1. Lecture 2: Supply, Demand, Complements, Substitutes
Benjamin Graham
Lecture 2: Supply, Demand, etc Benjamin Graham

2. Lecture 2: Supply, Demand, etc. Benjamin Graham
Today’s Plan
Housekeeping
Supply and Demand
Demand vs. Quantity Demanded
Supply vs. Quantity Supplied
Complements and Substitutes
Lecture 2: Supply, Demand, etc Benjamin Graham

3. Lecture 2: Supply, Demand, etc. Benjamin Graham
Housekeeping
Section begins next week
We have very knowledgeable TAs
SIR Undergraduate Research Program
IR 392 (2 credits, Friday afternoons)
No laptops, but I post my slides
Why start with supply and demand?
Lecture 2: Supply, Demand, etc Benjamin Graham

4. 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

5. 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

6. 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

7. Why we’re starting with supply and demand
As bedrock as bedrock gets
We usually talk about goods
S&D also explains prices for labor (i.e. wages)
It even explains the value of currencies
Why start with supply and demand?
Lecture 2: Supply, Demand, etc Benjamin Graham

8. Lecture 2: Supply, Demand, etc. Benjamin Graham
Demand (individual)
Lecture 2: Supply, Demand, etc Benjamin Graham

9. Lecture 2: Supply, Demand, etc. Benjamin Graham
Demand (market)
Lecture 2: Supply, Demand, etc Benjamin Graham

10. Demand vs. Quantity Demanded
Lecture 2: Supply, Demand, etc Benjamin Graham

11. Demand vs. Quantity Demanded
Changes in the price of oil cause the demand curve for oil to shift, whereas changes in the fuel efficiency of cars cause a movement along the demand curve for oil.
A. True
B. False
was this the question that didn’t work?
Lecture 2: Supply, Demand, etc Benjamin Graham

12. Lecture 2: Supply, Demand, etc. Benjamin Graham
Quick Question
What affects the demand for automobiles?
Lecture 2: Supply, Demand, etc Benjamin Graham

13. Lecture 2: Supply, Demand, etc. Benjamin Graham
Supply (individual)
Lecture 2: Supply, Demand, etc Benjamin Graham

14. Lecture 2: Supply, Demand, etc. Benjamin Graham
Supply (market)
Lecture 2: Supply, Demand, etc Benjamin Graham

15. Quick Question (not clicker)
What are two things that affect the supply of automobiles?
Lecture 2: Supply, Demand, etc Benjamin Graham

16. Lecture 2: Supply, Demand, etc. Benjamin Graham
Clicker Question
If the price of automobiles went up, what would happen?
A. The supply curve would shift right
B. The supply curve would shift left
C. The quantity supplied would increase
D. The quantity supplied would decrease
E. A&C
F. B & D
Lecture 2: Supply, Demand, etc Benjamin Graham

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

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

19. 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:
1. supply 2. demand
3. quantity supplied
4. quantity demanded
Lecture 2: Supply, Demand, etc Benjamin Graham

20. Demand Shock

21. Supply and Demand Both Move

22. 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

23. 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

24. 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

25. 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