2. Demand, Supply & Market Equilibrium Lecture 5 Dr. Jennifer P. Wissink ©2015 John M. Abowd and Jennifer P. Wissink, all rights reserved. September 8, 2015

3. Announcements (MACRO) Fall 2015 u Get yourself set up on MEL ASAP. –MEL Quiz#01 was posted days ago and was due 10am today. –MEL Quiz#02 was posted already and is due 10am Sept 15. –MEL Quiz#03 was posted this morning and is ALSO due 10am Sept 15. –Missing a few MEL deadlines here and there is no big deal – no need to contact me and ask for extensions, forgiveness, etc. I expect people to miss now and again. I would too! That’s why we do the 500 points bit. There will be at least 700 points assigned over the 15 or so MEL quizzes that will be posted between now and early December. (See the syllabus for details.) u Reminder: The Learning Strategies Center supports this class in several ways. –Check it all out on their web pages http://lsc.cornell.edu/http://lsc.cornell.edu/ –Or talk with Albert Alexander up at the Learning Strategies Center u 5-button i>clicker info: Stay tuned to Bb for info on how to register your devise so that score shows up on Bb My Grades.

4. i>clicker question Given the combined PPF, which one of the following is true? A.Between points A and B on the PPF, both countries are producing both goods. B.Between points B and D on the PPF, both countries are producing both goods. C.At point A on the PPF only England is making wine. D.At point B on the PPF England is making only cloth and Portugal is making only wine. E.At point B on the PPF England and Portugal are each making 4 barrels of wine and 20 yards of cloth. C W 10 120 8 40 B A D LABOR (L) HOURS REQUIRED ENGLANDPORTUGAL 1 yd. cloth2 hours1 hour 1 barrel wine 40 hours10 hours

5. i>clicker question Given the table, suppose Portugal and England are going to trade wine and cloth with each other. Suppose Portugal is making wine and England cloth. What is the lowest price (in terms of cloth) we would expect to see barrels of wine selling for? A.1/10 a yard of cloth B.1/20 a yard of cloth C.10 yards of cloth D.20 yards of cloth E.10 barrels of wine LABOR (L) HOURS REQUIRED ENGLANDPORTUGAL 1 yd. cloth2 hours1 hour 1 barrel wine 40 hours10 hours

6. i>clicker question Given the table, suppose Portugal and England are going to trade wine and cloth with each other. Suppose Portugal is making wine and England cloth. What is the highest price (in terms of cloth) we would expect to see barrels of wine selling for? A.40 yards of cloth B.1/40 a yard of cloth C.10 yards of cloth D.20 yards of cloth E.20 barrels of wine LABOR (L) HOURS REQUIRED ENGLANDPORTUGAL 1 yd. cloth2 hours1 hour 1 barrel wine 40 hours10 hours

7. Exchange Rates LABOR (L) HOURS REQUIRED ENGLANDPORTUGAL 1 yd. cloth2 hours1 hour 1 barrel wine 40 hours10 hours

8. u 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.  French MOC of cloth=1/15 bls  French MOC of wine=15 yds W W W W C C C C The Combined PPF With 3 Countries! Portugal’s PPF 80 8 2 40 England’s PPF 3 45 France’s PPF 13

9. An International Cloth Supply Curve

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

11. The Beauty of the PPF

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

13. A Market Is Perfectly Competitive... u When there are many buyers and sellers. u When each item traded in the market is identical to all the others. u When firms can freely enter and exit the market. u When all buyers and sellers have full and symmetric information. u 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. u Do “Perfectly Competitive” Markets exist?

14. Market Model Of Demand & Supply

15. The Market For Portable Speakers

16. Demand Concepts u The demand function for X: Q x D = f(P X, P s, P c, I, T&P, Pop) Where: Q x = the number/quantity of units demanded P X = X’s price P s = the price(s) of substitutes P c = the price(s) of complements I=income T&P=tastes and preferences Pop=population in market or market size

17. The Demand Curve (Verbal) u 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. –Q X D = f(P X ) given P s, P c, I, T&P, Pop u 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.” u “Own-price” changes cause movements along a given demand curve.

18. The Demand Curve (Graph) u Q X D = f(P X ) –Note: Law of Demand implies a negative or downward slope to the graph. –Note: In the graph we have switched the axes. Price Quantity 25 15 Demand u At P = $25, the quantity demanded = 15.

19. Movements vs. Shifts u Q X D = f(P X ) given P s, P c, I, T&P, Pop u A movement along the demand curve for X would be caused by a change in P x. –Remember this is referred to as an increase or decrease in quantity demanded! u 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 Quantity 25 15 Demand

20. i>clicker question Given the demand for X, an increase in its own-price will A.increase demand. B.decrease demand. C.increase quantity demanded. D.decrease quantity demanded. Price Quantity Demand

21. Movements vs. Shifts: Getting It Right Summary u Recall: Q X D = f(P X ) given P s, P c, I, T&P, Pop ΔPxΔPx  Movement along demand curve, Px and Q D x move in opposite directions. ΔPSΔPS  Shift of Demand. Ps and Demand move in the same direction. ΔPcΔPc  Shift of Demand. Pc and Demand move in opposite directions. ΔIΔI  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.