lecture 2: supply, demand, complements, substitutes...lecture 2: supply, demand, etc. benjamin...
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Lecture 2: Supply, Demand, Complements, SubstitutesBenjamin Graham
Office Hours: Tues 8:30-10AM, Weds 10-11AMSoS B9
Lecture 2: Supply, Demand, etc. Benjamin Graham
Tuesday, August 28, 12
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Today’s Plan
• Housekeeping• Supply and Demand• Complements and Substitutes
Lecture 2: Supply, Demand, etc. Benjamin Graham
Tuesday, August 28, 12
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Housekeeping
• Buy the 13th edition • Buy and register your clicker• Syllabus
• Homework 1 now due Weds (Sept. 12) instead of Mon (Sept. 10)• Office Hours
Lecture 2: Supply, Demand, etc. Benjamin Graham
Tuesday, August 28, 12
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Mock Reading Quiz
• Peanut butter and jelly are:• A. Complementary Goods• B. Substitutes• C. Superior Goods• D. Partner Goods• E. Welfare-maximizing Goods
Lecture 2: Supply, Demand, etc. Benjamin Graham
Tuesday, August 28, 12
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Why we’re starting with supply and demand
• As bedrock as bedrock gets• We usually talk about goods
• S&D also explains prices for labor (i.e. wages)• It even explains the value of currencies
Lecture 2: Supply, Demand, etc. Benjamin Graham
Tuesday, August 28, 12
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Demand (individual)
Lecture 2: Supply, Demand, etc. Benjamin Graham
Tuesday, August 28, 12
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Demand (market)
Lecture 2: Supply, Demand, etc. Benjamin Graham
Tuesday, August 28, 12
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Demand vs. Quantity Demanded
Lecture 2: Supply, Demand, etc. Benjamin Graham
Tuesday, August 28, 12
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Demand vs. Quantity Demanded
Lecture 2: Supply, Demand, etc. Benjamin Graham
Changes in the price of oil cause the demand curve for oil to shift, whereas changes in the fuel efficiency of cars cause a movement along the demand curve for oil.
A. TrueB. False
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Quick Question
Lecture 2: Supply, Demand, etc. Benjamin Graham
What affects the demand for automobiles?
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Supply (individual)
Lecture 2: Supply, Demand, etc. Benjamin Graham
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Supply (market)
Lecture 2: Supply, Demand, etc. Benjamin Graham
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Quick Question
Lecture 2: Supply, Demand, etc. Benjamin Graham
What affects the supply of automobiles?
Tuesday, August 28, 12
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Clicker Question
Lecture 2: Supply, Demand, etc. Benjamin Graham
If the price of automobiles went up, what would happen?
A. The supply curve would shift rightB. The supply curve would shift leftC. The quantity supplied would increaseD. The quantity supplied would decreaseE. A&CF. B & D
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Supply Meets Demand
Lecture 2: Supply, Demand, etc. Benjamin Graham
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Markets Not in Equilibrium
Lecture 2: Supply, Demand, etc. Benjamin Graham
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What Creates Surpluses and Shortages?
Lecture 2: Supply, Demand, etc. Benjamin Graham
• In the 1970s, there was a gasoline shortage in the US.
•What caused the shortage?
•What would have happened if the price controls were removed?
Write down what would have happened to supply, demand, quantity supplied, and quantity demanded.
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Demand Shock
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Supply and Demand Both Move
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Normal Goods vs. Inferior Goods
• Normal good: higher income, higher quantity demanded• Inferior Good: higher income, lower quantity demanded
• Let’s brainstorm a few of each
Lecture 2: Supply, Demand, etc. Benjamin Graham
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Complements and Substitutes
• Two goods are complements the consumption of one item increases the demand for the other• bullets and handguns
• Two goods are substitutes if the consumption of one item decreases the demand for the other.• Buses and Trains
Lecture 2: Supply, Demand, etc. Benjamin Graham
Tuesday, August 28, 12
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Clicker Question
• Right now the price of a gram of cocaine in the US is lower than it was in the 1970s (adjusted for inflation). Which of the following could explain that?• A. Supply in the US is higher now than in the 70s (i.e. our
interdiction efforts have worked poorly)• B. Demand in the US is lower now than in the 70s (i.e. DARE and
other education and treatment programs have worked well)• C. Substitutes, like meth, have increased in supply. • D. A & B• E. A & C• F. A, B & C
Lecture 2: Supply, Demand, etc. Benjamin Graham
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Group Questions
• An aid organization buys grain in the US and ships it to a village in a developing country that is experiencing a drought. • What happens to the price of grain in the area?• What happens to the price of corn in that area?• What happens to the price of grain back in the US?
• Which of the following actors gain, and who loses?• Consumers of food in the drought-stricken region• Producers of food (i.e. farmers) in the drought-stricken region• Consumers of food in the US• Producers of food in the US
Lecture 2: Supply, Demand, etc. Benjamin Graham
Tuesday, August 28, 12