1. Demand, Supply & Market Equilibrium Lecture 5
Dr. Jennifer P. Wissink
©2017 John M. Abowd and Jennifer P. Wissink, all rights reserved.
September 5, 2017

2. Announcements: MACRO Fall 2017
MEL Stuff:
First graded MEL quiz was due this morning.
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Exam Stuff:
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3. The Combined PPF W W
England’s PPF 8
Portugal’s PPF 2 40 80 C C

4. The Combined PPF With 3 Countries!
Portugal’s PPF
France’s PPF 8
England’s PPF
The Combined PPF With 3 Countries! 3
Suppose you add France, who can make either 3 barrels of wine OR 45 yards of cloth OR anything on a straight line between these end points.
So… French MOC of cloth=1/15 bls French MOC of wine=15 yds 2 W 80 40 C 45 C C 13 C

5. An International Cloth Supply CurveW C
Portugal’s PPF 80 2 40
England’s PPF 3 45
France’s PPF

6. Note Of Caution
Information on comparative advantage is often given in many other forms - pay careful attention to the information you are given.
Three ways to present the same kind of information

7. The Beauty of the PPF

8. Simple Model Of A “Free Market” Economy
What is a market?
A collection of buyers and sellers organized for the purpose of exchanging goods and services for money.
Markets can be global, national, regional, or local depending upon the item being bought and sold.
What is a free market economy?

9. A Market Is Perfectly Competitive ...
When there are many buyers and sellers.
When each item traded in the market is identical to all the others.
When firms can freely enter and exit the market.
When all buyers and sellers have full and symmetric information.
So...
The law of one price prevails.
No single buyer or seller can cause the price to move up or down.
In this case, we say that the buyers and sellers are “price takers.”
Use supply and demand.
Do “Perfectly Competitive” Markets exist?

10. Market Model Of Demand & Supply

11. The Market For Portable Speakers

12. Demand Concepts
The demand function for X: QxD = f(PX, Ps, Pc, I, T&P, Pop) Where: QxD = the number/quantity of units demanded PX = X’s price Ps = the price(s) of substitutes Pc = the price(s) of complements I = income T&P = tastes and preferences Pop = population in market or market size

13. The Demand Curve (Verbal)
The demand curve, a.k.a. demand, describes the relation between a good’s price and the maximum quantity that buyers are willing and able to buy at that price, ceteris paribus.
Ceteris paribus means holding all the other demand function variables constant at some given level.
QXD = f(PX) given Ps, Pc, I, T&P, Pop
The “Law of Demand”
the relationship between a good’s price and the quantity demanded of that good is negative.
Example: suppose the price of the good falls from $25 to $10, and the quantity demanded rises from 15 to 30.
This is referred to as a “change in quantity demanded” and in this case an “increase in quantity demanded.”
“Own-price” changes cause movements along a given demand curve.

14. The Demand Curve (Graph)
QXD = f(PX)
Note: Law of Demand implies a negative or downward slope to the graph.
Note: In the graph we have switched the axes.
Price
Quantity
Demand 25 15
At P = $25, the quantity demanded = 15.
At Q = 15, the demand price = $25.

15. Movements vs. Shifts QXD = f(PX) given Ps, Pc, I, T&P, Pop
A movement along the demand curve for X would be caused by a change in Px.
Remember this is referred to as an increase or decrease in quantity demanded!
A shift of the entire demand curve would be caused by a change in one of the “ceteris paribus” demand variables.
This would be referred to as an increase or decrease in demand.
Price
Demand 25 15
Quantity

16. Movements vs. Shifts: Getting It Right Summary
Recall: QXD = f(PX) given Ps, Pc, I, T&P, Pop
ΔPx
Movement along demand curve, Px and QDx move in opposite directions-the law of demand.
ΔPS
Shift of Demand. Ps and Demand move in the same direction.
ΔPc
Shift of Demand. Pc and Demand move in opposite directions. ΔI
Shift of Demand. Relationship depends on if X is a normal good (same direction) or if X is an inferior good (opposite directions).
ΔT&P
Shift of Demand. T&P and Demand move in the same direction.
ΔPop
Shift of Demand. Pop and Demand move in the same direction.

17. 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

18. The Demand Curve (Equation)
Another example
QD = 100 – 2P P Q

19. 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.

20. 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

21. The Supply Curve (Verbal)
The supply curve, a.k.a. supply, describes the relation between a good’s price and the maximum quantity that sellers are willing and able to put on the market for sale at that price, ceteris paribus.
Ceteris paribus means holding all the other supply function variables constant at some given level.
QXS = g(PX) given Pfop, Poc, S&T, N
The “The Law of Supply”
the relationship between a good’s price and the quantity supplied of the good is positive.
higher prices generate higher quantities supplied
lower price generate lower quantities supplied
Example: Suppose PX falls from $25 to $10, then the quantity supplied might fall from, say, QX=31 to QX=16.
This is referred to as a “change in quantity supplied” and in this case a “decrease in quantity supplied.”
“Own-price” changes  movements along a given supply curve, i.e., changes in quantity supplied.

22. The Supply Curve (Graph)
QXS = g(PX)
Note: Law of Supply implies a positive or upward slope to the graph.
Note: In the graph we switched the axes... again.
Price
Supply 25 31
Quantity

23. 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

24. 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.

25. The Supply Curve (Equation)
A linear supply curve from the points we’ve used. QXS = 6 + PX
So, 31 =
Law of Supply?
yes!
Beware: the graph we draw is the inverse of the equation we write (most times).
Price
Supply 25 31
Quantity

26. i>clicker question
Suppose the supply curve in market “Y” is as follows: QS = P. The equation for the market inverse supply (so the picture we draw) is:
QS = /3P.
PS = Q.
QS = /3P.
PS = 5 + 1/3Q.
PS = 5 – 1/3Q. P Q

27. 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.

28. 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 at PX*: QXD = QXS or
Find a PX* so that: QXD(PX*) = QXS(PX*)

29. Market Equilibrium (Table)
At P* = $17, the QD = QS=23
So Q*=23

30. 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