Supply and Demand: Introduction: Supply & Demand – Chapter 2 Lecture Notes

Context and Scope

• Lecture covers Chapter 2 of the course (the instructor skips Chapter 1, calling it “introductory stuff”).

• Central focus: the analytical model of supply and demand, its assumptions, uses, caveats, and illustrative real-world examples.

• Speaker promises that, despite seeming simplicity, the model is “quite complex, interesting, and very useful.”

Universal Reach of Supply & Demand

• Every good, service, or resource has a market with suppliers and demanders.

  • Physical goods: food, appliances, real estate, stocks, bonds, foreign exchange, money itself.

  • Services: haircuts, airline flights.

  • Labor markets, even markets for beggars (example: beggars on San Francisco corners fought over location/time slots — proof of differentiated demand side by location).

Historical Background (Alfred Marshall, 1890)

• Alfred Marshall’s “Principles of Economics” (1890) formalized supply & demand.

  • Aim: give economics everyday usefulness through analytic rigor.

• Marshallian demand curve: downward-sloping; higher price $\Rightarrow$ lower quantity demanded.

• Marshallian supply curve: upward-sloping; producers require higher prices to supply larger quantities, largely due to rising marginal (additional) cost.

  • Production-line speed-up $\Rightarrow$ falling worker productivity $\Rightarrow$ rising marginal cost $\Rightarrow$ need for higher selling price.

Equilibrium (Preview)

• Intersection of supply and demand determines equilibrium price and quantity.

• Disequilibrium terminology: excess demand (shortage) vs. excess supply (surplus).

Enumerated Key Concepts for Chapter 2 (Instructor’s slide)

1. Key assumptions underlying supply and demand.

2. Factors that influence demand $Q_d = f(P,\,\text{other})$.

3. Factors that influence supply $Q_s = f(P,\,\text{other})$.

4. Equilibrium, excess demand, excess supply.

5. Flat vs. steep (elastic vs. inelastic) curves.

6. Short-run vs. long-run supply & demand.

7. Price elasticity of demand (own vs. cross elasticity).

8. Price elasticity of supply.

9. Income elasticity of demand.

10. Changes in market equilibrium over time.

Four Key Assumptions of the Basic Model

1. Analysis pertains to a single, well-defined market at a specific place and time.

2. All units of the good are identical (homogeneous product).

3. All units sell for one market price (no price dispersion).

4. All agents have identical information.

• Implicit market structure: “many producers, many consumers.”

• Real-world note: assumptions 1–3 are “almost never strictly met,” yet the model still yields insights.

Gasoline Price Dispersion Example (Dallas)

• Empirical observation (via GasBuddy):

  • Lowest: $\$2.45$ / gal at a 7-Eleven, South Dallas.

  • Highest: $\$3.99$ / gal at a Shell, McKinney & Maple (downtown).

  • Spread: $\$1.54$/gal ⇒ $\$30.80$ on a 20-gal tank.

Demand-Side Interpretation

• Downtown motorists often value time/convenience; many are wealthy (near Ritz Carlton, etc.).

• Opportunity cost of a 35-mile, 1-hour round-trip exceeds $\$30$ to them.

• Some may literally be out of gas ⇢ cannot arbitrage.

Supply-Side Interpretation

• Downtown stations pay higher rent ⇒ higher average and marginal cost per gallon.

• Competition cannot push downtown prices down to South Dallas levels (
  “cost-covering floor”).

Result

• Price differential is a “sustainable equilibrium differential.”

• Market prices in different neighborhoods move as a vector: all rise/fall together around a central midpoint.

Pandemic & Oil-War Shock (July 28 2020 price snapshot)

• Observed gasoline prices fell dramatically compared with earlier data.

  • Demand shock: COVID-19 → less driving, fewer flights.

  • Supply shock: Russia–Saudi Arabia production battle → large output increase.

• Yet, relative dispersion (vector movement) persisted.

Demand Curve Mechanics (Tomato Example)

• Graph axes: Q (horizontal, “pounds of tomatoes”), P (vertical, $\$/lb$).

• Data points:

  • At $P = \$5$, $Q_d = 0$.

  • Demand increases smoothly as P falls; at $P = 0$, $Q_d = 1{,}000\;\text{lb}$.

• Nearly all markets assumed to have downward-sloping demand.

Conspicuous Consumption Caveat

• Definition: Goods whose demand rises with price over some range because high price itself signals status.

• Instructor insists phenomenon is “growing,” must be discussed.

Luxury Examples Cited

• $\$3{,}000{,}000$ car.

• $\$48{,}000$ Hermès purse.

• Tom Ford lipstick anecdote: $\$52$ tube declined; conspicuous value matters only when observers notice.

• Other products: engraved silverware, diamond pet jewelry, Bentley car, Rolex, Hermès necktie.

• Digital luxury: “I Am Rich” iPhone app, $\$999$, did nothing but display a ruby (pulled by Apple).

Theoretical Roots

• Thorstein Veblen, “The Theory of the Leisure Class” (1899): coined “conspicuous consumption;” wealthy display power via leisure & goods.

Socio-Economic Expansion

• Conspicuous consumption now common among:

  • Low-income individuals striving for status.

  • Emerging-market middle & upper classes (China, India, Russia, etc.).

• Historical analogy: 1700s pineapple rented out for status signaling; cost ≈ $\$10{,}000$ in today’s dollars.

• Modern American meme: “$30{,}000$ millionaire” or Stanley Johnson commercial (LendingTree) — outward display financed by debt.

Contrasting Profile: The Millionaire Next Door

• Demographics of typical U.S. millionaire woman (from cited research):

  • Age 49, children, 50 hr/week work schedule.

  • Annual income $\$250{,}000$; net worth $\$2.9$ million.

  • Frugal: avg. $\$139$ per pair of shoes; avoids luxury car, large home, country club.

• Marketing implication: domestic conspicuous consumption market limited; bigger opportunity abroad among nouveau riche.

Ultra-High-Net-Worth Growth Data

• Households with >\$30 million net worth growing rapidly worldwide.

  • China: expected rise from $62{,}000$ → $\approx 100{,}000$ soon.

  • Other regions likewise (instructor references forthcoming “black & blue pie chart”).

Returning to Standard Demand Analysis

• From this point forward, lecture sets aside conspicuous-consumption anomaly.

• Maintains standard inverse relationship: $Q_d \propto 1/P$.

• Graph conventions:

  • Price changes ⇒ move along existing demand curve.

  • Changes in non-price determinants ⇒ whole demand curve shifts.
    • Outward/rightward shift: higher demand at every price.
    • Inward/leftward shift: lower demand at every price.

• Next section (1.2) will catalogue those “other factors.”

Formal Notation & Elasticities (preview)

• Demand function: $Q<em>d = f\big(P,\,P</em>{\text{related goods}},\,Y,\,T,\,E,\,N,\,\dots \big)$.

• Supply function: $Q<em>s = g\big(P,\,P</em>{\text{inputs}},\,T,\,E,\,N,\,\dots \big)$.

• Elasticity definitions (items 7–9 in key-concept list):

  • Own-price elasticity of demand $\epsilon<em>{d} = \frac{\%\,\Delta Q</em>d}{\%\,\Delta P}$.

  • Cross-price elasticity $\epsilon<em>{xy} = \frac{\%\,\Delta Q</em>{d,x}}{\%\,\Delta P_y}$.

  • Price elasticity of supply $\eta<em>s = \frac{\%\,\Delta Q</em>s}{\%\,\Delta P}$.

  • Income elasticity of demand $\epsilon<em>Y = \frac{\%\,\Delta Q</em>d}{\%\,\Delta Y}$.

Practical & Pedagogical Takeaways

• Even when strict assumptions fail, supply-and-demand reasoning clarifies:

  • Why prices differ across space (rent, income demographics, arbitrage costs).

  • How simultaneous shocks (COVID demand fall + oil supply surge) move equilibrium as a “vector.”

• Marketing/managerial insight: understand both standard price sensitivity and status-signaling motives; target segments accordingly.

• Ethical note: conspicuous consumption may be financed by debt or reflect social pressure; contrasts sharply with wealth-building frugality.

End of current lecture segment; next video section promises detailed enumeration of “all these other factors” influencing demand (Section 1.2).