Lecture 2:
Supply, Demand, Complements, Substitutes
Joshua Tuynman
Office Hours: Monday 1:30-3:00 Tuesday 9-10:30
Office Location: VKC B42G (under the stairs at VKC library entrance)
Lecture 2: Supply, Demand, etc.
Benjamin Graham
Today’s Plan
• Supply and Demand
• Complements and Substitutes
Lecture 2: Supply, Demand, etc.
Benjamin Graham
Housekeeping
•
Buy the 13th edition
•
Buy and register your clicker
•
Syllabus
– Homework 1 now due Weds (Sept. 1
• Office Hours for Josh
– Monday 1:30-3:00, Tuesday 9-10:30
– VKC B42G (under the stairs at VKC library entrance)
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
Market Demand For Sodas at Coachella
$16
$14
$12
$10
$8
$6
$4
$2
$-
100,000 200,000 300,000 400,000 500,000 600,000 700,000
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 oil?
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
Supply of oil
What affects the supply of oil? Let’s think through what happens
with changes in price.
Oil is at a much higher price now than it was twenty years ago. In
what specific ways has that affected the way oil is produced?
What does the change in oil production mean for the future of oil
prices?
Lecture 2: Supply, Demand, etc.
Benjamin Graham
Question
If the price of oil 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 1973, OPEC enacted an oil embargo. The shortage in supply caused
the price of a barrel of oil to rise from $3 to $12. This (with an
intermediate step) led to a gasoline shortage in the US.
• What U.S. policy caused the gasoline shortage?
• What would have happened if that policy had not been in place?
Write down what would have happened to supply, demand, quantity
supplied, and quantity demanded.
Lecture 2: Supply, Demand, etc.
Benjamin Graham
A Demand Shock
When 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 if the consumption of one item
increases the demand for the other
– Hot dogs and hot dog buns
• Two goods are substitutes if the consumption of one item
decreases the demand for the other.
– Buses and trains
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. antidrug 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 wheat in the US and ships it to a
village in a developing country that is experiencing a drought.
– What happens to the price of wheat 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
– 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