Thursday, September 14, 2006

Class handout for Lecture 2 (Supply and Demand)

Lectures III and IV (Based on Chapter 3 in the textbook).

Note: I will post a practice problem on the website. There will be a take home quiz posted next Tuesday.

I) The Law of Demand –
a) Why does the demand curve slope downward?
1) Common sense
2) Diminishing Marginal Utility.
3) Income and substitution effect
b) Change in the quantity demanded vs change in demand (very important)
c) Changes in Demand
1) Tastes
2) Number of Buyers
3) Income (caveat: normal vs inferior goods)
4) Price of related goods (substitutes vs complements)

II) Law of Supply
a) Why does the supply curve slope upwards.
1) Common sense
2) Increasing costs per additional unit (marginal cost)
b) Change in the quantity supplied vs a change in supply
c) Changes in Supply
1) Resource Prices
2) Technology
3) Taxes and subsidies
4) Number of sellers
5) Price of other goods

III) Market Equilibrium
a) The automatic tendency for a market to tend towards equilibrium
b) Shortages vs Surpluses as an incentive to move towards equilibrium
c) What determines “Price” Marshall and scissors

IV) Applying supply and demand to the real world
a) Shifting curves
b) Why do sports players get paid so much money?
c) Why did oil prices rise so much during the summer?
d) Why did the fall so fast in thefall?

V) Price Controls
a) Price floor (minimum wage)
b) Price ceiling (oil prices)
c) How this distorts the market

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