Lecture 3: Supply & Demand Continued   Lecture 3: Comparative Advantage Benjamin Graham

Lecture 2: Supply, Demand, etc. Benjamin Graham Housekeeping We’ll test TopHat today Homework 1 will be posted tomorrow Lecture 2: Supply, Demand, etc. Benjamin Graham

Lecture 2: Supply, Demand, etc. Benjamin Graham Reading Quiz Peanut butter and jelly are: A. Complementary Goods B. Substitutes C. Superior Goods D. Partner Goods E. Welfare-maximizing Goods Why start with supply and demand? Lecture 2: Supply, Demand, etc. Benjamin Graham

Lecture 2: Supply, Demand, etc. Benjamin Graham Reading Quiz 2 Demand curves slope _________. A. Upward B. Downward C. Upward for superior goods, downward for inferior goods D. Upward for inferior goods, downward for superior goods Why start with supply and demand? Lecture 2: Supply, Demand, etc. Benjamin Graham

Lecture 2: Supply, Demand, etc. Benjamin Graham Reading Quiz 3 A rise in temperature is likely to . A. Increase the demand for ice cream B. Increase the supply of ice cream C. Increase the quantity of ice cream supplied D. Both A & B E. Both A & C Why start with supply and demand? Lecture 2: Supply, Demand, etc. Benjamin Graham

Lecture 2: Supply, Demand, etc. Benjamin Graham Supply Meets Demand Lecture 2: Supply, Demand, etc. Benjamin Graham

Markets Not in Equilibrium Lecture 2: Supply, Demand, etc. Benjamin Graham

What Creates Surpluses and Shortages? In the 1970s, there was a gasoline shortage in the US. What caused the shortage? What would have happened if the price controls were removed? In groups of 2-3, write down what would have happened to each of the following if the price controls were removed at the height of the crisis: 1. supply 2. demand 3. quantity supplied 4. quantity demanded Lecture 2: Supply, Demand, etc. Benjamin Graham

Demand Shock

Supply and Demand Both Move

Review Question If we have a large increase in demand and small increase in supply, what will happen to the price? A. The price will rise B. The price will fall C. The price will stay the same

Normal Goods vs. Inferior Goods Normal good: higher income, higher quantity demanded Inferior Good: higher income, lower quantity demanded Let’s brainstorm a few of each (talk with your neighbors) Ask for normal and inferior goods Lecture 2: Supply, Demand, etc. Benjamin Graham

Complements and Substitutes Two goods are complements if the consumption of one item increases the demand for the other bullets and handguns Computers and IT specialists Two goods are substitutes if the consumption of one item decreases the demand for the other. Buses and Trains Robots and assembly-line workers Lecture 2: Supply, Demand, etc. Benjamin Graham

Lecture 2: Supply, Demand, etc. Benjamin Graham Clicker Question Right now the price of a gram of cocaine in the US is lower than it was in the 1970s (adjusted for inflation). Which of the following could explain that? A. Supply in the US is higher now than in the 70s (i.e. our interdiction efforts have worked poorly) B. Demand in the US is lower now than in the 70s (i.e. DARE and other education and treatment programs have worked well) C. Substitutes, like meth, have increased in supply. D. A & B E. A & C F. A, B & C Lecture 2: Supply, Demand, etc. Benjamin Graham

Lecture 2: Supply, Demand, etc. Benjamin Graham Group Questions An aid organization buys grain in the US and ships it to a village in a developing country that is experiencing a drought. What happens to the price of grain in the area? What happens to the price of corn in that area? What happens to the price of grain back in the US? Which of the following actors gain, and who loses? Consumers of food in the drought-stricken region Producers of food (i.e. farmers) in the drought-stricken region Consumers of food in the US Producers of food in the US Lecture 2: Supply, Demand, etc. Benjamin Graham