Lecture 2: Supply, Demand, Complements,
Substitutes
Benjamin Graham
Lecture 2: Supply, Demand, etc.
Benjamin Graham
Problems without Passports: Washington, D.C.
IR 445 US Defense and Foreign
Policy: Nonproliferation and
Weapons of Mass Destruction
Interested in U.S. Defense and Foreign Policy?
Students of IR 445 will meet an array of experts involved in the formulation of policy, including NGOs, think
tanks, consultants, lobbying firms, Executive Branch agencies, and relevant office and committees in
Congress. In addition to meeting with experts, students will interview these experts on non proliferation
issues and learn first-hand how legislators, policy makers, and interest groups interact to produce and
manage policies.
Information Session: Wednesday,
January 20
4 pm, VKC 300A
Today’s Plan
• Housekeeping
• Supply and Demand
• Demand vs. Quantity Demanded
• Supply vs. Quantity Supplied
• Complements and Substitutes
Lecture 2: Supply, Demand, etc.
Benjamin Graham
Housekeeping
• Section begins next week
• Make sure your clicker is working today
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
Demand vs. Quantity Demanded
Lecture 2: Supply, Demand, etc.
Benjamin Graham
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. True
B. False
Lecture 2: Supply, Demand, etc.
Benjamin Graham
Quick Question
What affects the demand for automobiles?
Lecture 2: Supply, Demand, etc.
Benjamin Graham
Supply (individual)
Lecture 2: Supply, Demand, etc.
Benjamin Graham
Supply (market)
Lecture 2: Supply, Demand, etc.
Benjamin Graham
Quick Question
What affects the supply of automobiles?
Lecture 2: Supply, Demand, etc.
Benjamin Graham
Clicker Question
If the price of automobiles went up, what would happen?
A. The supply curve would shift right
B. The supply curve would shift left
C. The quantity supplied would increase
D. The quantity supplied would decrease
E. A&C
F. B & D
Lecture 2: Supply, Demand, etc.
Benjamin Graham
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?
• 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.
Lecture 2: Supply, Demand, etc.
Benjamin Graham
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
Lecture 2: Supply, Demand, etc.
Benjamin Graham
Complements and Substitutes
• Two goods are complements the consumption of one item
increases the demand for the other
• bullets and handguns
• Computers and IT specialists
• Two goods are substitutes if the consumption of one item
decreases the demand for the other.
• Buses and Trains
• Robots and assembly-line workers
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. 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
Lecture 2: Supply, Demand, etc.
Benjamin Graham
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
Lecture 2: Supply, Demand, etc.
Benjamin Graham