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Standard 1Understand the fundamental concepts relevant to the development of a market economySS.912.E.1.4Define supply, demand, quantity supplied, and quantity demanded; graphically illustrate situations that would cause changes in each, and demonstrate how the equilibrium price of a product is determined by the interaction of supply and demand in the market place
The Law of Demand: • The inverse relationship between price and quantity demanded; when price rises, quantity demanded falls • Quantity demanded is a number; it’s how many units of a good you bought
Why is the demand curve downward sloping? • Story from Economics is Everywhere
Today is a great day in economic research. A study of mine, written jointly with a former colleague, has been accepted for publication in a leading scholarly journal. Both he and I are very happy about it. For a professor, getting recognition for your ideas is always very gratifying and, in my profession, publication outlets form a clear hierarchy, with this one near the top. This outlet had previously published thirteen papers by my ex-colleague, but none of mine. The marginal utility of the fourteenth paper published in that journal must be less than the marginal utility of the first. If we are both rational and have the same preferences, then I should be much happier about having this study accepted for publication than he is. • Q: I have had many scholarly papers published over my thirty-eight-year career in economics, many of them in others of the very top scholarly journals in the field. What’s special about this one?
Why is the demand curve downward sloping? • Diminishing Marginal Utility • The marginal benefit you receive from an item falls as you gain more of the item • The only way to get you to buy more is to lower the price • Demonstration: eating marshmallows or bananas • Video: Cool Hand Luke
Demand is the relationship between two variables: price and quantity demanded • Changes: • (1) When price changes, quantity demanded changes but demand does NOT change • This is movement along a demand curve • (2) When something else changes, demand changes (i.e., the relationship changes) • This is movement of the entire curve
Typical demand shifters: • Consumer income • Number of consumers • Prices of substitutes and complements • Expectations • Demographic changes • Consumer preferences
The price and demand for one good can be intimately tied to demand for another good • (1) Substitute goods-used in place of each other • An increase (decrease) in price for the first good will increase (decrease) demand for the second good
(1) Substitute goods • Example: • If the price of _______ increases people will buy less _______ and more ________
Fun example of substitutions • Video: Tim Hawkins- I can only eat margarine
(2) Complement goods-usually consumed at the same time • An increase (decrease) in price for the first good will decrease (increase) demand for the second good
(2) Complement goods • Example: • If the price of ________ increases people will buy less _______ and less ______
The Law of Supply: • The positive relationship between price and quantity supplied; when price rises, quantity supplied rises • Quantity supplied is a number; it’s how many units of a good you made
Why is the supply curve upward sloping? • At a higher price, a product is usually more profitable so a firm has a stronger incentive to make more.
Price is not the only factor that determines how much a firm makes • Changes: • (1) When price changes, quantity supplied changes but supply does NOT change • This is movement along a supply curve • (2) When something else changes, supply changes (i.e., the relationship changes) • This is movement of the entire curve
Typical Supply Shifters: • Resource prices • Technology • Weather • Political conditions • Taxes • Subsidies
Even gangsters’ supply curves slope upward. In his book But He Was Good to His Mother (Jerusalem: Gefen, 2000), Robert Rockaway reports that an associate of Big Jack, a New York gangster in the early twentieth century, stated to police that Big Jack had the following price list for his services: slash on the cheek with knife, $1 to $5; shot in leg, $1 to $25; shot in arm, $5 to $25; throwing a bomb, $5 to $50, murder, $10 to $100. Clearly, the prices are higher for the more difficult tasks; and the range of prices for a particular criminal act probably reflects the ease of access to the target. Perhaps a shot in the leg costs less than one in the arm because hitting a person in the leg without causing further damage is easier than hitting someone in the arm. • Q: Draw a supply curve for criminal activities. Then show how it would shift if unemployment were low and there were many good legitimate jobs. Then show how the curve would shift if jobs were scarce.
Key points: • (1) Excess supply and excess demand are NOT unique points • (2) Equilibrium IS a unique point
If free to do so, markets tend toward an equilibrium where supply equals demand. That’s even true for the market for dating, as shown in the 1960s No. 1 hit song, “Surf City,” by Jan and Dean. They sing, “We’re going to Surf City; gonna have some fun…Two girls for every boy.” Two girls for every boy is not an equilibrium- it is a disequilibrium situation. There is a shortage of boys and a surplus of girls. Jan and Dean are going to Surf City, having been attracted by the surplus of girls. Their arrival there will reduce the size of the surplus of girls and also reduce the shortage of boys. If enough other boys follow their lead, the market for dates in Surf City will be in equilibrium- the shortage and surplus will have been removed by the action of the market as people respond to the shortage of boys by “going to Surf City.” • Q: If you have ever been to a mixer or a singles bar where there is an excess of members of one sex, why did the excess arise? What prevented the equilibrium, roughly equal numbers of men and women, from being reached?
Supply and Demand analysis • You don’t have to use graphs but it’s helpful • Use this 3 step procedure: • (1) Identify the change • (2) Determine if Supply or Demand is affected and how • (3) Draw and read graph (or reason through the change)
Only allow one variable to change at a time. • Example: Part of Doak Campbell Stadium is destroyed by locusts • (1) Fewer seats will be available • (2) Supply is affected, will decrease • (3) Shift supply left and find new equilibrium
