Eco 101 Lecture Notes - LEC 6

The speaker starts with a casual vibe check, ensuring everyone is engaged and on the same page.
Last class, we discussed supply and demand, building upon previous lectures.
We're now combining supply and demand concepts on the same graph.

The central question is: Why does the market behave at the point where quantity supplied equals quantity demanded?
It's illogical for the market to operate elsewhere because:
- If quantity is less than equilibrium, businesses can profit by producing more.
- If quantity is more than equilibrium, firms produce goods that cost more than consumers are willing to pay, leading to losses or unsold inventory.
Equilibrium implies balance; forces push the market back towards it if it deviates.
If production is too high or too low, profit incentives drive behavior back to equilibrium.
Equilibrium is a state where no participant can improve their situation by changing behavior.

Trump imposed tariffs on American film companies producing movies outside the US.
Many countries, like Canada, offer significant tax credits to attract film production (e.g., $65\%$ of movies filmed in Canada for a decade).
Example: X-Men movies CGI-ed the Statue of Liberty into a park in Oakland.
Silent Hill was filmed in Brantford, Ontario, due to its desolate appearance.
The speaker jokes about the extent of tariffs, possibly around $10\%$ . He does not know for sure.
Marvel may be affected, with Avengers: Doomsday being filmed in London.
Toronto is often used as a stand-in for New York City in films.

Trump aimed to increase American production to bolster the US economy.
The US primarily generates money through its financial and government systems by moderating the international financial system and being the world's bank.
This increases the value of the American dollar, benefiting the financial system but not necessarily others.
Trump foresaw a future where the US only provides banking services and consumes, questioning its long-term viability.
The US has offshored manufacturing jobs and now faces the loss of industries like Hollywood.
While actors may still be American, filming increasingly occurs elsewhere.

Graphs are used as tools to extract more information using math.
The demand curve represents demand in reality, and the supply curve represents supply. The market operates where these two equalize.
By using the equations of these lines, we can solve for the equilibrium point, finding equilibrium quantity and price.

A business owner selling Xboxes for $300 finds 200 people in line but only has 100 units.
Instead of selling to the first 100 and leaving the rest unhappy, the owner can raise the price.
The owner increases the price until only 100 people remain in line, ensuring everyone there values the Xbox at or above the asking price.
This maximizes profit, as some people in the original line were willing to pay more than $300.
By raising the price to $350 and then $400, the line is reduced to 100 willing buyers.

The housing market in Canada operates at equilibrium, but with extremely high prices.
There are a limited number of houses; prices must be high enough so only a certain number of people can afford them.
The population grows faster than housing supply, lengthening the line of potential buyers and increasing prices.
To own a house in Canada, one must be among the wealthier individuals who can afford the limited supply.
The market is starting to show cracks in "dog shit" products like Toronto condos (less than 600 square feet).
There's enough housing for students and individuals, but not for families.
Government projects have focused on building condos rather than houses.
Condos are down 40% from 2022 peaks, while houses remain expensive.

Buying a house is essentially an auction where people bid what they're willing to pay.
The auction system whittles down the number of interested parties until only one remains at the highest price.
Rent prices aren't exactly auctions, but they function similarly, with landlords looking at comparable properties.
Factors increasing housing prices include population growth and the amount of money people are willing to spend.
Low interest rates and government money in 2022 led to bidding wars, driving prices up significantly.

Waterloo is more expensive than Kitchener due to factors like property taxes.
Waterloo is now more expensive than Downtown Toronto.
Waterloo has a history of lucrative industries, including brewing, distillation, production, engineering, and tech (BlackBerry).
The Seagram distillers were based in Waterloo and heavily involved in prohibition.
Numerous startups and significant insurance companies (Manulife, Sun Life) contribute to the wealth in the area.
High wealth leads to expensive housing.

The goal is to use math to solve for the equilibrium, combining supply and demand equations.
The speaker asks for the equations from the previous class. 40 - 1/50p (Demand) and 5 + 1/100p (Supply).
At equilibrium, quantity supplied (QS) equals quantity demanded (QD).
In math, having three variables and only two equations would typically be unsolvable. However, economic principles clarify an equilibrium, enabling the solution to be found.

The equations are set equal to each other: $40 - \frac{1}{50}p = 5 + \frac{1}{100}p$ . To simplify, multiply by 100, resulting in $4000 - 2p = 500 + p$ .
Group like terms: $3500 = 7p$ .
Solve for p: $p = \frac{3500}{7} = 500$ . The equilibrium price is $500.
Plug the equilibrium price ($500) into either the demand or supply equation to find the equilibrium quantity.
Using the demand equation: $QD = 40 - \frac{1}{50}(500) = 40 - 10 = 30$ .
Using the supply equation: $QS = 5 + \frac{1}{100}(500) = 5 + 5 = 10$ .

Previously, the optimal price for the speaker to sell 90s was $1000. Why is the equilibrium price now $500?
The previous calculation assumed a monopoly. Now, with competition, the price is lower.
The equilibrium price maximizes total surplus, not just profit. Competitive markets lead to total allocated efficiency.

Now that we have a model, we can manipulate it to see how changes affect price and quantity.
Examples: demand shifts, quotas, declaring war (grades don't matter), Trump tariffs.
This model can predict the behavior of commodity prices.

We want to understand how changes in price and quantity affect firms' profits and consumers' happiness.
This helps governments determine whether policies are beneficial.

We want to measure how good the market is for firms, measured by profit (price minus costs).
The supply curve represents how much a firm is willing to sell something for.
It is reasonable to assume that the supply curve represents the marginal cost of production.
Under some assumptions, the supply curve is a measurement of the cost of production.
The competitive model proves that the supply curve is the aggregation of all firms' marginal cost functions.

Producer surplus is the area between the price and the supply curve.
Surplus measures welfare, the amount of happiness or well-being produced by a market operator.
In the context of the firm, the producer surplus is their profit.
Producer surplus represents the difference between the cost to produce and the selling price.

Consumer welfare is more complex to measure than firm profit.
Consumers gain happiness when they can purchase goods for less than what they are willing to pay.
The difference between a consumer's internal value and the price they actually have to pay is