Economics 101: Principles of Economics

1. Economics 101: Principles of Economics • Queries? • Don’t forget to answer the “Links & Smiles” questions in PS #1 • Read chapters 7 & 19 of Fair Play (electronic reserve)

2. Determinants of Demand • What causes the demand curve to shift? • Incomes • Normal good • Inferior good Examples? • Tastes • Prices of Substitutes and Complements • Expectations • Population • Shift in Demand vs. Change in quantity demanded • The effect of Traffic Schools on D for speeding • Movement along the D-curve for speeding ? • Shift of the D curve?

3. Supply Curve • Law of Supply • Other factor influence S and they are assumed constant along this S - curve • Market vs. Firm supply • Supply is not greater at a higher price, rather quantity supplied is greater. “Supply” typically refers to the entire curve. • Same distinction as D-curve: movement along S-curve vs. shift of S-curve Price of VCRs S $150 $130 300,000 600,000 Quantity of VCRs

4. Determinants of Supply • What causes the supply curve to shift? • Technology • Factor prices & productivity • Profitability of Alternate products • # suppliers • Expectations • Weather, Govt, Goals • Right or Left? • Higher wages? • Lower interest rates? • Higher price of electricity? • Bad weather? • More market entrants? S Price S S Quantity

5. Determinants of Demand: revisited Price • Right or Left? • Price of complement falls? • Price of substitute falls? • Income rises? • Population grows? • Price increase expected? • Tastes shift away from the good? D D D Quantity

6. Equilibrium Price & Quantity(graphically) Price of VCRs • Equilibrium price is the price at which quantity demanded = quantity supplied • Intersection of the S and D curves • If not there, market tends to move toward equilibrium • at $125 = Excess Demand • at $155 = Excess Supply • Describe the process of moving toward the equilibrium! • NB: we have a “moving target”, i.e., the equilibrium itself can be moving if forces are causing the S & D-curves to shift S $155 E* $140 $125 D 200 475 600 Quantity of VCRs

7. Equilibrium Price & Quantity(algebraically) • Find the equilibrium Price and Quantity for a market whose supply curve is P = 2+3Qs and demand curve is P = 10 - Qd. • Analytical steps • Characterize the market (g/s, decision-makers, & mkt structure) • Identify goals and constraints • Find the equilibrium (which method will you use) • What happens when things change

8. Comparative Statics Market Adjustments to Changes in Demand and Supply Shock P* Q* Increase in Demand (“leads to”) higher higher Increase in Supply  lower higher Decrease in Demand  lower lower Decrease in Supply  higher lower Examples: • Why do baby-sitters get paid more these days? • Denied Boarding Compensation • For all these transitions to equilibrium to happen, prices must be free to adjust. Sometimes they aren’t: Price ceilings and price floors.

9. Elasticity • We assume all D-curves have a downward-slope, but how steep one is depends on the commodity. • A reduction in the Pmilk may lead to a small increase in purchases, but a  in Pairline may lead to a big increase in purchases. • Price Elasticity of Demand = X,Px = % QdX / % PX • Just how sensitive is qty demanded to a change in price? •  = (Q/Q)/(P/P) = (Q/P)*(P/Q) = (1/slope)*(P/Q) • If  < -1 we say D for that good is elastic > -1 D is inelastic = -1 D is unit-elastic

10. Elasticity • Find the elasticity of a D-curve: Q = a - bP. • Properties of Price Elasticity of Demand when D-curve is linear • it is different at every point along the D-curve approaching - at vertical intercept, 0 at horizontal intercept • it is never positive (always negative, except one point) • it is inversely related to the slope of the linear D-curve • Two polar cases • slope of D-curve is much easier to calculate, so why bother with elasticity at all?