Lecture 2: Supply, Demand, Complements, Substitutes...Lecture 2: Supply, Demand, etc. Benjamin Graham Tuesday, August 28, 12 Group Questions •An aid organization buys grain in the

Lecture 2: Supply, Demand, Complements, SubstitutesBenjamin Graham

Office Hours: Tues 8:30-10AM, Weds 10-11AMSoS B9

Lecture 2: Supply, Demand, etc. Benjamin Graham

Tuesday, August 28, 12

Today’s Plan

• Housekeeping• Supply and Demand• Complements and Substitutes



Housekeeping

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

• Homework 1 now due Weds (Sept. 12) instead of Mon (Sept. 10)• Office Hours



Mock Reading Quiz

• Peanut butter and jelly are:• A. Complementary Goods• B. Substitutes• C. Superior Goods• D. Partner Goods• E. Welfare-maximizing Goods



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



Demand (individual)



Demand (market)



Demand vs. Quantity Demanded



Demand vs. Quantity Demanded


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


What affects the demand for automobiles?


Supply (individual)



Supply (market)



Quick Question


What affects the supply of automobiles?


Clicker Question


If the price of automobiles 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



Markets Not in Equilibrium



What Creates Surpluses and Shortages?


• In the 1970s, there was a gasoline shortage in the US.

•What caused the shortage?

•What would have happened if the price controls were removed?

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


Demand Shock


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



Complements and Substitutes

• Two goods are complements the consumption of one item increases the demand for the other• bullets and handguns

• Two goods are substitutes if the consumption of one item decreases the demand for the other.• Buses and Trains



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. DARE and

other education and treatment programs have worked well)• C. Substitutes, like meth, have increased in supply. • D. A & B• E. A & C• F. A, B & C



Group Questions

• An aid organization buys grain in the US and ships it to a village in a developing country that is experiencing a drought. • What happens to the price of grain 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• Producers of food (i.e. farmers) in the drought-stricken region• Consumers of food in the US• Producers of food in the US



Documents

Lecture 2: Supply, Demand, Complements, Substitutes...Lecture 2: Supply, Demand, etc. Benjamin Graham Tuesday, August 28, 12 Group Questions •An aid organization buys grain in the