1. Market Demand & Supply Lecture 6
Dr. Jennifer P. Wissink
©2017 John M. Abowd and Jennifer P. Wissink, all rights reserved.
February 13, 2017

2. i>clicker question (from last week)
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.

3. 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

4. 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.

5. 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

6. 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

7. 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.

8. 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

9. 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

10. 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.

11. 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*)

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

13. 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

14. 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 = or Q*=23 =

15. i>clicker question
Suppose the winter demand and supply curves in the market for earmuffs 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

16. 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!

17. The Ivanka Trump Brand Products Market
What impact will the following type of story have on Ivanka Trump branded products?
Kellyanne Conway Promotes Ivanka Trump Brand, Raising Ethics Concerns
What do you predict will happen to the equilibrium market price and quantity? 17

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

19. The Apple Market
5 facts about this year's apple harvest, plus a challenge
#1: In spite of weather challenges – frost during bloom in some areas, hail in others – is the state’s growers are forecast to pick 30 million cartons of apples. That’s slightly above the state’s average crop of 28.6 million cartons over the past five years. “We really are the Big Apple – we are the largest apple-producing state East of the Mississippi, and second only to Washington state nationally,” says Allen.
What do you predict will happen to the equilibrium market price and quantity? 19

20. Comparative Statics: An Increase in Supply 
Price
Demand0
Supply0
P*o
Q*o
Quantity

21. i>clicker question
Suppose the following two events simultaneously occur in the “tennis ball” market: 1) there is a fall in the wages of workers who make the balls 2) the fabulousness of Roger Federer at the Australian Open increases interest in youth tennis. At the new market equilibrium we predict
both P* and Q* must fall.
both P* and Q* must rise.
P* must fall and Q* must rise.
Q* must fall and P* must rise.
Q* must rise and P* can either rise, fall or stay the same.
Price
Supply0
Demand0
P*o
Quantity
Q*o

22. Comparative Statics Summary: Can You Fill This In?
The demand curve
QD = f(P) given Ps, Pc, I, T&P, Pop
The supply curve
QS = g(P) given Pfop, Poc, S&T, N
Comparative Statics Summary:
EVENT P* Q* ↑D ↓D ↑S ↓S
↑D ↑S etc...

23. 4 Classic Government Interventions
Price Floors
Price Ceilings
Quantity Quotas
Commodity Taxes
Ambrogio Lorenzetti, The Effects of Good Government in the city, Siena Italy, circa 1338

24. Price Floors Government established minimum selling price.
Floor must be above P* to be binding.
Why? Government usually thinks the market price is too low for some reason.
Usually end up with….
Surpluses!
And all the problems they create.
Examples:
supported milk prices
minimum wage laws

25. Price Floors & Market Surplus
Equilibrium is at P*=17 and Q*=23.
Price
Demand
Pfloor = $25.
Supply
At the artificially high price of $25, sellers want to sell 31.
Surplus = 16 25 15 31 17 23
But buyers only want to buy 15.
There is a surplus of 16.
Quantity

26. Price Ceilings Government established maximum selling price.
Must be below P* to be binding.
Why? Government usually thinks the market price is too high for some reason.
Usually end up with….
Shortages!
And all the problems they generate.
Examples:
Gas price ceilings
Apartment rent control

27. Price Ceilings & Market Shortage
Equilibrium is at P*=17 and Q*=23.
Price
Demand
Pceiling=$10.
Supply
At the artificially low price of $10, buyers want to buy 30. 17 23
But sellers only want to sell 16. 10 16
Shortage = 14 30
There is a shortage of 14.
Quantity

28. Quantity Quotas Government established maximum number of units sold.
Qmax must be below Q* to be binding.
Why? Government thinks too many units are being traded.
Example: import restrictions
Usually end up with...
Higher prices and more.

29. Quantity Quotas P P D D S S Q Q 29