Lecture 2: Supply, Demand, Complements, Substitutes

Joshua TuynmanOffice Hours: Monday 1:30-3:00 Tuesday 9-10:30Office Location: VKC B42G (under the stairs at VKC library entrance)

 

Lecture 2: Supply, Demand, etc. Benjamin Graham

Today’s Plan

• Supply and Demand• Complements and Substitutes

Lecture 2: Supply, Demand, etc. Benjamin Graham

Housekeeping

• Buy the 13th edition • Buy and register your clicker• Syllabus

– Homework 1 now due Weds (Sept. 1 • Office Hours for Josh

– Monday 1:30-3:00, Tuesday 9-10:30– VKC B42G (under the stairs at VKC library entrance)

Lecture 2: Supply, Demand, etc. Benjamin Graham

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

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

Demand (individual)

Lecture 2: Supply, Demand, etc. Benjamin Graham

Demand (market)

Lecture 2: Supply, Demand, etc. Benjamin Graham

Market Demand For Sodas at Coachella

Lecture 2: Supply, Demand, etc. Benjamin Graham

-

100,000

200,000

300,000

400,000

500,000

600,000

700,000 $-

$2

$4

$6

$8

$10

$12

Demand vs. Quantity Demanded

Lecture 2: Supply, Demand, etc. Benjamin Graham

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

Quick Question

Lecture 2: Supply, Demand, etc. Benjamin Graham

What affects the demand for oil?

Supply (individual)

Lecture 2: Supply, Demand, etc. Benjamin Graham

Supply (market)

Lecture 2: Supply, Demand, etc. Benjamin Graham

Supply of oil

Lecture 2: Supply, Demand, etc. Benjamin Graham

What affects the supply of oil? Let’s think through what happens with changes in price.

Oil is at a much higher price now than it was twenty years ago. In what specific ways has that affected the way oil is produced? What does the change in oil production mean for the future of oil prices?

Question

Lecture 2: Supply, Demand, etc. Benjamin Graham

If the price of oil 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

Supply Meets Demand

Lecture 2: Supply, Demand, etc. Benjamin Graham

Markets Not in Equilibrium

Lecture 2: Supply, Demand, etc. Benjamin Graham

What Creates Surpluses and Shortages?

Lecture 2: Supply, Demand, etc. Benjamin Graham

• In 1973, OPEC enacted an oil embargo. The shortage in supply caused the price of a barrel of oil to rise from $3 to $12. This (with an intermediate step) led to a gasoline shortage in the US.

• What U.S. policy caused the gasoline shortage?

• What would have happened if that policy had not been in place?

Write down what would have happened to supply, demand, quantity supplied, and quantity demanded.

A Demand Shock

When Supply and Demand Both Move

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

Complements and Substitutes

• Two goods are complements if the consumption of one item increases the demand for the other

– Hot dogs and hot dog buns

• 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

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. anti-drug 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

Group Questions

• An aid organization buys wheat in the US and ships it to a village in a developing country that is experiencing a drought.

– What happens to the price of wheat 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– 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