1. Lecture 3: Supply & Demand Continued
Lecture 3: Comparative Advantage Benjamin Graham

2. Lecture 2: Supply, Demand, etc. Benjamin Graham
Housekeeping
We’ll test TopHat today
Homework 1 will be posted tomorrow
Lecture 2: Supply, Demand, etc Benjamin Graham

3. 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

4. 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

5. 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

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

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

8. 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 at the height of the crisis:
1. supply 2. demand
3. quantity supplied
4. quantity demanded
Lecture 2: Supply, Demand, etc Benjamin Graham

9. Demand Shock

10. Supply and Demand Both Move

11. Review Question
If we have a large increase in demand and small increase in supply, what will happen to the price?
A. The price will rise
B. The price will fall
C. The price will stay the same

12. 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

13. 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

14. 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

15. 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