Economics Lecture: Supply and Demand Overview

Introduction

• Presenter: Jacob Clifford
• Purpose: Bridge the gap between introduction and application of supply and demand.
• Advice: First understanding, then note-taking if needed.

Demand

• Demand Curve: Shows inverse relationship between price and quantity demanded.
  • As price increases, quantity demanded decreases.
  • As price decreases, quantity demanded increases.

Reasons for the Law of Demand

1. Substitution Effect:
   • Price increase leads consumers to buy substitutes (e.g., candy bars instead of ice cream).
   • Price decrease leads to consuming more of the good.
2. Income Effect:
   • Higher prices reduce purchasing power, leading to less consumption.
   • Lower prices increase purchasing power, leading to more consumption.
3. Law of Diminishing Marginal Utility:
   • More consumption results in less additional satisfaction, necessitating a price decrease to increase quantity demanded.

Shifters of Demand

• Changes in factors other than price can shift the demand curve.

1. Taste and Preferences:
   • E.g., hot weather increases demand for ice cream.
2. Number of Consumers:
   • More consumers increase demand; fewer consumers decrease it.
3. Price of Substitutes and Complements:
   • Increased price of substitutes (e.g., candy bars) increases demand for the good.
   • Increased price of complements (e.g., cones) decreases demand for the good.
4. Income:
   • Normal Goods: Higher income increases demand; lower income decreases it.
   • Inferior Goods: Higher income decreases demand; lower income increases it.
5. Expectations:
   • Future price expectations can affect current demand.

Supply

• Supply Curve: Shows positive relationship between price and quantity supplied.
  • As price increases, quantity supplied increases (due to profit incentive).
  • As price decreases, quantity supplied decreases.

Shifters of Supply

• Changes in factors other than price can shift the supply curve.

1. Price of Resources or Inputs:
   • Increase in input costs decreases supply; a decrease increases supply.
2. Technology:
   • Technological improvements increase supply.
3. Government Actions:
   • Taxes decrease supply; subsidies increase supply. Regulations may affect supply.
4. Number of Sellers:
   • More sellers increase supply; fewer sellers decrease it.
5. Expectations:
   • Future price expectations can affect current supply.

Equilibrium

• Market Equilibrium: Point where quantity demanded equals quantity supplied.
• Disequilibrium:
  • Shortage: Quantity demanded exceeds quantity supplied at a low price.
  • Surplus: Quantity supplied exceeds quantity demanded at a high price.
  • Prices adjust to eliminate shortages and surpluses, returning to equilibrium.

Application and Examples

• Example 1: Study shows ice cream makes you smarter.
  • Demand increases → Price and quantity increase.
• Example 2: New machine makes ice cream cheaper.
  • Supply increases → Price decreases, quantity increases.
• Example 3: Increase in milk price.
  • Supply decreases → Price increases, quantity decreases.

Conclusion

• Four Main Cases: Demand up, demand down, supply up, supply down.
• Graphing Advice: In case of confusion, draw the graph.
• Further Study:
  • Explore price controls (ceilings and floors) and double shifts.
  • Macro: Apply concepts to the entire economy.
  • Micro: Study elasticity.

Practice and Resources

• Practice: Essential for mastering concepts.
• Resources: Ultimate review packet, economics worksheets.

Closing

• Call to Action: Practice, explore more resources, and stay engaged in learning economics.