Econ 102 - Chapter 3: Demand and Supply

Law of Demand

There exists an inverse relationship between the price of a good and the amount of it people are willing to produce.

If the price (P) of a good increases, the quantity demanded (QD) decreases.

See Notebook for example

Change in Quantity Demanded

Movement along the demand curve (A-->B) is a result of change in price alone. (Changing endogenous variable)

Change in Demand

A shift in the entire curve (D1-->D2) occurs when something other than the Price/ QD changes.

(Change in demand curve)

The demand curve shifts when ceteris paribus is violated (something besides P or QD changes)

What are some examples of changes that would cause a change in demand (demand curve shift)?

Changes in income levels, Tastes, Price of related goods (Compliments/ Substitutes), expectations, etc.

TPS

Imagine you work at a restaurant that serves beer. Your boss asks you the following question: Which of the following would increase/ Shift right the demand for beer the most?

Note: Increase in Demand, shift right are the same. Decrease in demand, shift left are the same.

A. A reduction in the price of a complementary good (appetizers)

B. A reduction in the price of beer

C. Both A and B would increase demand for drinks

D. A reduction in the price of a substitute good (wine)

A. shifts the curve right

B. would not shift the curve, but rather move along the demand curve (changes quantity demanded)

(C. would shift the curve left)

(See notebook if picture is desired (not required))

Law of Supply

There exists a direct relationship between the price of a good and the amount of it that will be offered for sale (as price increases, quantity supplied increases).

In general supply may be curved, but we will draw it as linear in this course.

What is a change in quantity supplied (Qs)?

A movement along the supply curve (A-->B) is a result in the change in price alone.

What is a change in supply?

A shift in the entire curve (S1-->S2) occurs when something other than P or Q changes. The supply curve shifts whenever ceteris paribus is violated.

What are some examples of changes that would cause a change in supply (a shift in the supply curve)?

Input costs (lemon price increase to make lemonade), changes in technology, taxes/subsidies (giving someone money to produce a good), expectations (looking at the future).

Example of supply and demand:

If the price of sprinkles goes up, the demand curve for ice cream?

Shifts In

Example of supply and demand:

If the price of whipped cream rises, the demand curve for whipped cream?

Stays the Same

Example of supply and demand:

If the price of ice cream used when making shakes goes up, the supply curve for shakes?

Shifts In

See Hadsucker Proxy examples in notebook

What is Adam Smith's invisible hand of the market?

The Price changes in response to a good being sold or not sold. This happens until Adam Smith's invisible hand of the market pushes the price to where Qs = QD.

What is perfect competition?

Many firms in marketplace who individually cannot influence price.

See math example in notebook

Suppose the US places a $5,000 tariff on German Cars. (German manufacturers must pay US 5,000 to sell a car to the US).

1. What happens to the equilibrium market P and Q of German Cars imported

2. What happens to Market P and Q of US cars produced?

See Notebook for answers

In Washington, right after marijuana was legalized the price of cannabis plummeted. What happened?

See Notebook for answers