Market Equilibrium Lecture 6 Dr. Jennifer P. Wissink ©2018 John M. Abowd and Jennifer P. Wissink, all rights reserved. September 11, 2018 1

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; 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 direction). 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 Demand Q

The Demand Curve (Equation) Another example Suppose… 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 (Graph) QXS = g(PX) Note 1: Law of Supply implies a positive or upward slope to the graph. Note 2: 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; 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: 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

Market Equilibrium (Equations) Two equations and Two unknowns Equations: Demand and Supply Curves Unknowns: P and Q To find P*, set QD = QS Recall: QD = 40 - P and QS = 6 + P So for an equilibrium: (40 - P*) = (6 + P*) 34 = 2P* or P* = 34/2 so... P*=$17 To find Q*, plug P* into either the demand or supply equation. Q*=23 = 40 - 17 or Q*=23 = 6 + 17

i>clicker question Suppose the demand and supply curves in the market for fidget spinners are as follows: QD = 40 – 4P and PS = 1 + 1/2Q. Which one is true? Q*=7 and P*=12 Q*=12 and P*=7 Q*=7/12 and P*=12/7 Q*=7 and P*=7 none of the above is true