1. ECON 100 Lecture 11
Wednesday, October 22

2. Announcements
Course webpage
Class participation records are updated. Announcements section
Problem Set #4 is posted. Many midterm #1 questions will be similar to PS#4 questions! Assignments section
I posted the detailed answers to the difficult in-class exercise (the small t-shirt factory and its supply schedule and supply curve) Lecture Notes section.
Midterm Exam #1-Spring 2014 is posted (The answer key will be posted later) Announcements section
Problem sets are an important resource for exam preparation.
Problem sets are not graded.

3. Problem Session / KOLT tutors
PS1: FRIDAY B4 (at 13:00) in room SOS B21 PS2: FRIDAY B5 (at 14:30) in room SOS B08 No attendance is taken at the PSs.
Econ 100 KOLT tutors: Sonkurt, Jülide, and Ilgaz

4. Please turn off your phones.
Class participation
You must attend the section where you are registered.
Your in-class exercise is your participation record. I collect them at the end of the lecture.
Please turn off your phones.

5. Before the lecture

6. A short reading on “markets”: Thing 1 (or Chapter 1) from the book
Thing 4 The washing machine has changed the world more than the internet has ....

7. Now the lecture

8. We discussed the concept of DEMAND and the concept of SUPPLY.
So far
We discussed
the concept of DEMAND
and the concept of SUPPLY.

9. How much do you remember?
Self test
How much do you remember?

10. In class activity #1 The demand and supply of bicycles
For each event on the next slide, determine which curve is affected (supply or demand), and what direction is it shifted (increase or decrease)?

11. a. The price of cars increases. (Cars and bicycles substitute goods.)
For each event (there will be 5 in total), determine which curve is affected (supply or demand for bicycles), and what direction is it shifted (is it a decrease or an increase)?
a. The price of cars increases. (Cars and bicycles substitute goods.)
b. Consumers' incomes decrease. (Bicycles are a normal good.)
c. The price of steel used to make bicycle frames increases.
d. An environmental movement shifts tastes toward bicycling.
e. A technological advance in the manufacture of bicycles occurs.
SAMPLE ANSWERS
Supply shifts left: supply decreases.
???
No attempt for c, d, and e.

12. For each event (there will be 5 in total), determine which curve is affected (supply or demand for bicycles), and what direction is it shifted (is it a decrease or an increase)?
a. The price of cars increases. (Cars and bicycles substitute goods.) b. Consumers' incomes decrease. (Bicycles are a normal good.) c. The price of steel used to make bicycle frames increases. d. An environmental movement shifts tastes toward bicycling. e. A technological advance in the manufacture of bicycles occurs.

13. The equilibrium in the competitive market

14. Competitive markets
A market is a group of buyers and sellers of a particular good or service. A perfectly competitive market is where Individual buyers and sellers have no impact on the market price and all sellers produce the same product.

15. The equilibrium: Demand = Supply

16. Supply, demand, and market equilibrium
Demand Schedule
Supply Schedule
At P = $2.00, quantity demanded equals quantity supplied! 36

17. The equilibrium in the competitive market
Equilibrium : The price has reached the level where the quantity supplied equals the quantity demanded. 36

18. The equilibrium in the competitive market
The equilibrium price is the price at which the quantity supplied equals the quantity demanded. The equilibrium quantity is the quantity supplied and the quantity demanded at the equilibrium price. 36

19. Price of
Ice-Cream
Demand
Supply
Equilibrium price
$2.00
Equilibrium
quantity 1 2 3 4 5 6 7 8 9 10 11 12 13
Quantity of Ice-Cream

20. Now with the demand and supply equations
Demand Schedule
Supply Schedule
Demand: QD (P) = 19 – 6P, (if P ≤ 19/6)
Supply: QS (P) = –5 + 6P, (if P ≥ 5/6)

21. Let’s compute the equilibrium price and quantity.
We will compute the equilibrium price and quantity using the market demand and market supply quations
The equation for the market demand is
QD(P) = 19 – 6P, if P ≤ 19/6, QD = 0 if P > 19/6
The equation for the market supply is
QS(P) = –5 + 6P, if P ≥ 5/6, QS = 0 if P < 5/6
Let’s compute the equilibrium price and quantity.
QD(P) = QS(P) (this means Q demanded equals Q supplied)
19 – 6P = –5 + 6P
Solve for P: 24 = 12P  Pe = 2
To compute the equilibrium quantity, we let P = 2 in the demand equation: Qe = 19 – 6x2 = 7. (Or let P = 2 in the supply equation.)

22. Your turn now

23. Question #2 There are four identical buyers and three identical sellers. Each individual buyer has the same demand schedule as shown in the table below. Each individual seller has the same supply schedule as shown in the table below.
INDIVIDUAL
DEMAND
SUPPLY
Price
Quantity demanded
Quantity supplied 1 5 2 4 3 6 8

24. Question #2 A competitive market with four buyers, and three sellers
What is the equilibrium price?
What is the equilibrium quantity?
Is there a shortage or a surplus when price is P = 2? How many units?
Is there a shortage or a surplus when price is P = 4? How many units?

25. A few words on the role of prices: The price mechanism at work

26. Equilibrium: The price mechanism at work
The price adjusts to bring the quantity supplied and the quantity demanded into balance. The price is the tool through which the market is cleared.

27. The price mechanism works as follows:
If the quantity demanded > the quantity supplied then the price will rise until the excess demand is eliminated.

28. Figure 9 Markets Not in Equilibrium
Excess Demand, shortage
Price of
Ice-Cream
Supply
Cone
Demand
$2.00 7
1.50 10 4
Shortage
Quantity of
Quantity
supplied
Quantity
demanded
Ice-Cream
Cones
Copyright©2003 Southwestern/Thomson Learning

29. The price mechanism works PART II
If the quantity demanded < the quantity supplied then the price will decrease until the excess supply is eliminated.

30. Excess Supply, surplus Price of Ice-Cream Supply Cone Surplus Demand
$2.50 10 4
2.00 7
Quantity of
Quantity
demanded
Quantity
supplied
Ice-Cream
Cones
Copyright©2003 Southwestern/Thomson Learning

31. A few words on the meaning of the market equilibrium
Equilibrium means quantity demanded = quantity supplied

32. A few words …
At the equilibrium price every individual buyer can buy as much as they want. There is no shortage: There is no buyer who says: “I want to buy more and I am willing to pay the market price, but I can’t find any seller.”

33. A few words …
At the equilibrium price every seller can sell as much as they want. There is no surplus (unsold goods). There is no seller who says: “I want to sell more of the good at the existing market price, but I can’t find any buyers.”

34. Now something really important

35. Analyzing Changes in Equilibrium: The three steps method
0. Something (an event) happens that will effect the supply or demand or both. e.g., a meteor hits the earth. 45

36. Analyzing Changes in Equilibrium: The three steps method
Decide whether the event shifts the supply curve, or the demand curve, or both.
Decide whether the curve(s) shift(s) to the left or to the right.
Use the supply-and-demand diagram to see how the shift affects the equilibrium price and the equilibrium quantity. (The equilibrium quantity increases/decreases; The equilibrium price increases/decreases) 45

37. This method is called “the comparative statics analysis”
This method is called “the comparative statics analysis”. Economist use this method to analyze how the equilibrium price and equilibrium quantity are affected by changes in the demand and supply conditions.

38. An example: The ice-cream market

39. Figure 10 How an Increase in Demand Affects the Equilibrium
Research published in JAMA finds that regular consumption of ice-cream reduces the risk of cardiovascular diseases.
Price of
Ice-Cream
Cone D D
Supply
New equilibrium
$2.50 10
resulting
in a higher
price . . .
2.00 7
Initial
equilibrium
Excess demand at P = 2 12
Quantity of 3.
. . .
and a higher
quantity produced and sold.
Ice-Cream Cones
Copyright©2003 Southwestern/Thomson Learning

40. This is what prices do: Prices communicate information
Demand rises: people want more ice-cream.
There must be more production to meet the higher demand.
How can you convince/make the sellers supply more?
They are self interested, they need higher prices to work harder and supply more.
So.
The price must rise to create more supply (raise the quantity supplied)
The “demand-induced-higher-price” is a message from the buyers to the sellers: We want more ice-cream.

41. This is how the sellers learn the relative desirability (consumption value, benefit to consumers etc) of ice-cream: they learn it through its price.

42. Prices act as signals that guide the allocation of scarce resources in a market economy.

43. One more example
A supply shift

44. Figure 11 How a Decrease in Supply Affects the Equilibrium
Price of
There is an increase in the
price of sugar (a major input
In the production of ice cream)
Ice-Cream
Cone
Excess demand, shortage S2 S1
Demand
New
equilibrium
$2.50 4
resulting
in a higher
price of ice
cream . . .
Initial equilibrium
2.00 7
Quantity of 3.
. . .
and a lower
quantity produced and sold.
Ice-Cream Cones
Copyright©2003 Southwestern/Thomson Learning

45. Your turn now

46. Some questions from Exercise Set #4

47. 12. Which of the four graphs represents the market for peanut butter
after a major hurricane hits the peanut-growing parts of the country?
a. A
b. B
c. C
d. D
To answer this, think: Which curve is affected and what is the direction of the shift?

48. 13. Which of the four graphs represents the market for winter coats
as we progress from winter to spring?
a. A
b. B
c. C
d. D
Which curve is affected and what is the direction of the shift?

49. This one is more difficult!

50. 20. The events shown in graph A and graph C happen at the same time
20. The events shown in graph A and graph C happen at the same time. The definitive result of the two events is
a. an increase in the equilibrium quantity.
b. an increase in the equilibrium price.
c. an instance in which the law of demand fails to hold.
d. all of the above are correct

51. What happens to the equilibrium price and quantity of bicycles if the consumers' incomes decrease and bicycles are an inferior good. Please draw a graph!

52. This one is also difficult!

53. Question #3: from the exercise set #4
What happens to the equilibrium price and quantity in the fresh seafood market if both events occur at the same time?
A scientific report finds that fish contains mercury, which is toxic to humans.
The price of diesel fuel falls significantly.

54. End of the lecture