Demand and Supply © Peter Berck 1998

Goods A particular thing in a particular place at a particular time. Coal today and coal tomorrow are not the same good. A rotten peach and a yummy peach are not the same good. Wheat in Minneapolis and wheat in Iowa are not the same good.

Lecture Outline Firms Supply Goods; People Demand Goods; Firm’s Demand Inputs Keep them Separate Demand and Supply intersect at the equilibrium price and quantity

Demand Curve Q as function of P not Q itself Diagram: P on vertical D(p) is the demand curve. It associates a quantity with every price. D-1(Q) is the inverse demand curve. It associates a price with every quantity. P D-1(Q) Q

Shifting the Demand Curve Qown = D(pown,pother,y) If the price of the other good goes up and the demand curve shifts in, the goods are complements. If it shifts out, they are substitutes. P D-1 Q

Shifting the Demand Curve: y Qown = D(pown,pother,y) If income goes up and the demand curve shifts out, the good is a normal good. If it shifts in, it is an inferior good. P D-1 Q

Supply S(pout , pin , x) pout is the price of the product the firm makes (an output). pin are the prices of the inputs the firm uses to make the output. x are exogenous factors, like the weather. slope up or flat (assumed for this course) in pout. shift in with increased price of input

Equilibrium The equilibrium price and quantity are the coordinates of the point where the supply and demand curve intersect. One observes only this equilibrium price and quantity in the market.

Example

Algebraic Example Q = 3 p is S(p) Q = 12 - 4p is D(p) (graph using y = mx + b) ps = Q/3 slope 1/3 pd = 3 - Q/4 slope - 1/4 Equilibrium: p = ps=pd : Q/3=3-Q/4 Q= 36/7; p= 12/7

Excess S or D Suppose P is 2.5. Suppose Q = 2 Suppose P is 1

E Coli Burgers Which curve shifted? Where was there a movement along a curve? What points are observed?

Ag. Programs: Loan PL: amnt at which will purchase any or all wheat How much does the gov’t buy and store? Are consumers better off? producers better off?

Rent Control Excess demand for housing lines bribes When rent control ends can students be worse off?

Horizontal Addition P demand from developed world from less developed world Dx + Dp = total demand Total Demand Q

Pinhead’s View of Hunger demand from developed world from less developed world Supply* Supply $2.74 Total Demand Q QE