1. ECON 100 Lecture 10
Monday, October 20

2. Announcements
Course webpage
Class participation records are updated. Announcements section
Answers to Problem set #3 are posted. Assignments section
Midterm Exam #1-Spring 2014 is posted (The answer key will be posted later) Announcements section
Problem Set #4 (bigger than #3) will be posted later in the week.
Problem sets are an important resource for exam preparation.
Problem sets are not graded.

3. Problem Session / KOLT tutors
PS1: FRIDAY B4 (at 13:00) in room SOS B21 PS2: FRIDAY B5 (at 14:30) in room SOS B08 No attendance is taken at the PSs.
Econ 100 KOLT tutors: Sonkurt, Jülide, and Ilgaz

4. Please turn off your phones.
Class participation
You must attend the section where you are registered.
Your in-class exercise is your participation record. I collect them at the end of the lecture.
Please turn off your phones.

5. Now the lecture

6. Demand, Supply, and Market Equilibrium
READ Chapter 4!
Web link to PDF file of Chapter 4 (publisher’s website, perfectly legal)

7. Last lecture Wednesday in-class exercise

8. Demand for running shoes
Draw the market demand curve for running shoes.
Choose a price (say PO) and label the quantity demanded (Q1) at that price.
Draw a new demand curve that shows a smaller quantity demanded (Q2) at the same price PO.
Give two (2) reasons for the decrease in demand.

9. 1. Draw the market demand curve for running shoes.
Price
of running shoes D1
Quantity demanded

10. 2. Choose a price (say PO) and label the quantity demanded (Q1) at that price.
of running shoes PO D1
Quantity demanded Q1

11. 3. Draw a new demand curve that shows a smaller quantity demanded (Q2) at the same price PO.
of running shoes
decrease
in demand PO D1 D2
Quantity demanded Q2 Q1

12. 4. Give two reasons for the decrease in demand.
A decrease in consumers’ income (running shoes are a normal good.)
A scientific study finds that running is bad for health.
Price
of running shoes
decrease
in demand PO D1 D2
Quantity demanded Q2 Q1

13. Test yourself: How much do you remember?
Activity #1

14. Zeynep’s income Price of X 120 100 80 3 14 ?? 4 5 10
The table below gives the quantities Zeynep demands at various price and income combinations. For example when her income is 120 TL/week and the price is 3TL, she demands 14 units of good X. Some entries are missing.
Please complete the table such that
Good X is a normal good.
Zeynep’s demand satisfies the “law of demand.”
Please explain your
reasoning (to yourself!).
Zeynep’s income
Price of X
120
100 80 3 14 ?? 4 5 10

15. A brief review of Wednesday’s lecture in 60 seconds
Demand is the relationship between price and quantity demanded.
Demand schedule
Demand curve

16. The law of demand
If price falls, quantity demanded will increase. If price rises, quantity demanded will decrease. Therefore, the demand curve slopes downward.
price
quantity demanded

17. Summary The other determinants of quantity demanded are: income,
the prices of complement and substitute goods,
consumer’s tastes,
Expectations
Number of buyers (market demand)
If one of these “other” determinants changes, the demand curve shifts.

18. Demand curve shifts - Income
Normal goods: When income increases demand increases; (when income decreases demand decreases). Inferior goods: When income increases, demand decreases. (when income decreases demand increases).

19. Demand curve shifts – price of related goods
Complement goods: Demand for a good will increase if the price of the complement good falls. Example: Demand for cars will increase if the price of gasoline falls.)

20. Substitute goods: Demand for a good will increase if the price of the substitute good increases. Example: Demand for bulgur will increase if there is a sharp increase in the price of rice.

21. Let’s do…
Activity #1

22. Zeynep’s income Price of X 120 100 80 3 14 ?? 4 5 10
The table below gives the quantities Zeynep demands at various price and income combinations. For example when her income is 120 TL/week and the price is 3TL, she demands 14 units of good X. Some entries are missing.
Please complete the table such that
Good X is a normal good.
Zeynep’s demand satisfies the “law of demand.”
Please explain your
reasoning (to yourself!).
Zeynep’s income
Price of X
120
100 80 3 14 ?? 4 5 10

23. A brief discussion of supply
New material
A brief discussion of supply

24. Supply: basic definitions
Supply is the relationship between two variables: price and quantity supplied. What is quantity supplied? Quantity supplied is the amount of a good that sellers are willing and able to provide/bring to the market for sale. 25

25. What determines the quantity supplied?

26. The determinants of quantity supplied
The price of the good itself
Prices of inputs the seller uses to produce the good. (Example: milk and sugar are inputs for ice-cream.)
Technology
Expectations
Number of sellers (market supply)

27. The relationship between quantity supplied and price
The supply schedule is a table that shows the relationship between price and quantity supplied with other variables, such as input prices, and technology, are constant.
The supply curve is a graph that shows the relationship between price and quantity supplied with other variables, such as input prices, and technology, are constant. 25

28. Supply Schedule – Ice-cream
Dondurmacı Ali Usta (Moda) 29

31. Supply Schedule – Ali Usta (Moda)
Price of ice-cream
Quantity of ice-cream cones supplied
0.00
1.00 3
2.00 6
3.00 9
4.00 12
5.00 15
6.00 18 29

32. Supply Curve – Ali Usta (Moda)
Price
Quantity supplied
0.00
1.00 3
2.00 6
3.00 9
4.00 12
5.00 15
6.00 18 P Q 32

33. The Law of Supply
Other things equal, the quantity supplied of a good rises when the price of the good rises, (and falls when the price falls).

34. The law of supply in action: A change in the quantity supplied
Price of Ice-Cream S C
3.00
We show this change as a movement along the supply curve.
The price of ice-cream goes up. A
1.00
The higher price causes an increase in quantity supplied.
Quantity of Ice-Cream 3 9 30

35. The market supply curve is the horizontal sum of the supply curve of the individual firms. (Just like the demand curve)

36. Market Supply for ice cream
The quantity supplied in the market is the sum of the quantities supplied by all sellers at each price.
Suppose Ali Usta (Moda) and Veli Usta (Tarabya) are the two sellers in this market. (Qs = quantity supplied)
0.00
6.00
5.00
4.00
3.00
2.00
1.00
Price 18 15 12 9 6 3
Ali U. 12 10 8 6 4 2
Veli U.
Market Qs + = + = 5 + = 10
Again, the assumption of only two sellers is a clear violation of perfect competition. However, it’s much easier for students to learn how the market supply curve relates to individual supplies in the two-seller case. + = 30 25 20 15 36

37. The small t-shirt factory
Learning activity #2

38. Find the supply schedule
Draw the supply curve

39. This is a really nice example

40. The data
A small t-shirt factory uses one machine (leased at 200TL a week) to produce t-shirts. The machine is operated by one worker and produces one t-shirt per hour.
The worker is paid 10TL per hour on weekdays, 15TL per hour on Saturdays , and 20TL per hour on Sundays. Working day is max 10 hours by law. (strictly enforced.)
All other costs, such as raw materials, electricity, etc., are 4TL per t-shirt.

41. Who is the buyer?
Benetton is the only buyer of t-shirts. They will buy as many as the factory can supply.

42. The offer price
Suppose Benetton made an offer of 20TL per t-shirt. Given this offer, how many t-shirts will the company supply? Should the factory operate on Saturday?

43. How many t-shirts will be supplied if Benetton pays…
P = 10TL? _________
P = 15TL? _________
P = 20TL? _________
P = 25TL? _________
P = 30TL? _________
When you figure out how many t-shirts will be supplied at each price, you already have the supply schedule. You have the table with two columns: for each given price (10, 15, 20, etc.,) it shows the quantity supplied at that price.
For the supply curve: Draw the price and quantity axis. Put these price and quantity supplied numbers on the graph and connect the dots with a line. What is the shape of the line?

44. Rational people think at the margin!
Marginal benefit and marginal cost.

45. Heather’s Problem
Compost
(bags)
Tomatoes
(kg) 50 1 60 2 68 3 74 4 78 5 80
How many bags of compost should Heather use? Her goal is profit maximization. Prices: compost $10/bag, tomatoes $2/kg.

46. How many t-shirts will be supplied if Benetton pays…
P = 10TL? _________
P = 15TL? _________
P = 20TL? _________
P = 25TL? _________
P = 30TL? _________
The worker is paid 10TL/hour on weekdays, 15TL/hour on Saturdays, and 20TL/hour on Sundays. Working day is 10 hours by law.
Raw materials, electricity, etc., are 4TL per t-shirt.

47. Start with zero t-shirts and ask the question : “Should we produce one more t-shirt?” Compare the cost and benefit of that first t-shirt. If the answer is yes, repeat the question: “Should we produce one more t-shirt?” Compare the cost and benefit of the additional (i.e., 2nd) t-shirt. Keep going until the answer is “no”.

48. How many t-shirts will be supplied if Benetton pays…
P = 10TL? _________
P = 15TL? _________
P = 20TL? _________
P = 25TL? _________
P = 30TL? _________
The worker is paid 10TL/hour on weekdays, 15TL/hour on Saturdays, and 20TL/hour on Sundays. Working day is 10 hours by law.
Raw materials, electricity, etc., are 4TL per t-shirt.

49. Now your turn. Complete the workout!

50. Now back to
Supply Curve Shifters

51. Supply Curve Shifters
The supply curve shows how price affects quantity supplied, other things being equal.
These “other things” are
Input prices (For ice-cream: price of sugar, workers’ wages)
Technology
Expectations
Number of sellers
Changes in them shift the S curve…
“Non-price determinants of supply” simply means the things – other than the price of a good – that determine sellers’ supply of the good. 51

52. Supply Curve Shifters: Input Prices (wages, and prices of raw materials.)
A decrease in input prices makes production more profitable at each output price, so firms supply a larger quantity at each price, and the S curve shifts to the right: When input prices decrease, supply increases.
In the second bullet point, “output price” just means the price of the good that firms are producing and selling. I have used “output price” here to distinguish it from “input prices.” 52

53. Supply Curve of ice cream shifts to the right Input Prices (milk)P Q
Suppose the price of milk falls.
At each price, the quantity of ice- cream supplied will increase.
Again, the animation here is carefully designed to help make clear that a shift in the supply curve means that there is a change in the quantity supplied at each possible price. If it seems tedious, you can turn it off.
In any case, be assured that, by the end of this chapter, the animation of curve shifts will be streamlined and simplified. 53

54. Supply Curve Shifters: Technology
Technology determines how much inputs are required to produce a unit of output.
A technological improvement means more production with a given amount of inputs.
A technological improvement shifts the supply curve to the right. 54

55. Supply Curve Shifters: The ice-cream making technology improves!P Q
Again, the animation here is carefully designed to help make clear that a shift in the supply curve means that there is a change in the quantity supplied at each possible price. If it seems tedious, you can turn it off.
In any case, be assured that, by the end of this chapter, the animation of curve shifts will be streamlined and simplified. 55

56. Shifts versus movements along the supply curve: A change in supply versus a change in quantity supplied
When the price of the good changes we show this as a movement along the supply curve. We call it a change in quantity supplied.
When input prices, or technology change, we show this as a shift in the supply curve. We call it a change in supply.

57. This concludes our discussion of supply.

58. The equilibrium in the competitive market
NEXT
The equilibrium in the competitive market

59. READ Chapter 4. Web link to PDF file of Chapter http://www. cengage
End of the lecture