S-D
Steve White
1. Markets
Some terms and context for S-D
What does S-D help explain?
Mostly the prices of different products.
Oil prices
2
wages (price for your labor)
3
interest rates (“price of a loan”)
4
Supply and Demand model
market = group of buyers and sellers for some product
(good or service)
competitive = has many buyers and many sellers
The basic idea here is that sellers can’t determine the price on their own. Neither can
buyers. There is a standard price that everyone has to accept because they don’t have
enough power to change it.
Supply and demand is a model for prices and quantities
bought/sold in competitive markets.
5
Practice
Not all markets are competitive.
Which of the following markets do you think
are competitive?
a. market for economics tutoring online
b. market for a new iPhone 12 Pro
c. market for a used iPhone 7
d. market for a mortgage loan
6
Example: market for a used iPhone 7
Source: eBay
Outline
1.
2.
3.
4.
5.
6.
Markets ✓
Demand
Supply
Equilibrium
Comparative Statics
Models (post-class)
8
2. Demand
Quantity Demanded
quantity demanded, 𝑄𝐷 = amount of the good
that buyers want to buy
demand = relationship between 𝑄𝐷 and 𝑃
- can represent this relationship different ways
10
Demand for what?
We need to pick some specific good or service so we
can try to model demand for it. My choice:
11
Poll
Let’s do a poll. Raise you hand if you would pay for
tutoring if it cost:
i. $5/hr
ii. $15/hr
P
Q
iii. $50/hr
$5
Law of Demand:
𝑃 ↑ ⇒ 𝑄𝐷 ↓
(negative correlation)
$15
$50
12
Represent demand as a curve or table
(new small numbers I made up)
P
Q
1
8
2
6
4
2
5
0
13
Practice
What is the independent variable in this model?
10
P
9
8
7
6
5
4
3
2
D
1
0
0
1
2
3
4
5
6
7
8
9
10
Q
14
What if . . .
colleges decide to get rid of grades. You just have to
show up and you get credit for your classes.
Would that change the demand for tutoring?
15
Probably
Most likely the quantity demanded for each P would be lower:
New
Old
P
Q
P
Q
1
8
1
3.75
2
6
2
2.5
4
2
5
0
4
0
5
0
⇒
16
New demand curve and equation
10
P
9
8
7
6
P
Q
1
3.75
2
2.5
4
0
5
0
5
4
3
2
D
1
0
0
1
2
3
4
5
6
7
8
9
10
Q
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Increase vs Decrease
An increase (right shift) in demand means that larger quantities
are demanded at any given price.
A decrease (left shift) in demand is the opposite. Smaller
quantities are demanded at any given price.
Both increases and decreases are changes in demand.
18
Which of the following events would
probably increase DEMAND for a Shiba dog?
a. a stronger economy leads to higher pay for
most workers
b. a Shiba attacks and kills a beloved celebrity
c. The price of a Shiba rises
d. The price of a Shiba declines
https://www.youtube.com/watch?v=E6CcUj2mDbI
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Change in demand vs change in 𝑸𝑫
If the price increases from $2 to $4 does that decrease
demand?
Does it decrease the quantity demanded?
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Change in demand vs change in 𝑸𝑫
P ($/dog)
If doge virus discourages people from buying a doge
but the price remained $2 would that change demand?
7
6
5
4
3
2
1
D
D’
0
0
1
2
3
4
5
6
7
8
9
10
11
12
Q (dogs)
Does it change the quantity demanded?
21
Change in demand vs change in 𝑸𝑫
This same distinction applies for supply to.
You can have one change and not the other.
But you can also have both change.
You could theoretically have nothing change, but that
wouldn’t be interesting now would it?
Ask yourself:
Did the curve/relationship/equation change?
Did the amount people want to to buy change?
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3. Supply
Quantity supplied
quantity supplied, 𝑄𝑆 = amount of good that
sellers want to sell
supply = relationship between 𝑄𝑆 and 𝑃
- can represent this relationship different ways
Intuition for Supply
“The market for online tutoring expanded significantly during the pandemic. You could
get into that market using your computer and Zoom to offer tutoring sessions.
Suppose that the current standard price you will get paid is $____/hour. How
many hours per week would you want to tutor?”
𝑃
𝑄𝑆
$5
687
$10
915
$15
1410
$25
1530
$50
1695
The Supply Curve
𝑃
𝑄𝑆
$5
687
$10
$15
$25
915
1410
1530
$50
1695
Law of Supply
𝑃 ↑ ⇒ 𝑄𝑆 ↑
“But I thought if there was more supply the price would fall?”
Which shows an increase in S?
P
SA
S
SB
Q
Left and Right (not up and down)
Practice
Which of the following events would probably
increase the SUPPLY of online tutoring?
a) many people lose their traditional job due
to COVID-19 related lockdowns
b) the price of online tutoring rises
c) the government requires tutors pass a
hard and expensive certification test
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4. Equilibrium
What makes that point special?
There is an obvious geometric answer but what is the economic
explanation?!?!?!
P
12
11
S
10
9
8
7
6
5
4
3
2
D
1
0
0
1
2
3
4
5
6
7
8
9
10
11
12
Q
Equilibrium
It is easier to see that all the other prices are bad than to see
why the price at the intersection is good.
𝑃 > 6 ⇒ 𝑄𝐷 < 𝑄𝑆 or a surplus, downward pricing pressure
P
12
11
S
10
9
8
7
6
5
4
3
2
D
1
0
0
1
2
3
4
5
6
7
8
9
10
11
12
Q
Equilibrium
𝑃 > 6 ⇒ 𝑄𝐷 < 𝑄𝑆 or a surplus, downward pricing
pressure
𝑃 < 6 ⇒ 𝑄𝐷 > 𝑄𝑆 or a shortage, upward
pricing pressure
P
12
11
S
10
9
8
7
6
5
4
3
2
D
1
0
0
1
2
3
4
5
6
7
8
9
10
11
12
Q
Equilibrium
𝑃 > 𝑃∗ ⇒ 𝑄𝐷 < 𝑄𝑆 or a surplus, downward pricing pressure
𝑃 < 𝑃∗ ⇒ 𝑄𝐷 > 𝑄𝑆 or a shortage, upward pricing pressure
𝑃 = 6 ⇒ 𝑄𝐷 = 𝑄𝑆 so stable, no pressure to change, an
equilibrium
P
12
11
S
10
9
8
7
6
5
4
3
2
D
1
0
0
1
2
3
4
5
6
7
8
9
10
11
12
Q
5. Comparative Statics
Comparative Statics
One of the main uses of a model is to make predictions.
“If [something] happens, what would happen to the
price?”
comparative statics = comparing equilibriums, or more
generally comparing before and after a change
all else equal = phrase used to emphasize that you
don’t generally want to look at 26 things changing at
once
37
Example: Spiny Lobster
The COVID-19 pandemic dramatically reduced demand
for spiny lobster. What probably happened to P?
Did the supply decrease?
38
I saw this on a trash can
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More comparative statics (if time)
The market for an apartment in Boston is heating up. Should we buy
one? Before we can answer that it is probably helpful to think about
the factors that could cause rents to rise and fall over time. How
would the following events impact the rent for an apartment in
Boston?
a) more colleges open in the area, leading to a larger population of
students
b) Boston creates a new income tax, all residents must pay 4% of
their income to the city
c) many apartment buildings in Chinatown are condemned for not
being safe(this means no one can live there)
d) what would happen to the rent if the events in (b) and (c)
happened at the same time?
40
More comparative statics
a) more colleges open in the area, leading to a larger
population of students
41
More comparative statics
b) Boston creates a new income tax, all residents must
pay 4% of their income to the city
42
More comparative statics
c) many apartment buildings in Chinatown are
condemned for not being safe (this means no one can
live there)
43
Two shifts
d) what would happen to the rent if the events in (b) and (c) happened at the
same time? S and D both decreased
44
Two shifts
d) what would happen to the rent if the events in (b) and (c) happened at the
same time? S and D both decreased
45
Two shifts
d) what would happen to the rent if the events in (b) and (c) happened at the
same time? S and D both decreased
Event
Effect on P
Effect on Q
(b) 𝐷 ⇐
(c) 𝑆 ⇐
Overall
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Further study
There is so much more to S-D than we could fit into one
day. If you take Ec101 you will learn a lot more about
this model including:
i. measuring gains from trade
ii. modeling government policies (min. wage, taxes)
iii. applications, e.g. international trade
47
6. Models
There is a post-class video on this topic
What is a model?
The best way to understand is by seeing many examples.
Source: news.sky.com
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Example: Subway map
Models are simplified pictures that help you understand the world.
They strip away what you don’t need so you can focus on important
connections and relationships.
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But . . .
Don’t models oversimplify?
And isn’t that misleading?
YES!
Distance from
Lechmere to Kendall
0.7 miles
Riverside to Cleveland Circle
5.4 miles
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Balancing act
So would it be better to use this subway map?
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Lesson: Balancing act
Our models need to balance not leaving out something
important against including too much detail and
complexity
Example: physics and air resistance
Economics examples:
1. “the” price of tutoring
2. lumping all “tutoring” together
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What did we learn?
Summary
1. Models help us understand the world.
2. S-D is a model for P and Q in comparative
markets.
3. Demand, quantity demanded, shifts of D, etc.
4. Repeat for S
5. Equilibrium is a result of pricing pressure. You
should be able to explain that process in your
own words.
6. Comparative statics exercises involve using a
model to make predicts. We did some for S-D
THE END