Transcription
How's it class? So, this chapter is where we start the supply and demand section. This is chapter three, and this is, like I mentioned in one of the earlier videos, what I considered one of the gold star ideas in economics. I mentioned that I thought there were three primarily that we can start discussing. The first one is opportunity cost, the second one is supply and demand, and the third one summarizes simply: marginal revenue equals to marginal cost, or marginal benefit equals to marginal cost, and that is our marginal optimization solution.
So, getting back to supply and demand, we're going to start off with the concept of markets. Market share arrangements that individuals have for exchanging with one another. And markets represent the interaction of the buyers and sellers, and the markets is where we set the prices we pay and receive. So, we're going to start off with one side, the side that we're most comfortable with, the demand side. So, the general idea of demand, it's going to be a schedule of how much of a good or service people will purchase at any price during a specified time period, *ceteris paribus*.
So, when it says it's a schedule, it's a bunch of solutions. It's not one individual point. And when I say point, it's we're looking at the price and quantity, the two variables that will be plotted on the axes of a demand or a supply schedule. So, the law of demand simply states that quantity demanded is inversely or negatively related to price, *ceteris paribus*. So, *ceteris paribus* again, meaning holding all other variables constant. So, holding all other variables constant, quantity demanded is going to have a negative relationship with price. So, as one goes up, the other goes down. As one goes down, the other goes up. They're going to move in opposite directions.
So, when we say *ceteris paribus*, we're talking about holding variables constantly. What variables are we holding constant? Things like income, things like price of other goods, things like expectations, and etc. Because those types of things can matter in the real world. So, we want to isolate the isolate the variable, isolate the the the the change in question, and not have too many things going on there. So, if I want to see what happens to the change in the price of a quarter pounder with cheese at McDonald's, if it goes down in price, are more people going to want to purchase it? Well, if we don't *ceteris*, for example, holding price of other goods constant, such as Subway sandwiches, which is what we consider a substitute good for it for a hamburger, then that would confound the issue, that would confuse the issue. So, if the price of quarter pounder with cheese goes down, people would expect that to be consumed more. However, if the price of other goods that are related, such as Subway sandwiches, also go down, it's hard to determine what will actually happen. So, when we *ceteris paribus*, we're really trying to isolate and see what one effect will do. But in the real world, we usually have multiple situations that we have to consider.
So, looking at the demand schedule, that uh, it's gonna be a table relating prices to quantity demanded. Those are our two variables. And in this example, we're going to be looking at individual demand versus market demand. So, here we see individual one in our two individual example. Like I said, we're going to have two individuals just to kind of keep things simple, because if we have more, then we're going to have to be adding a lot more just to make our point. So, simply two individuals in our entire economy that demand plate lunches. So, individual one, we see individual one's demand schedule. So, at their various prices, individual one will have a different quantity demanded for each. So, at eight dollars, maybe in a given time frame, we'll say, let's just say a month, uh, individual one will want 12 plate lunches. But when the price goes down, *ceteris paribus*, holding all the other variables constant, then plate lunches might become a more suitable option for meals. And if the price continues to go down from seven to six to five to four, then the quantity demanded will go up from 13 to 14 to 14, 15, and 16 and so forth.
So, with this, we can go ahead and plot individual one's demand for plate lunches. So, here we see at eight and twelve, we have that point. But when the price goes down to seven dollars, then this individual will actually want 13. So, here we have another solution. And as the price continues to drop, we can see we're going to have another solution. And so, this is individual one's quantity demanded, or demand schedule rather, for plate lunches. And it's this downward sloping demand curve. And likewise, individual two will have their demand for plate lunches as well. And so, the numbers are a little different. So, eight dollars, individual two will want ten plate lunches. But as the price goes down to seven, then to six, to five, to four, you can also see that they will also, what we say, substitute their consumption towards the cheaper plate lunch, the cheaper good, relative to other things such as Subway sandwiches or or other types of options out there that one could have for a lunch. So, we could go ahead and also plot individual two's demand schedule as well. So, we have at eight and ten dollars, we have a point. At seven and eleven, six and twelve, five and thirteen, four and fourteen. And there we have it, the demand for plate lunch for individual two.
So, we have market demand, which is where we sum all the individual demand curves, what we say horizontally. And so, this is why we only have two individuals, because I didn't want to do three, four, or fifty, or a hundred. But here we have individual one and individual two, and together they make up market demand. So, we have the quantity one and quantity two, and then this is going to be the market total quantity. And so, essentially, what we could do is we could take the two demand curves that we have, eight, seven, six, five, four, price, quantity, price, quantity, eight, seven, six, five, four, ten, eleven, twelve, thirteen, fourteen for our individual one. And then twelve, thirteen, fourteen, fifteen, sixteen for individual two. Then we have these demand curves. Add these two up. Then what we're gonna get is we're gonna get market demand curve, price, quantity, eight, seven, six, five, four, twenty-two, twenty-four, twenty-six, twenty-eight, and thirty. And there we get our market demand curve, price, quantity.
One thing to note is that price and quantity are actually on the opposite axes of what we're generally used to from math concepts. Our independent variable in math is generally on our horizontal, our x-axis. However, price in our supply and demand examples in economics classes is our independent variable. But if you notice now, we put our independent variable on our vertical axis. Now, I know in the past, some students, uh, maybe who are very devoted to math concepts, they sometimes almost refuse to put the price on the vertical axis. I am requiring you guys to follow the general economic conventional standards of putting price on the vertical axis. So, make sure you do that if you are asked to generate a market demand curve or any type any type of supply and demand curve for a quiz or an exam or something that you have to draw out and turn in. Please make sure you conform to this: price on the vertical, quantity on the horizontal.
So, here you see our market demand curve, uh, with the points picked out. And again, we just connect the dots, and there we have our demand curve for the marketplace, where we horizontally summed the quantities from our individual demand curves. Fortunately, we only had two individuals in our marketplace, made it simple. Now, I want us to pause and consider a little bit what this demand curve is here to tell us. This demand curve tells us at what price, what the quantity demanded will be. At eight dollars, it'll be 22 demanded. At seven dollars, it'll be 24. So, we can say, well, what happens then when the price goes down from seven to six dollars? The demand curve tells us exactly what's supposed to happen. So, we went from 7 and a quantity of 24 down to 6 and a quantity of 26. So, someone says the price of plate lunches went down from seven to six, the demand curve doesn't have to do anything. It just sits there and tells us what the new solution is. So, anytime there's a change in a good's own price, so in this case, plate lunches' own price changes from seven to six dollars, the demand curve, sitting as it is, tells us what happens. We can say the quantity demanded increased. What happens if the price goes down from six to five dollars? Then the quantity demanded increases. That's what it's meant to do.
But think about a situation where we said, what happens if, like I mentioned, the price of, if we talk about plate lunches, what happens when the price of a Subway sandwich changes? Where do we see that Subway sandwich factor in on this diagram? We don't. We only see two variables, we only see price and quantity. So, that's a situation that now we have to account for in other ways, because the demand curve, sitting as it does, does not tell us what occurs. So, when we talk about this, we're talking about shifts in demand. A shift in demand is when the curve actually moves, because sitting as it does doesn't account for the change in variable that we're trying to analyze. When the good's own price, when a plate lunch price changes, yeah, yeah, the demand curve can sit exactly where it does and tells us what it's supposed to. But when the price of Subway sandwiches changes, it's not in there.
So, let's look at the situation of shifts in demand. This is when we relax those *ceteris paribus* issues, such as income, taste and preferences, and expectations, and so forth. So, scenario here, where we looked at the government pays for half of all students' plate lunches. Now, the government pays for half of all student plate lunches. The cost of plate lunches, or the cost that they're being the the price that they're being sold for, doesn't change. It's just that half the cost is being subsidized, for example, by the government. So, in other words, students pay a lower price. So, to them, it's no longer, let's just say, eight dollars, and now it's four dollars. So, when the government pays for half of the plate lunch cost, when we consider a shift in the demand curve, one way you can think about it is at the same price, what happens? At the same price, so if the price of a plate lunch happens to be six dollars, and the government makes it cheaper for students because they're paying for half of it, are students going to eat more or less? Well, the price is still six dollars, but to the students, it's less. So, in a sense, at six dollars, at the same price, students are going to want more. So, instead of 26 being consumed, maybe they're going to want 30. And that's one of the important things to kind of keep in mind. Notice how it's, we're pegging the price at six, whatever the price happens to be, we're pegging it at where we're pegging it at six, and at the same price, are they going to want more or less? And that's one of the general methods of how you're going to determine whether or not a curve shifts to the right or to the left. You're going to ask yourself, at the same price, are people going to want more? Are they going to want less?
So, another situation, suppose eating plate lunches, it's determined by the FDA that they cause sudden blindness. So, at six and 26, the original D1, are people going to want more or less at six dollars? Well, if it causes sudden blindness, at six dollars, people are going to want less. So, that, for example, goes down to 24. So, at six dollars, we have a new point, six and 24. And that's how we choose where D3 goes. And so, it shifts to the left. That's a shift in demand curve. Another one, when demand increases, the quantity demanded will be greater at each price. So, not just six, we can look at every price on the demand. When demand shifts, at six and at five dollars, the quantity demanded will be greater. Okay. When demand decreases, the opposite occurs. The quantity demanded will be lower at each price. Okay.
So, when we're thinking about what shifts demand specifically, you can classify things into five determinants of demand. So, if a good's own price is not changing, then the change will come under one of these five following determinants. The first one will be income. Now, income, as you make more money or less money, it really depends on what type of good we're talking about. So, if you got a problem that says your income doubled, what happens to the quantity demanded of, or what happens to the demand curve, which way does it shift for this good? Well, you have to ask yourself, well, what type of good is it? So, it's the second step for the determinant of demand of income. You need to ask yourself, well, is it a normal good or is it an inferior good? A normal good is a good for which demand increases as income rises. You make more, you want more of it. An inferior good, now, the word inferior does not really necessarily reflect anything about quality. It might be, in the palace of truth, the most quality product for the money out there. But it's all maybe about kind of taste and preferences. If people don't want it, then it's an inferior good if they make more. So, goods for which demand decreases as income rises.
So, another determinant of demand is taste and preferences. Uh, that's simply, it's a lot pretty easy. We can say something that people, uh, people all of a sudden desire things like maybe fresh sushi or something like that, and you know that'll change demand, uh, shifted to left or right depending on how the situation is formed. Uh, the third one is the price of related goods, like I mentioned with the Subway sandwiches and and and plate lunches and quarter pounder with cheese. But just like the first one, where income had to consider normal goods versus inferior goods, the related good has to be determined: is it a complement good or a substitute good? Complement goods are goods that are generally consumed together. So, things like coffee and cream, coffee and sugar, uh, sushi and wasabi, or sushi and soy sauce, or pizza and beer, things like that. Substitutes, on the other hand, are goods that are consumed instead of each other. So, people might have for a hot caffeinated beverage, they might have coffee, or they might have tea. They generally don't consume them together. Another other substitutes are things like Coke and Pepsi, plate lunches and Subway sandwiches, or hamburgers, any, for example. And so, when the price of one good changes, how does it change the demand for another good? And then the fourth, uh, determinant of demand would be expectations. And expectations, uh, could be things about future prices, it could be about one's future income, and it could be expectations about future product availability. Now, expectations is sometimes tricky for students because they sometimes forget to think about things about expectations of the future and how it affects the demand today. What they do is they talk about the expectation of a price change in the future, and they say, well, in the future, this is going to happen, demand will shift to the left, or demand will shift to the right. Uh, but that's not what we're looking at. We're looking at how it affects, uh, demand today. And then the final one would be the market size, or the number of buyers. So, in our market size that we started with, our example, we only had two buyers. If we had two more buyers for plate lunches, then that's going to shift that market demand curve to the right, and that'll be reflected in higher numbers on the horizontal axis, because we horizontally sum those schedules. Okay.
So, taking a look at some examples, determines the demand for a normal good increases in income increases. Demand, on the other hand, a decrease in income decreases demand. They're going to have that effect for a normal good. And then inferior good. Normal good might be things like steak dinners, lobster dinners. But an inferior good might be considered things like Spam musubi, or something like that, where it's, you know, quick and easy, cheap, or ramen noodles. That's another typical inferior good, instant ramen noodles. Particularly as people make more money, they tend to want less of it. But what happens if you make less money? Then you're on a tighter budget, and something like instant ramen noodles looks good. So, when you make less money, the decrease in income will increase demand for ramen noodles. On the other hand, if you have an increase in income, then the demand for ramen noodles will decrease. You're probably going to substitute away from away from instant ramen, maybe to normal ramen noodles, or actually maybe to a high quality sushi and sashimi and whatnot. Taste and preferences, suppose the FDA announces cigarettes are healthy. Well, then the demand for cigarettes, at the same price, people will want more cigarettes, so demand would shift to the right. On the other hand, if the FDA approves cigarettes cause spontaneous and uncontrollable flatulence in people, then at the same price, people will want less. And then price of related goods for substitutes, for example, looking at sandwiches and plate lunches. If the price of sandwiches increases, then people will have less desire for sandwiches. And take a look at the horizontal axis here, we're looking at plate lunch, that's our good in question. So, the price of sandwiches increases, which is a related good to our plate lunches. The demand for plate lunch increases because people will substitute their consumption away from sandwiches, the higher priced sandwiches, toward the now relatively lower priced plate lunches. And price of sandwiches decrease, the demand for plate lunches decreases. This is for substitutes. Complement goods, on the other hand, looking at coffee and sweetener. Uh, if price of coffee decreases, well, what happens when a price of something like Starbucks coffee, for example, goes down? Are people going to want to drink more or less coffee? Probably more coffee. Look at the horizontal axis, this is the market for sweetener. So, people are going to want more coffee, they're going to need more sweetener to go for to go with it. So, demand for sweetener will increase. Okay. Expectations, uh, expectations of a higher income or of a future price increase increases demand for normal goods. Okay, actually, we need to be clear about that. Expectations of a higher income or future price increase increases demand, whereas expectations of a lower income, people curb their consumption desires and demand shifts to the left, or a future price decrease decreases demand today. That's that's what uh, where the uh, mix-up can be. Expectations of a lower income, uh, people are going to pull back today and decrease demand. Population, increase in the population increases demand, decreases decreases demand. Okay.
So, we need to be very clear. What we kind of mentioned earlier is that there's a very big difference, especially in our language in the class, of a change in demand versus a change in quantity demanded. A change in a non-price determinant, such as income, taste and preferences, price of related goods, expectations, number of buyers in the marketplace, will lead to a change in demand. That's a shift in the demand curve, and that is a movement of the curve. Changes in, however, in red, it says a change in a good's own price leads to a change in the quantity demanded. That's where the curve doesn't move. It just stays where it is, and it's a movement on the curve. So, you have to be careful of your language. This is where students take it for granted a little bit, and if they're writing a a short answer with a with in sentences, and they oftentimes misuse the concept of change in demand versus change in quantity demanded, or if I'm talking after class, uh, with a student, or now it would be in Zoom or whatever, uh, that's where they would misuse. They might say change in quantity, they might say change in demand when they actually meant a change in quantity demanded. Now, you have to be cautious because we will be looking for that. I mean, that's just a general economic class thing, whichever school you go to. Okay. So, there's that movement along, it sits where it is, it's a change in the good's own price, as opposed to a movement along it.
So, now all these ideas that we built in terms of the mechanics of demand, it's going to be very similar to the supply. Just the theory and reasoning behind certain things like movements of our movements along the supply curve. Those, uh, especially of the supply curve, will be different. But supply, essentially, the amount of a product or service that firms are willing to sell at alternative prices, *ceteris paribus*. So, there's the law of supply. The price of a product or service and the quantity supplied are directly or positively related, *ceteris paribus*. So, again, very similar to demand. I'm not going to linger on it too much. The supply schedule relating individual supply relative to market supply. So, the supply for plate lunches. This can be tricky, actually, for some first-time econ students, because they live their lives thinking like a consumer, like a demander. They don't have much experience oftentimes on the business side of things. So, to them, they have a knee-jerk reaction that high prices are bad, low prices are good. That's a very common reflexive reaction for a student who's taking economics for the first time. But when you think about supply, now the opposite is true. High price for a good is a good thing, whereas the low prices for your good is not necessarily as good, or it's not good, because you'd rather be able to sell your pr your product at a higher price. So, individual one would actually be firm one. So, actually, that should change the firm one. The supply for plate lunches. And if you notice, let's start at the bottom, at four dollars on the price, going up to five, to six, to seven, to eight. If you go up in price, you can see that the firm is willing to increase the supply, quantity supplied of plate lunches. Why? Because as the price goes up, this is an important concept, the opportunity cost of not supplying a plate lunch increases. As the price goes up for their good, the opportunity cost of not supplying the plate lunch increases. Therefore, they will supply more plate lunches. So, therefore, you have that positive or upward sloping relationship. So, here we have four and twelve at the bottom, then going up to five dollars, five and thirteen, six and fourteen, seven and fifteen, and eight and sixteen. And there we have our upward sloping supply for firm number one. Okay. And likewise, we have for firm number two, the supply for plate lunches. And the same idea goes, as the price increases from four to five to six, the opportunity cost of not producing one increases, so they will produce more. And so, we can go ahead and plot the same way we did, and we'd still have that upward sloping supply. And just like demand curve, we have our two firms, firm one and firm two, and the quantities that they have with respect at the respective prices. And we would horizontally sum those values in red. So, we have here 14 and 16 at eight dollars, and that equals to 30. And then 13 and 15, that's 28. 12 and 14, and 26. And here's our price schedule. So, we can go ahead and plot it as well. So, going on to the next slide, then we can see then that four and 22, blah, blah, blah, up, up, up. Then we have our upward sloping supply. That's our market supply curve.
So, just like demand, we have shifts in supply, non-price determinants. Whereas a movement along the supply curve is when the good's own price changes. So, the scenario here represents a shift in a non-price determinant, which means the supply curve shifts. A new machine technology reduces the cost of producing a plate lunch by 50%. So, *ceteris paribus*, holding all the variables constant, such as the actual cost of the plate lunch that you're selling, the price of the plate lunch that you're selling, it stays the same, eight dollars for a plate lunch, let's just say. But the cost of producing the plate lunch just went down to the firm. So, is the firm happy or sad in that case? The firm is happier. They're playing less cost to get the same revenue. So, at the same price, they're going to want to produce more. So, here we have the supply curve. I said eight, but it's six dollars. Let's say they're producing 26. And at the same price, are they going to want to produce more when the costs for them go down? In that case, at the same price, they're going to produce more plate lunches. Okay. And on the other hand, if costs increase, the supply decreases. Okay. And same idea, when it shifts, when the supply increases, the quantity supplied will be greater at each price. So, supply increase, at six and seven, and at five and four and eight, the quantity supplied will be greater. Okay. And vice versa when it shifts to the left.
So, the determinants of supply, we have cost of inputs, we have technology and productivity, taxes and subsidies, price expectations, and number of firms in the industry. Cost of inputs, uh, raw inputs that go into it. So, for example, for a plate lunch, that would be your chicken, your rice, your styrofoam plates, your plastic forks, things like that. Uh, technology and productivity, I think that that kind of stands on its own. Taxes and subsidies. Taxes, where the government takes away from you for every plate lunch that you sell, essentially lowering your revenue that you receive when you sell one. On the other hand, that, so I think taxes is no problem. But subsidies sometimes confuse students if they're not familiar. Subsidies are reverse taxes, reverse taxes. So, when the government wants to encourage an activity, a supply of inactivity, then they would substitute subsidize it. And, uh, so a firm, if they sell, if they sell plate lunches at six dollars, and the government says, you know what, we're gonna give you a subsidy of two dollars for every plate lunch that you sell, they're gonna wanna sell more plate lunches at six dollars because they're getting more money because of the government subsidizing. So, anyway, then price expectations and number of firms in the industry. So, cost of inputs, a decrease in the cost increases the supply curve, and vice versa, uh, increase decreases it. Technology and productivity, I think that makes sense. Improvements in technology increase supply, decreases in productivity decrease supply. Taxes and subsidies, a decrease in taxes, where the government takes less, uh, for of each of money from you for each plate lunch that you sell, you're going to increase supply because now you keep more money. So, the opportunity cost of not producing a plate lunch went up, so you will produce more. Uh, whereas an increase in taxes or decrease in subsidies decreases supply. Okay. Price expectations. Expectations of lower prices tomorrow, as a firm, you can think about this way. Remember, lower prices don't go with your consumer gut reaction that low prices are good. To a firm, low prices of your good or service is not good. So, you're going to want to increase supply today. Why will you increase supply today? Because you want to capture the higher prices that you can get for the prices today, instead of selling the same product, our same service, for less in the future. So, today you're going to want to sell as much as you can, so supply increases. As opposed to expectations of a higher price tomorrow, decreases supply today because you're going to hold on to your supply so you can sell it at the higher price in the future. And the number of firms in the industry, that's the whole idea of adding firms and horizontally summing their curves, or a decrease in firms shifts it to the left. And again, the same idea of a change in supply versus change in quantity supplied. A change in one or more of the non-price determinants will lead to a change in supply, which is a movement of the curve. Whereas a change in a good's own price leads to a change in quantity supplied, and this is a movement on the curve.
So, looking at the supply and demand schedule, putting demand and supply together. We have market demand, we have market supply. Prices are going to be that constant scale of eight to four. But, uh, taking the demand and supply, we can see that they're moving in the opposite directions relative to the price. Okay. And so, we can put those together. There's our supply curve, representing the supply schedule. There's a demand curve, the consumer side, representing the demand schedule. Okay. And then we're going to talk a little bit about disequilibrium, a point where we are not in equilibrium, where things are a little, uh, off based on what the market will end up with if left alone. So, we're going to choose a price of four dollars, which is a low price. Uh, a price of four dollars, we're going to see a shortage of plate lunches. So, looking at four in red on the vertical axis, you can see point A and point B. Point A is the solution that we get from the firms. At four dollars, they're not really excited about selling plate lunches, so they're gonna provide 22. But at four dollars, consumers love this low price plate lunches, and they're going to want a lot, 30, it looks like. So, this is a shortage. We're going to have 30 demanded and 22 supplied. There's going to be a shortage of eight plate lunches. So, with this shortage, the consumers who are willing to pay more are going to bid up the price, and that's going to put upward pressure on the price of four dollars, and it's gonna rise, and it's gonna continue to rise until quantity supplied, gotten from the red curve, equals the quantity demanded, gotten by the blue curve. And you can probably see on the vertical axis, that's going to be at six dollars.
Now, on the other hand, at a really high price, eight dollars, consumers are not really thrilled about a high price plate lunches when they can go for a five dollar foot long at Subway or whatever. So, the quantity demanded of plate lunches will be low, looks like at about 22. But eight dollars, firms like that. They're happy to receive higher prices, and they're willing to crank out more. But there's going to be excess supplied, uh, of plate lunches. Therefore, there's going to be a surplus. And it looks like there's going to be 30 plate lunches supplied, based on the horizontal axis, and that point on the red, a point C and point D. This looks like there's going to be 22 demanded. So, the difference between 30 and 22, there's going to be a surplus of eight plate lunches. Spoilage, definitely an issue for plate lunches. So, those plate lunches sitting on the shelf or the counter rather, being unsold, firms are going to lower the price until quantity supplied equals quantity demanded. So, there will be downward pressure until we hit that point of quantity supplied equals quantity demanded. And that seems to be at six dollars. And that is our equilibrium, also known as our market clearing price. So, that's how we reach equilibrium when price is not at equilibrium. Again, equilibrium when quantity supplied equals quantity demanded, our particular price, also known as the market clearing price. Now, we discuss shortages in that diagram. Shortages is when quantity demanded is greater than quantity supplied. It exists at any price below the equilibrium price. And remember, shortage from chapter, I think one, is not the same as scarcity. On the other hand, there's a surplus when the price, when quantity supplied is greater than quantity demanded, and it exists at any price above the equilibrium price. Okay.
So, for those who are utilizing the videos, I hope this helped. I hope you were able to, uh, get a lot out of it. Uh, I hope the dynamic study modules are helpful. That's supposed to help these lectures go down much easier with a lot less, maybe note-taking or going back and forth and stopping and and reviewing, uh, old portions and so forth. Um, anyway, um, hope this helped. And if you have any questions, please feel free to contact us. Uh, stay safe and stay healthy, and I look forward to talking to you guys soon. Aloha.