Notes on Supply and Demand Lecture by Jacob Clifford

Introduction

• Purpose: To bridge the gap between introduction and application of supply and demand.
• Focus on using supply and demand, not just knowing them.
• No need to take notes initially; understand concepts first.

Demand

Demand Curve

• Represents inverse relationship between price and quantity demanded.
• Law of Demand:
  • Price increase leads to less quantity demanded.
  • Price decrease leads to more quantity demanded.

Reasons for Law of Demand

1. Substitution Effect:
   • Higher price leads consumers to buy substitutes.
   • Lower price leads consumers to switch back from substitutes.
2. Income Effect:
   • Higher price reduces purchasing power.
   • Lower price increases purchasing power.
3. Diminishing Marginal Utility:
   • More consumption leads to less satisfaction.
   • Price must fall to increase quantity demanded.

Shifters of Demand

1. Tastes and Preferences
   • E.g., demand for ice cream increases on hot days.
2. Number of Consumers
   • More consumers increase demand.
3. Price of Related Goods
   • Substitutes: Price increase in candy bars increases ice cream demand.
   • Complements: Price increase in cones decreases ice cream demand.
4. Income
   • Normal Goods: Income up, demand up.
   • Inferior Goods: Income up, demand down.
5. Expectations
   • Expectation of future price increases can increase current demand.

Supply

Supply Curve

• Positive relationship between price and quantity supplied.
• Higher price leads to more quantity supplied due to potential profits.

Shifters of Supply

1. Price of Resources
   • Higher resource prices decrease supply.
2. Technology
   • Better technology can increase supply.
3. Government Actions
   • Taxes reduce supply; subsidies increase supply.
4. Number of Sellers
   • More sellers increase supply.
5. Expectations
   • Expectation of future price increases might reduce current supply.

Equilibrium

• Market Clearing Price: Quantity demanded equals quantity supplied.
• Disequilibrium can occur with shortages or surpluses.
• In a free market, prices adjust to reach equilibrium.

Application

• Demand and supply scenarios affect price and quantity at equilibrium.
• E.g., ice cream makes you smarter increases demand; more efficient production increases supply.

Conclusion

• Only four possible shifts: demand up/down, supply up/down.
• Important to practice drawing graphs to understand shifts.
• Additional topics like price controls and elasticity not covered in detail.
• Practice is essential for mastering these concepts.

Additional Resources

• Ultimate review packet for practice.
• Economics worksheets for teachers.