Demand, Supply & Market Equilibrium Lecture 5 Dr. Jennifer P. Wissink ©2017 John M. Abowd and Jennifer P. Wissink, all rights reserved. September 5, 2017

Announcements: MACRO Fall 2017 MEL Stuff: First graded MEL quiz was due this morning. If you worked on it and forgot to Submit, I automatically submit for you. If you want to review the quiz now, you can. Go to Results. Click on Review by the quiz. To see current number of MEL points for grading purposes, go to Results You have earned # out of # points for a Overall Score of 0%. Ignore the % information. Just focus on # and work towards getting that to be 500 by the end of the semester. Exam Stuff: Sign up Registration for Prelim 1 Cornell created evening prelim conflicts is up on Blackboard. See LHS. Will post one for Prelim 2 soon. Make-Up Final Exam will be on Monday December 11 at 2pm. It will only be for people who qualify under Cornell’s guidelines OR for people who come and see me in person with extremely compelling reasons. Note that I am very very tough on this. Papers that are due at the end of the term do not count as extremely compelling since you know they are due and have plenty of time to get them done. So don’t procrastinate! Also make sure you carefully read Cornell’s guidelines – many people seem to misinterpret them. Cornell expects you to be able to take 2 exams on the same day. But not, “more than two exams in twenty-four hours”. See: https://registrar.cornell.edu/exams/final-exam-policies

The Combined PPF W W England’s PPF 8 Portugal’s PPF 2 40 80 C C

The Combined PPF With 3 Countries! Portugal’s PPF France’s PPF 8 England’s PPF The Combined PPF With 3 Countries! 3 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. So… French MOC of cloth=1/15 bls French MOC of wine=15 yds 2 W 80 40 C 45 C C 13 C

An International Cloth Supply Curve W C Portugal’s PPF 80 2 40 England’s PPF 3 45 France’s PPF

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

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: QxD = the number/quantity of units demanded PX = X’s price Ps = the price(s) of substitutes Pc = the price(s) of complements I = income T&P = tastes and preferences Pop = population in market or market size

The Demand Curve (Verbal) The demand curve, a.k.a. demand, describes the relation between a good’s price and the maximum quantity that buyers are willing and able to buy at that price, ceteris paribus. Ceteris paribus means holding all the other demand function variables constant at some given level. QXD = f(PX) given Ps, Pc, I, T&P, Pop The “Law of Demand” the relationship between a good’s price and the quantity demanded of that good is negative. Example: suppose the price of the good falls from $25 to $10, and the quantity demanded rises from 15 to 30. This is referred to as a “change in quantity demanded” and in this case an “increase in quantity demanded.” “Own-price” changes cause movements along a given demand curve.

The Demand Curve (Graph) QXD = f(PX) Note: Law of Demand implies a negative or downward slope to the graph. Note: In the graph we have switched the axes. Price Quantity Demand 25 15 At P = $25, the quantity demanded = 15. At Q = 15, the demand price = $25.

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 Demand 25 15 Quantity

Movements vs. Shifts: Getting It Right Summary Recall: QXD = f(PX) given Ps, Pc, I, T&P, Pop ΔPx Movement along demand curve, Px and QDx move in opposite directions-the law of demand. ΔPS Shift of Demand. Ps and Demand move in the same direction. ΔPc Shift of Demand. Pc and Demand move in opposite directions. ΔI Shift of Demand. Relationship depends on if X is a normal good (same direction) or if X is an inferior good (opposite directions). ΔT&P Shift of Demand. T&P and Demand move in the same direction. ΔPop Shift of Demand. Pop and Demand move in the same direction.

The Demand Curve (Equation) A linear demand curve: QXD = 40 – PX So, 15 = 40 – 25 Law of Demand? YES. Beware: the graph we draw is the inverse of the equation we write (most times). P 25 15 D Q

The Demand Curve (Equation) Another example QD = 100 – 2P P Q

i>clicker question Which one of the following would NOT generate a shift in the demand curve for portable speakers? A change in the price of music downloads. A change in the price of headphones. A change in the income of college-aged people. A change in the perceived “coolness” factor of portable speakers. A change in the price of plastic used to make portable speakers.

Supply Concepts The supply function for X: QXS = g(PX, Pfop, Poc, S&T, N) Where: QXS = quantity that sellers are willing and able to supply PX = X’s price Pfop = the prices of factors of production Poc = the opportunity costs S&T = science and technology N = number of firms in the market

The Supply Curve (Verbal) The supply curve, a.k.a. supply, describes the relation between a good’s price and the maximum quantity that sellers are willing and able to put on the market for sale at that price, ceteris paribus. Ceteris paribus means holding all the other supply function variables constant at some given level. QXS = g(PX) given Pfop, Poc, S&T, N The “The Law of Supply” the relationship between a good’s price and the quantity supplied of the good is positive. higher prices generate higher quantities supplied lower price generate lower quantities supplied Example: Suppose PX falls from $25 to $10, then the quantity supplied might fall from, say, QX=31 to QX=16. This is referred to as a “change in quantity supplied” and in this case a “decrease in quantity supplied.” “Own-price” changes  movements along a given supply curve, i.e., changes in quantity supplied.

The Supply Curve (Graph) QXS = g(PX) Note: Law of Supply implies a positive or upward slope to the graph. Note: In the graph we switched the axes... again. Price Supply 25 31 Quantity

Movements vs. Shifts QXS = g(PX) given Pfop, Poc, S&T, N A movement along the supply curve for X would be caused by a change in Px. Remember this is referred to as an increase or decrease in quantity supplied. A shift of the entire supply curve would be caused by a change in one of the “ceteris paribus” supply variables. This would be referred to as an increase or decrease in supply. Price Supply 25 31 Quantity

Movements vs. Shifts: Getting It Right Summary Recall: QXS = g(PX) given Pfop, Poc, S&T, N ΔPx Movement along the supply curve, Px and QSx move in the same direction - the law of supply. ΔPfop Supply curve shifts. Pfop and supply curve move in opposite directions. ΔPoc Same as above. ΔS&T Supply curve shifts. S&T and supply curve move in the same direction. ΔN Supply curve shifts. N and supply curve move in the same direction.

The Supply Curve (Equation) A linear supply curve from the points we’ve used. QXS = 6 + PX So, 31 = 6 + 25 Law of Supply? yes! Beware: the graph we draw is the inverse of the equation we write (most times). Price Supply 25 31 Quantity

i>clicker question Suppose the supply curve in market “Y” is as follows: QS = -15 + 3P. The equation for the market inverse supply (so the picture we draw) is: QS = -5 + 1/3P. PS = -15 + 3Q. QS = 15 + 1/3P. PS = 5 + 1/3Q. PS = 5 – 1/3Q. P Q

Market Equilibrium We are considering the market for portable speakers. Recall that we defined the following for our market: The type and style of portable speakers. The quality of the portable speakers. All other attributes of the generic portable speaker. A time frame that applies to our market for portable speakers. Demanders are the buyers and from them we get the demand function, etc. QxD = f(PX, Ps, Pc, I, T&P, Pop) Suppliers are the sellers and from them we get the supply function, etc. QXS = g(PX, Pfop, Poc, S&T, N) The market is a perfectly competitive market.

Market Equilibrium (Verbal) A place of “rest”. Equilibrium: a price where the quantity demanded equals the quantity supplied. In notation: Find a PX* so that at PX*: QXD = QXS or Find a PX* so that: QXD(PX*) = QXS(PX*)

Market Equilibrium (Table) At P* = $17, the QD = QS=23 So Q*=23

Market Equilibrium (Graph) The market equilibrium occurs at the intersection of the supply and demand curves. Let’s drop the subscript X, ok? Price Demand Supply 17 At P* = $17, QD = QS = 23 So Q* = 23 23 Quantity