Chapter 2 Introduction to Microeconomics

Lecture 3: Supply and Demand Economics

Learning Outcomes:

  1. Find the equilibrium price and quantity.
  2. Identify situations of shortage and excess.
  3. Solve problems involving shocks to the economy.

Review Problems From Last Lecture:

  1. You purchase a jacket for $245 after tax. The original price of the jacket was $215. What is the tax rate?
  2. There are 300 textbooks sold for every 357 students. If enrollment increases by 15%, what is the new enrollment and how many textbooks are needed?
  3. The OCSU wants to raise $1.25 million over the next 5 years to fund a student union building. With current enrollments at 3000 students with an expected increase of 5% over the previous year, how much should OCSU charge each student in order to raise this money?
  4. Abby and Max are starting a partnership where Abby will originally invest $35,000 and Max will invest $75,000. Abby wants to even out the ratio, so she adds another $20,000 to the investment. If Max wanted to maintain the original ratio, how much would he have to add to the investment?
  5. Lacey bought 25.5 hectares of land for $63,000. If she buys another 80 hectares of land at the same price per hectare as her first purchase, how much must she pay for her second purchase?

Lecture Notes:

Lecture material for this class come from Section 2.2 and can be found below. This material is considered review material and so it is not covered in depth.

  1. There are several assumptions that are typically made in a perfectly competitive microeconomic market.
    • Rational Behavior: Individuals are rational and aim to maximize their utility or profit.
    • Profit Maximization: Firms choose output levels to maximize profit, typically where marginal cost equals marginal revenue.
      • Perfect Information: All agents have full and accurate information for decision-making.
      • Ceteris Paribus: All other factors are held constant when analyzing a change in one variable.
      • Perfect Competition: Many buyers and sellers, identical products, no market power, and free market entry/exit.
    • No Externalities: All costs and benefits are internal to market participants; no spillover effects.

  2. Video: The Basics of the Supply Curve
    • Upward Sloping: The supply curve generally slopes upward, indicating that higher prices incentivize producers to supply more.
    • Movement Along the Curve: Caused by a change in the price of the good itself. This reflects a change in quantity supplied.
    • Short Run vs. Long Run: In the short run, some inputs are fixed; in the long run, all inputs are variable, leading to a potentially more elastic supply.

  3. Video: The Basics of the Demand Curve
    • Downward Sloping: The demand curve typically slopes downward, indicating that as the price of a good decreases, the quantity demanded increases.
    • Movement Along the Curve: Caused by a change in the price of the good itself. This reflects a change in quantity demanded, not demand.

  4. Video: Excesses and Surplusses
    • Shortage (Excess Demand): Occurs when the quantity demanded exceeds the quantity supplied at a given price.
    • Caused by Price Below Equilibrium: If the market price is set below the equilibrium price, demand increases and supply decreases, creating a shortage.
    • Upward Pressure on Price: In a shortage, consumers compete for limited goods, pushing prices upward toward equilibrium.
    • Surplus (Excess Supply): Occurs when the quantity supplied exceeds the quantity demanded at a given price.
    • Caused by Price Above Equilibrium: If the market price is set above the equilibrium price, supply increases and demand decreases, creating a surplus.
    • Downward Pressure on Price: In a surplus, sellers lower prices to clear excess inventory, moving the market toward equilibrium.
    • Market Forces Restore Equilibrium: In a competitive market, shortages and surpluses are typically temporary, as price adjustments lead the market back to equilibrium.

  5. Video: Equilibrium Price and Quantity
    Video: Shocks to Equilibrium
    • Shift vs. Movement: A shift refers to a change in the entire supply or demand curve, while a movement refers to a change along the curve due to a price change.
    • Demand Curve Shifts: Occur when a non-price determinant of demand changes. These include:
      • Income: Increases in income shift the demand for normal goods right and for inferior goods left.
      • Prices of Related Goods:
        • Substitutes: An increase in the price of one increases demand for the other.
        • Complements: An increase in the price of one decreases demand for the other.
      • Tastes and Preferences: Favorable changes shift demand right.
      • Expectations: Expectations of future price increases can raise current demand.
      • Number of Buyers: More buyers increase market demand.
    • Supply Curve Shifts: Occur when a non-price determinant of supply changes. These include:
      • Input Prices: Lower input costs shift supply right; higher costs shift it left.
      • Technology: Improvements shift supply right by increasing efficiency.
      • Expectations: If future prices are expected to rise, current supply may decrease.
      • Number of Sellers: More sellers shift supply right.
      • Government Policies: Taxes, subsidies, and regulations can shift supply.
    • Effect on Equilibrium:
      • Demand Increase: Raises equilibrium price and quantity.
      • Demand Decrease: Lowers equilibrium price and quantity.
      • Supply Increase: Lowers equilibrium price and raises quantity.
      • Supply Decrease: Raises equilibrium price and lowers quantity.

Lecture Problems:

  1. Suppose the market demand and supply for a certain good are given by the following equations: \[\begin{align*} Q_D &= 100 - 2P \quad (Demand) \\ Q_S &= 20 + 3P \quad (Supply) \end{align*}\] Where:
    • \(Q_D\) is the quantity demanded,
    • \(Q_S\) is the quantity supplied,
    • \(P\) is the price of the good. Find the equilibrium price and equilibrium quantity in this market.
  2. Suppose the market demand and supply for a product are given by the following equations: \[\begin{align*} Q_D &= 80 - 2P \quad (Demand) \\ Q_S &= 20 + 3P \quad (Supply) \end{align*}\] Assume the current market price is \(P = 10\).
    • Calculate the quantity demanded and quantity supplied at this price.
    • Is the market experiencing a shortage, a surplus, or is it in equilibrium?
    • Based on your answer, what is likely to happen to the price in the next period?
  3. A foodborne illness outbreak reduces consumer confidence in a particular brand of lettuce.
  4. Due to a surge in health consciousness, consumers increasingly prefer plant-based protein, leading to an increase in the demand for tofu. At the same time, technological improvements reduce production costs, increasing the supply of tofu.
    • Illustrate the shifts in both the demand and supply curves on a graph.
    • What is the expected effect on the ?
    • Can we determine the effect on the ? Why or why not?

Additional Problems:

Additional problems that are typically done in class (with video solutions) can be found here: