Demand, Supply & Market EquilibriumLecture 5

Dr. Jennifer P. Wissink©2015 John M. Abowd and Jennifer P. Wissink, all rights reserved.

September 8, 2015

Announcements (MACRO) Fall 2015 Get yourself set up on MEL ASAP.

– MEL Quiz#01 was posted days ago and was due 10am today.

– MEL Quiz#02 was posted already and is due 10am Sept 15.

– MEL Quiz#03 was posted this morning and is ALSO due 10am Sept 15.

– Missing a few MEL deadlines here and there is no big deal – no need to contact me and ask for extensions, forgiveness, etc. I expect people to miss now and again. I would too! That’s why we do the 500 points bit. There will be at least 700 points assigned over the 15 or so MEL quizzes that will be posted between now and early December. (See the syllabus for details.)

Reminder: The Learning Strategies Center supports this class in several ways.

– Check it all out on their web pages http://lsc.cornell.edu/– Or talk with Albert Alexander up at the Learning Strategies Center

5-button i>clicker info: Stay tuned to Bb for info on how to register your devise so that score shows up on Bb My Grades.

i>clicker questionGiven the combined PPF, which one of the following is true?

A.Between points A and B on the PPF, both countries are producing both goods.B.Between points B and D on the PPF, both countries are producing both goods.C.At point A on the PPF only England is making wine.D.At point B on the PPF England is making only cloth and Portugal is making only wine.E.At point B on the PPF England and Portugal are each making 4 barrels of wine and 20 yards of cloth.

C

W

10

120

8

40

B

A

D

LABOR (L) HOURS REQUIRED

ENGLAND PORTUGAL

1 yd. cloth 2 hours 1 hour

1 barrel wine

40 hours 10 hours

i>clicker questionGiven the table, suppose Portugal and England are going to trade wine and cloth with each other. Suppose Portugal is making wine and England cloth. What is the lowest price (in terms of cloth) we would expect to see barrels of wine selling for?

A.1/10 a yard of clothB.1/20 a yard of clothC.10 yards of clothD.20 yards of clothE.10 barrels of wine

LABOR (L) HOURS REQUIRED

ENGLAND PORTUGAL

1 yd. cloth 2 hours 1 hour

1 barrel wine

40 hours 10 hours

i>clicker questionGiven the table, suppose Portugal and England are going to trade wine and cloth with each other. Suppose Portugal is making wine and England cloth. What is the highest price (in terms of cloth) we would expect to see barrels of wine selling for?

A.40 yards of clothB.1/40 a yard of clothC.10 yards of clothD.20 yards of clothE.20 barrels of wine

LABOR (L) HOURS REQUIRED

ENGLAND PORTUGAL

1 yd. cloth 2 hours 1 hour

1 barrel wine

40 hours 10 hours

Exchange Rates LABOR (L) HOURS REQUIRED

ENGLAND PORTUGAL

1 yd. cloth 2 hours 1 hour

1 barrel wine

40 hours 10 hours

Suppose you add France, who can make either 3 barrels of wine OR 45 yards of cloth OR anything on a straight line between these end points.French MOC of cloth=1/15 blsFrench MOC of wine=15 yds

W

W W W

C

CC C

The Combined PPFWith 3 Countries!

Portugal’s PPF

80

8

2

40

England’s PPF

3

45

France’s PPF

13

An International Cloth Supply Curve

Note Of Caution Information on comparative advantage is often given in many other

forms - pay careful attention to the information you are given.

Three ways to present the same kind of information

England Portugal1 yd. of cloth 2 hours 1 hour

1 barrel of wine 40 hours 10 hours

England Portugal1 hour of labor in cloth .5 yd. of cloth 1 yd. of cloth1 hour of labor in wine 1/40 bl. of wine 1/10 a bl. of wine

England Portugalmaximum cloth 40yds 80ydsmaximum wine 2bls 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.

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 ... 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.

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 pricePs = the price(s) of substitutesPc = the price(s) of complementsI=incomeT&P=tastes and preferencesPop=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.– QX

D = 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) QX

D = f(PX)– Note:

Law of Demand implies a negative or downward slope to the graph.

– Note: In the graph we have switched the axes.

Price

Quantity

25

15

Demand

At P = $25, the quantity demanded = 15.

Movements vs. Shifts

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!

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.

Price

Quantity

25

15

Demand

i>clicker questionGiven the demand for X, an increase in its own-price will

A.increase demand.B.decrease demand.C.increase quantity demanded.D.decrease quantity demanded.

Price

Quantity

Demand

Movements vs. Shifts: Getting It Right Summary Recall: QX

D = 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.