin S and D M and M Demand Supply Eqbm Elasticity
Where Does Supply Curve Go?
P
Q
D
S
Po*
Qo*
Pn*
Qn*
![Page 68: Lecture 1: Supply and Demand · demanded and the price consumers are willing to pay, holding ... demand for the main good? AdminS and DM and MDemandSupplyEqbmElasticity ... when price](https://reader033.fdocuments.in/reader033/viewer/2022041921/5e6bd935e8685078033ff110/html5/thumbnails/68.jpg)
Admin S and D M and M Demand Supply Eqbm Elasticity
Algebra: Impact of Shift in Supply
• Suppose that we learn that ADM develops a tomato thatripens more quickly, increasing yields
• For any price, the quantity supplied of tomatoes increases by400
• Recall QS,original = 200P − 200
• Then
QS,new
= QS ,original + 400
= 200P − 200 + 400
= 200P + 200
![Page 69: Lecture 1: Supply and Demand · demanded and the price consumers are willing to pay, holding ... demand for the main good? AdminS and DM and MDemandSupplyEqbmElasticity ... when price](https://reader033.fdocuments.in/reader033/viewer/2022041921/5e6bd935e8685078033ff110/html5/thumbnails/69.jpg)
Admin S and D M and M Demand Supply Eqbm Elasticity
Algebra: Impact of Shift in Supply
• Suppose that we learn that ADM develops a tomato thatripens more quickly, increasing yields
• For any price, the quantity supplied of tomatoes increases by400
• Recall QS,original = 200P − 200
• Then
QS,new = QS ,original + 400
= 200P − 200 + 400
= 200P + 200
![Page 70: Lecture 1: Supply and Demand · demanded and the price consumers are willing to pay, holding ... demand for the main good? AdminS and DM and MDemandSupplyEqbmElasticity ... when price](https://reader033.fdocuments.in/reader033/viewer/2022041921/5e6bd935e8685078033ff110/html5/thumbnails/70.jpg)
Admin S and D M and M Demand Supply Eqbm Elasticity
Algebra: Impact of Shift in Supply
• Suppose that we learn that ADM develops a tomato thatripens more quickly, increasing yields
• For any price, the quantity supplied of tomatoes increases by400
• Recall QS,original = 200P − 200
• Then
QS,new = QS ,original + 400
= 200P − 200 + 400
= 200P + 200
![Page 71: Lecture 1: Supply and Demand · demanded and the price consumers are willing to pay, holding ... demand for the main good? AdminS and DM and MDemandSupplyEqbmElasticity ... when price](https://reader033.fdocuments.in/reader033/viewer/2022041921/5e6bd935e8685078033ff110/html5/thumbnails/71.jpg)
Admin S and D M and M Demand Supply Eqbm Elasticity
Equilibrium: Impact of Shift in Supply
• How do we find the new equilibrium?
QS,new = QD
• Some algebra... P3 = 2
• And new equilibrium quantities?
• QD = 1000− 200P = 1000− 200(2) = 600
• QS ,new = 200P + 200 = 200(2) + 200 = 600
Therefore
• Price falls
• Equilibrium quantity increases
![Page 72: Lecture 1: Supply and Demand · demanded and the price consumers are willing to pay, holding ... demand for the main good? AdminS and DM and MDemandSupplyEqbmElasticity ... when price](https://reader033.fdocuments.in/reader033/viewer/2022041921/5e6bd935e8685078033ff110/html5/thumbnails/72.jpg)
Admin S and D M and M Demand Supply Eqbm Elasticity
Equilibrium: Impact of Shift in Supply
• How do we find the new equilibrium? QS,new = QD
• Some algebra... P3 = 2
• And new equilibrium quantities?
• QD = 1000− 200P = 1000− 200(2) = 600
• QS ,new = 200P + 200 = 200(2) + 200 = 600
Therefore
• Price falls
• Equilibrium quantity increases
![Page 73: Lecture 1: Supply and Demand · demanded and the price consumers are willing to pay, holding ... demand for the main good? AdminS and DM and MDemandSupplyEqbmElasticity ... when price](https://reader033.fdocuments.in/reader033/viewer/2022041921/5e6bd935e8685078033ff110/html5/thumbnails/73.jpg)
Admin S and D M and M Demand Supply Eqbm Elasticity
Equilibrium: Impact of Shift in Supply
• How do we find the new equilibrium? QS,new = QD
• Some algebra... P3 = 2
• And new equilibrium quantities?
• QD = 1000− 200P = 1000− 200(2) = 600
• QS ,new = 200P + 200 = 200(2) + 200 = 600
Therefore
• Price falls
• Equilibrium quantity increases
![Page 74: Lecture 1: Supply and Demand · demanded and the price consumers are willing to pay, holding ... demand for the main good? AdminS and DM and MDemandSupplyEqbmElasticity ... when price](https://reader033.fdocuments.in/reader033/viewer/2022041921/5e6bd935e8685078033ff110/html5/thumbnails/74.jpg)
Admin S and D M and M Demand Supply Eqbm Elasticity
Deducing Changes to Supply and Demand from Changesin P and Q
• Assume only supply or demand changes
• Suppose that we observe a decrease in prices for naturalvanilla
• And suppose that we also observe an increase in the quantityof vanilla used
• What can we assume happened to supply and demand?
• Work through problem step-by-step
![Page 75: Lecture 1: Supply and Demand · demanded and the price consumers are willing to pay, holding ... demand for the main good? AdminS and DM and MDemandSupplyEqbmElasticity ... when price](https://reader033.fdocuments.in/reader033/viewer/2022041921/5e6bd935e8685078033ff110/html5/thumbnails/75.jpg)
Admin S and D M and M Demand Supply Eqbm Elasticity
Deducing Changes to Supply and Demand from Changesin P and Q
Assume only supply or demand changes and that (1) pricesdecrease and (2) quantity of vanilla increases
• Prices decrease• Consistent with decrease in demand• Consistent with increase in supply
• Quantity increases• Consistent with increase in demand• Consistent with increase in supply
• → Demand constant, supply increased.
![Page 76: Lecture 1: Supply and Demand · demanded and the price consumers are willing to pay, holding ... demand for the main good? AdminS and DM and MDemandSupplyEqbmElasticity ... when price](https://reader033.fdocuments.in/reader033/viewer/2022041921/5e6bd935e8685078033ff110/html5/thumbnails/76.jpg)
Admin S and D M and M Demand Supply Eqbm Elasticity
Elasticity
![Page 77: Lecture 1: Supply and Demand · demanded and the price consumers are willing to pay, holding ... demand for the main good? AdminS and DM and MDemandSupplyEqbmElasticity ... when price](https://reader033.fdocuments.in/reader033/viewer/2022041921/5e6bd935e8685078033ff110/html5/thumbnails/77.jpg)
Admin S and D M and M Demand Supply Eqbm Elasticity
Elasticity
• Elasticity measures the change in quantity for a given changein price
• Absolutely crucial for policy decisions
• Health care reform: how do emergency room visits respond tohealth insurance expansion?
• Consumers have cheaper emergency room substitutes• But the emergency room cost is also lower• How elastic is QD
emergency room? Does the elasticity change?
• Formally, percentage change in one value relative topercentage change in another
![Page 78: Lecture 1: Supply and Demand · demanded and the price consumers are willing to pay, holding ... demand for the main good? AdminS and DM and MDemandSupplyEqbmElasticity ... when price](https://reader033.fdocuments.in/reader033/viewer/2022041921/5e6bd935e8685078033ff110/html5/thumbnails/78.jpg)
Admin S and D M and M Demand Supply Eqbm Elasticity
Elasticity
• Elasticity measures the change in quantity for a given changein price
• Absolutely crucial for policy decisions
• Health care reform: how do emergency room visits respond tohealth insurance expansion?
• Consumers have cheaper emergency room substitutes• But the emergency room cost is also lower• How elastic is QD
emergency room? Does the elasticity change?
• Formally, percentage change in one value relative topercentage change in another
![Page 79: Lecture 1: Supply and Demand · demanded and the price consumers are willing to pay, holding ... demand for the main good? AdminS and DM and MDemandSupplyEqbmElasticity ... when price](https://reader033.fdocuments.in/reader033/viewer/2022041921/5e6bd935e8685078033ff110/html5/thumbnails/79.jpg)
Admin S and D M and M Demand Supply Eqbm Elasticity
Do Not Confuse Slope and Elasticity
• In math, elasticity is%∆Q
%∆P
• Benefit of using elasticity rather than slope is comparingacross goods
• Do you think demand for milk or video games is more elastic?
We will avoid the textbook’s formulation of elasticity for linear demand
curves, E = ∆Q/Q∆P/P = ∆Q
∆P ∗PQ , because I think it causes more confusion
than benefit
![Page 80: Lecture 1: Supply and Demand · demanded and the price consumers are willing to pay, holding ... demand for the main good? AdminS and DM and MDemandSupplyEqbmElasticity ... when price](https://reader033.fdocuments.in/reader033/viewer/2022041921/5e6bd935e8685078033ff110/html5/thumbnails/80.jpg)
Admin S and D M and M Demand Supply Eqbm Elasticity
Do Not Confuse Slope and Elasticity
• In math, elasticity is%∆Q
%∆P
• Benefit of using elasticity rather than slope is comparingacross goods
• Do you think demand for milk or video games is more elastic?
We will avoid the textbook’s formulation of elasticity for linear demand
curves, E = ∆Q/Q∆P/P = ∆Q
∆P ∗PQ , because I think it causes more confusion
than benefit
![Page 81: Lecture 1: Supply and Demand · demanded and the price consumers are willing to pay, holding ... demand for the main good? AdminS and DM and MDemandSupplyEqbmElasticity ... when price](https://reader033.fdocuments.in/reader033/viewer/2022041921/5e6bd935e8685078033ff110/html5/thumbnails/81.jpg)
Admin S and D M and M Demand Supply Eqbm Elasticity
Price Elasticity of Demand
• ED ≡ percent change in quantity demanded divided bypercent change in price = %∆QD
%∆P
• If price increases by 1%, do we expect a positive or negativechange in quantity demanded?
• In general, ED ≤ 0
• Can interpret ED as a percent change in QD for a 1 percentchange in price
![Page 82: Lecture 1: Supply and Demand · demanded and the price consumers are willing to pay, holding ... demand for the main good? AdminS and DM and MDemandSupplyEqbmElasticity ... when price](https://reader033.fdocuments.in/reader033/viewer/2022041921/5e6bd935e8685078033ff110/html5/thumbnails/82.jpg)
Admin S and D M and M Demand Supply Eqbm Elasticity
Price Elasticity of Demand
• ED ≡ percent change in quantity demanded divided bypercent change in price = %∆QD
%∆P
• If price increases by 1%, do we expect a positive or negativechange in quantity demanded?
• In general, ED ≤ 0
• Can interpret ED as a percent change in QD for a 1 percentchange in price
![Page 83: Lecture 1: Supply and Demand · demanded and the price consumers are willing to pay, holding ... demand for the main good? AdminS and DM and MDemandSupplyEqbmElasticity ... when price](https://reader033.fdocuments.in/reader033/viewer/2022041921/5e6bd935e8685078033ff110/html5/thumbnails/83.jpg)
Admin S and D M and M Demand Supply Eqbm Elasticity
Price Elasticity of Supply
• ES ≡ percent change in quantity supplied divided by percentchange in price
• If price increases 1%, what do we expect to happen to supply?
• What does this imply for ES?
• In general, ES ≥ 0
![Page 84: Lecture 1: Supply and Demand · demanded and the price consumers are willing to pay, holding ... demand for the main good? AdminS and DM and MDemandSupplyEqbmElasticity ... when price](https://reader033.fdocuments.in/reader033/viewer/2022041921/5e6bd935e8685078033ff110/html5/thumbnails/84.jpg)
Admin S and D M and M Demand Supply Eqbm Elasticity
Price Elasticity of Supply
• ES ≡ percent change in quantity supplied divided by percentchange in price
• If price increases 1%, what do we expect to happen to supply?
• What does this imply for ES?
• In general, ES ≥ 0
![Page 85: Lecture 1: Supply and Demand · demanded and the price consumers are willing to pay, holding ... demand for the main good? AdminS and DM and MDemandSupplyEqbmElasticity ... when price](https://reader033.fdocuments.in/reader033/viewer/2022041921/5e6bd935e8685078033ff110/html5/thumbnails/85.jpg)
Admin S and D M and M Demand Supply Eqbm Elasticity
Price Elasticity of Supply
• ES ≡ percent change in quantity supplied divided by percentchange in price
• If price increases 1%, what do we expect to happen to supply?
• What does this imply for ES?
• In general, ES ≥ 0
![Page 86: Lecture 1: Supply and Demand · demanded and the price consumers are willing to pay, holding ... demand for the main good? AdminS and DM and MDemandSupplyEqbmElasticity ... when price](https://reader033.fdocuments.in/reader033/viewer/2022041921/5e6bd935e8685078033ff110/html5/thumbnails/86.jpg)
Admin S and D M and M Demand Supply Eqbm Elasticity
What Makes Elasticity Big or Small?
A non-complete list includes
• For demand, presence of substitutes
• For supply, ability to change levels of production
• Time horizon
![Page 87: Lecture 1: Supply and Demand · demanded and the price consumers are willing to pay, holding ... demand for the main good? AdminS and DM and MDemandSupplyEqbmElasticity ... when price](https://reader033.fdocuments.in/reader033/viewer/2022041921/5e6bd935e8685078033ff110/html5/thumbnails/87.jpg)
Admin S and D M and M Demand Supply Eqbm Elasticity
What Makes Elasticity Big or Small?
A non-complete list includes
• For demand, presence of substitutes
• For supply, ability to change levels of production
• Time horizon
![Page 88: Lecture 1: Supply and Demand · demanded and the price consumers are willing to pay, holding ... demand for the main good? AdminS and DM and MDemandSupplyEqbmElasticity ... when price](https://reader033.fdocuments.in/reader033/viewer/2022041921/5e6bd935e8685078033ff110/html5/thumbnails/88.jpg)
Admin S and D M and M Demand Supply Eqbm Elasticity
For Next Class
• Sing up for Piazza
• Sign up for Ripped from Headlines
• Article finders email me by Wednesday midnight
• Turn in Problem Set 1
• Read Chapter 3
I will
• post lecture notes
• anything else?
![Page 89: Lecture 1: Supply and Demand · demanded and the price consumers are willing to pay, holding ... demand for the main good? AdminS and DM and MDemandSupplyEqbmElasticity ... when price](https://reader033.fdocuments.in/reader033/viewer/2022041921/5e6bd935e8685078033ff110/html5/thumbnails/89.jpg)
Admin S and D M and M Demand Supply Eqbm Elasticity
For Next Class
• Sing up for Piazza
• Sign up for Ripped from Headlines
• Article finders email me by Wednesday midnight
• Turn in Problem Set 1
• Read Chapter 3
I will
• post lecture notes
• anything else?