Market Demand & Supply Lecture 6 Dr. Jennifer P. Wissink ©2018 John M. Abowd and Jennifer P. Wissink, all rights reserved. February 12, 2018

Announcements-micro Spring 2018 There are now 5 MEL “quizzes-that-count” for Spring 2018 assigned. This should take you all up to quiz work in preparation for prelim 1 on March 6. Start working on them as soon as you feel ready. Don’t procrastinate, and wait until the last minute. Remember, February is a short month…. Welcome David Silbey Cornell In Washington! https://www.ciw.cornell.edu/

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 (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 - 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: 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

Now What? Comparative Statics! SIMPLE AS THAT!? Then what.... Use the model to make predictions. Something changes in the market. Something that changes Demand. Something that changes Supply. Something that changes both! Something the government does to prevent an equilibrium. Would get a new equilibrium. Compare one market equilibrium with another market equilibrium and see what happens to P* and Q*. Compare two equilibriums - compare two static situations - comparative statics!

The Roses Market What impact will the approaching holiday have on the cut roses market? What do you predict will happen to the equilibrium market price and quantity? 20

Comparative Statics: Demand  Price Demand0 Supply0 P*o Q*o Quantity

The Florida Orange Market Number Crunch in Latest Florida Orange Crop Estimate (2/8/2018) http://www.growingproduce.com/citrus/numbers-crunch-latest-florida-orange-crop-estimate/ Forecasters from USDA are trying to take all factors into account. The agency’s updated 2017-2018 Florida all-orange crop estimate now stands at 45 million boxes, down 1 million boxes from last month’s estimate and 35% off last season’s tally. What do you predict will happen to the equilibrium market price and quantity? 22

Comparative Statics: Supply  Price Demand0 Supply0 P*o Q*o Quantity