ECO 2023 Week 4 - Day 1 Lecture Notes
ECO 2023 Week 4 - Day 1 Lecture Notes Eco 2023
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This 7 page Class Notes was uploaded by Erika Huber on Tuesday September 13, 2016. The Class Notes belongs to Eco 2023 at University of Florida taught by Mark Rush in Fall 2016. Since its upload, it has received 18 views. For similar materials see Principles of Economics: Microeconomics in Economics at University of Florida.
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Date Created: 09/13/16
9/12/16 ECO 2023 Week 4 – Day 1 Lecture Notes Chapter 3 Finishing up Supply & Demand In the previous notes, Week 3 Lecture Notes (https://studysoup.com/note/2316152/uf-eco- 2023-week-3-fall-2016) , we saw that: Equilibrium (price & quantity) The equilibrium price is unique: It is the only price at which there is no surplus and no shortage. Opposing forces balance each other. There is no automatic tendency to change. The best price for any product is the equilibrium price because any other price will change. Equilibrium price and quantity is determined by where the supply and demand curves intersect. A surplus will drag the price down & shortage with force the price up, so those prices are temporary. HOWEVER… One factor changes! This is the payoff!!! It pays off today, tomorrow, Friday, and…hopefully…for the rest of your life! Surpluses and shortages will change the price and quantity along the demand and supply curves. BUT… an outside force, such as all the shifters that we looked at in Week 2 Lecture Notes (https://studysoup.com/note/2310216/uf-eco-2023-week-2-fall-2016) will shift the demand and/or supply curve and can form a new equilibrium. A new equilibrium is formed where: o the old supply curve and new (shifted) demand curve cross o the old demand curve and new (shifted) supply curve cross OR… o the new supply AND new demand curve cross This would happen when both curves shift, but for now we are just going to look at one curve shifting. EX: Let’s take turkey. Let’s say turkey is a normal good & people’s incomes increase. Turkey *Not to scale Price Supply BTW, I use a 1 (and then eventually a 2…and maybe 3) to P1 indicate shifts in the demand & supply curves. The labels with no numbers are the P original curves. Demand 1 Demand Q Q1 Quantity Because people’s incomes increased and turkey is a normal good, the demand for turkey increased (shifting the demand curve to the right). When the demand increased, a new equilibrium was created. At the new equilibrium there is a new quantity demanded and a new price. The quantity demanded increased and the price increased. The 4-Step Method EX: Suppose the price of cotton used to make the incredibly stylish jeans Professor Rush wears rises, what happens to the price & quantity of jeans? 1. Draw a demand and supply diagram. Seen below. Just draw the normal supply and demand crossing each other. 2. Identify which curve shifts. Because the question specifically states that the price of cotton increases, we know that increasing the price of a compliment of production of a product will decrease the supply of that product (the jeans). 3. Determine the direction of the shift. When there is a decrease of supply, the supply curve shifts to the left. 4. Draw the new curve. Seen below with the label ‘Supply 1’. Supply 1 *Not to scale Jeans Price Supply Cost of cotton: P1 Supply of jeans: So to answer our question… P What happened to the price and quantity of jeans? Price: Quantity: Demand Quantity Q1 Q NOW… let’s look at when TWO things change… EX: Smartphones Assume smartphones are a normal good and people’s income increases. At the same time, the technology used to produce smartphones advances. What happens to the price and quantity of smartphones? Smartphones *Not to scale Price Supply Supply 1 P & P1 Demand 1 Demand Quantity Q Q1 When we make both shifts by the same amount, we see that the price of the new equilibrium is ambiguous. It appears as though the price doesn’t change. The price does actually change but we have to know if there is a bigger shift in the demand or in the supply. To do this, we have to follow a modified 4-step method. The 4-step method - The modified 4-step method 1. Draw two demand and supply diagrams. Seen below. Just draw the normal supply and demand crossing each other. 2. Identify which curve shifts. Because people’s incomes have increased, there is an increase in demand. And because there are advancements in technology (used to produce smartphones), supply (of smartphones) increases. 3. Determine the direction of the shift. And increase in demand is a rightward shift of the demand curve. An increase in supply is a rightward shift of the supply curve. 4. In one diagram, draw a big demand curve and small supply curve; in the other, draw a small demand curve shift and a big supply curve shift. We do this because as seen in the graph above, price is ambiguous and we can only know if price increases or decreases depending on which curve has a big shift and which curve has a smaller shift. Smartphones – Graph 1 *Not to scale Price Supply Supply 1 P1 P Demand 1 Demand Q Q1 Quantity Smartphones – Graph 2 *Not to scale Price Supply Supply 1 P P1 Demand 1 Demand Quantity Q Q1 Graph 1: A large shift in demand and a small shift in supply leads to an increase in quantity demanded and an increase in price. Graph 2: A large shift in supply and a small shift in demand leads to an increase in quantity demanded and a decrease in price. Now let’s examine the graphs in this scenario: The quantity increases no matter what. But the effect on price is ambiguous and depends how which shift is larger. So we don’t ever really know what happens to price. We draw out the two graphs to see what the two possibilities are and in which situations they would occur. Whenever both the demand and curve shift, only price or only quantity will be known, the other one will always be ambiguous and 2 graphs will have to be made. If told which shift is larger, then you can just make one graph with the said shift larger. We determine our production point on the PPF using the supply and demand graph. One supply and demand graph determines your production point on the PPF for both products. And it doesn’t matter which one you use. You do a supply and demand graph for just one product. Clothing Clothing Price Supply 25 20 $70 This is 15 the point at which you 10 produce. Demand 5 Quantity Food 0 10 5 10 15 20 25 30
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