Econ Video notes

Chapter 4: Supply and Demand in Equilibrium

Discussion Session

• The session commenced with a recap of the prior lecture, focusing on Slide 20. The class planned to cover about 40 slides during this session to ensure thorough understanding of the concepts.

• Emphasis was laid on the importance of muting phones and minimizing distractions to maintain an environment conducive to learning.

Buyer Behavior

Demand Curve Shifts vs. Movements along Demand Curve:

• Rightward Shift: Indicates an increase in demand, which can occur due to various external factors such as changes in consumer preferences, increased income levels, or a rise in the population.

• Leftward Shift: Indicates a decrease in demand, possibly resulting from factors such as a economic downturn, change in consumer tastes, or an increase in the prices of substitute goods.

• Movement Along Demand Curve: This movement occurs due to a change in the price of the good itself, referred to as a change in the quantity demanded, illustrating the law of demand.

• Ceteris Paribus: This principle allows economists to isolate the effect of price changes on demand by holding all other variables constant.

Example of Candy Demand:

• If the price of candy decreases, this generally leads to an increase in the quantity demanded as consumers find it more affordable; conversely, if the price increases, the quantity demanded typically decreases as fewer consumers are willing or able to pay the higher price.

• This reflects the Inverse Relationship between the price of a good and the quantity demanded, a fundamental concept in economics.

Variables Affecting Demand

Changes in demand can arise from:

• Income: As consumers' income increases, they may demand more goods, particularly luxury items.

• Population and demographics: Changes in the size or characteristics of the population can influence demand patterns.

• Price expectations: Anticipated future price changes can lead consumers to adjust their current buying habits.

• Prices of complementary and substitute goods:

  • Complementary Goods: These are goods consumed together, like shoes and laces or hot dogs with ketchup, where a rise in the price of one can decrease the demand for the other.

  • Substitute Goods: Goods used in place of another, such as margarine versus butter, where an increase in the price of one can lead to increased demand for the other.

Market Demand Curve for Oil

• The demand for oil typically increases as prices decrease, demonstrating the inverse relationship characteristic of demand curves. This elasticity of demand showcases how sensitive consumers are to price fluctuations in essential resources like oil.

Supply Behavior

Quantity Supplied

• Quantity Supplied: This is the amount of a good that sellers are willing to sell at a given price, reflecting suppliers' responsiveness to price changes.

• The supply schedule details the quantity supplied at different price points, which allows for plotting the supply curve that graphically demonstrates the relationship between price and supply.

Direct Relationship:

• There is a Direct Relationship between price and quantity supplied; as prices rise, suppliers are typically encouraged to increase production due to the potential for higher profits.

• Example: At a price of $25, 5 units of a product may be supplied; as the price climbs to $100, the quantity supplied could rise to 10 units; at $400, it might increase further to 30 units.

Influences on Supply Curve

Shifts in the supply curve can occur due to:

• Input prices: An increase in labor, raw materials, or overhead costs can reduce supply.

• Technology advancements or declines: Improvements in technology can enhance production efficiency, increasing supply, while technological setbacks can do the opposite.

• Number of sellers: An increase in the number of suppliers in the market can lead to greater overall supply.

• Seller expectations regarding future prices: If sellers expect prices to rise in the future, they may withhold products now to sell at the higher anticipated prices later.

Market Equilibrium

Competitive Equilibrium:

• The point of Competitive Equilibrium is where supply and demand curves intersect, setting the market price and quantity sold.

• Excess Demand: This scenario occurs when consumers wish to purchase more than suppliers can provide, resulting in a shortage where demand exceeds supply.

• Excess Supply: This happens when the available supply exceeds consumer demand, leading to a surplus in the market.

Example Scenarios:

• Excess Demand: If the price is set below the equilibrium point, it results in a decrease in the supply available while demand remains high, leading to unfulfilled consumer needs.

• Excess Supply: Conversely, when prices exceed the equilibrium, there will be an oversupply of products, causing an imbalance where the market has more product than consumers are willing to buy.

Price Floors and Ceilings

• Price Ceiling: This is set below the equilibrium price and can lead to shortages, where demand outstrips supply.

• Price Floor: Established above equilibrium price, this can create surpluses, with suppliers unable to sell all of their available products.

Real-World Examples and Illustrations

• Valentine's Day Demand for Roses: Typically sees increased demand, which drives up prices due to a relatively fixed supply in the short term.

• Super Bowl Beer Demand: Increased demand during the event can be met with increased supply from breweries, which helps stabilize prices despite spikes in consumer interest.

Anticipated Changes and Class Interaction

• The instructor encouraged class participation through questions and discussions about various supply and demand scenarios, enhancing engagement with the material.

• Students were reminded of preparing for the upcoming exam and reviewing essential concepts covered in class.

• Important announcements regarding quizzes and academic resources were provided to assist students.

Conclusion

• The session concluded with a strong emphasis on understanding the factors that cause shifts in demand and supply, their underlying triggers, and the resulting implications for the market.

• Students were encouraged to engage in continuous review of the material as the next class approaches to reinforce their understanding and retention of key concepts.