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This 7 page Class Notes was uploaded by John Om on Friday February 5, 2016. The Class Notes belongs to ECON 102 at Pennsylvania State University taught by Wayne Geerling in Winter 2016. Since its upload, it has received 20 views. For similar materials see Introductory Microeconomic Analysis and Policy in Economcs at Pennsylvania State University.
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Date Created: 02/05/16
Topic 3: Demand and Supply Markets Markets exist whenever goods & services are exchanged What’s Your Price? (Law of Demand) Law of Demand – holding all else constant, when the price of a product falls, the quantity demanded of the product will rise (& vice versa) Change in quantity Demanded Supply goes up and demand goes up (vice versa) Graph is shown to see how much you would pay for to see the artist of your dreams Shifts in Demand Movement along a demand curve: o Caused by a change in the price of the good o Inverse relationship between price and quantity demand Shift in demand: o Caused by changes in nonprice factors o Entire demand curve will shift to the left or right What causes a shift in demand? Income Price of a related good Tastes and preferences Future expectations Number of buyers Income Normal good o Good in which we buy more of when we get more income Inferior good o Good in which we buy less of when we get more income Price of Related Goods Complements o Goods and services used together Substitutes o Good and services that can be used in place of each other Change in Tastes & Preferences A good may become more or less fashionable Demand increases (shifts right) OR Demand decreases (shifts left) Other factors Future expectations: today v tomorrow Number of buyers Multiple Market Effects Goods are often related: o Complements & substitutes This means that one economic event can affect multiple markets in different ways Karaoke Experiment (law of supply) Law of supply: holding all else constant, increases in the price of a good causes an increase in the quantity supplied (and vice versa) More on Supply By changing the question we alter the supply relationship Places where you would be more comfortable singing? Places where it would be more embarrassing? Shifts in Supply Movement along a supply curve o Caused by a change in the price of the good o Direct relationship between price & quantity supplied Shift in supply o Caused by nonprice factors o Entire supply curve will shift left to right What causes a shift in supply? Input prices: o inverse relationship between input prices and supply Technological progress: o Lower costs of production Perunit government taxes or subsidies: o tax (shifts curve left); subsidy (shifts curve right) Number of suppliers Price expectations: higher prices expected tomorrow? Shortages & Surpluses Shortage o Quantity demanded > Quantity supplied o Occurs at any price below equilibrium o Price will rise over time toward equilibrium. Why? Surplus o Quantity supplied > Quantity demanded o Occurs at any price above equilibrium o Price will fall over time toward equilibrium. Why? Analyzing Changes in Market Equilibrium To determine the effects of any event: o 1. Decide whether event shifts demand, supply, or both o 2. Decide in which direction left or right o 3. Use supplydemand diagram to work out impact on equilibrium price and quantity Example 1: what happens to the price & quantity of bagels when the price of flour increases? Example 2: Example 3: Example 4: Example 5: Example 6:
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