Chapter 4 Demand and Supply

A more concise One-Page Test Review of Chapter 4 may help with exams.  

Updated 9/8/17

  Index
I. The Marketplace 
II. Demand 4 Videos
III. Supply
IV. Equilibrium 1 video
V. Ceilings and Floors
1 videos
VI. Changes in Supply & Demand Videos
 2 videos  
VII. Valuing Bonds 1 video
VIII. Deportation of many illegal immigrants and the minimum wage?
XI. Political Economy Book Summaries
XII. Free Economics Books

Quick Notes Economic Reviews is is for those pressed for time.

 I. The marketplace
     A. A market is defined as an institution or mechanism which
          promotes trade by bringing together buyers (demanders)
          and sellers ( suppliers).
     B. Replaced barter1 which is the direct exchange of goods.
          see
wikipedia.org/Barter
     C. A modern market brings money and prices into the circular
          flow of goods.
     D. Tom Sloan Cartoon Supply and Demand

II. Demand is willingness to buy.

      A. Demand is a schedule of the amounts of goods and
           services consumers are willing and able to buy at a
           set of prices.
      B. Total demand is the horizontal summation video of
           individual demand.
      C. Law of demand:: price and quantity are inversely related.
           1. As price goes up, quantity demanded goes down.
           2. As price goes down, quantity demanded goes up.
      D.
cartoonstock.com/ provided cartoons
     
E. More is bought as price drops because of the Income and
          Substitution Effects.
          1. Income Effect: as the price of a good drops, consumers
              feel richer and buy more.
          2. Substitution Effect: as the price of a good drops, it
              becomes cheaper relative to other goods and
              consumers buy more.
          3. Income and Substitution Effects
          4. Examples
              a.
Example #1 5 min. Video
              b. Example #2 
"Why hasn't economic progress lowered
                  work hours more?" Tyler Cowen, Hayek Lecture Series
                  42 min. video
          6. Optional
               a) Indifference Curves and Budget Lines Video 11 minutes
               b) Graphic Analysis using budget lines and indifference
                    goods  Video
 23 minutes  
       F. What determines demand   
           1. Tastes or preferences of consumers
           2. Number of consumers
           3. Incomes of consumers
               a. normal (superior) goods such as steak and vacations -
               more is purchased as income increases. 
               b. inferior goods such as bread and hamburger - less
                   is purchased as income increases.
           4. Consumer expectations
           5. Price of related goods
               a. Substitutes are goods that compete with each othe
                 r such as hot dogs and hamburgers.
                   If the price of a good increases, the demand for its
                   substitutes will increase.
               b. Complements are goods that are purchased together
                    like hot dogs and rolls. If the price of a good increases,
                    the demand for its complement will decrease.
          6. "Ceteris Paribus" is Latin for all other variables remain same..
               So one variable changed at a time.
   
G. Changes (shifts) in Demand
      
  1. A decrease in demand shifts the demand curve to the left
         2. An increase in demand shifts the demand curve to the right

         Note: Increase is to the right because the x-axis increases to the right.

     H. Explorations in Economic Demand by Kim Sosin,
          Department of Economics of the University
          of Omaha has good examples.
      I. Demand and Supply Quiz

III. Supply is willingness to sell
     A. Supply is a schedule of the amounts of goods
            or services producers are willing and able to
            sell at a set of prices.
       B. Law of supply: price and quantity supplied are
            directly related because price and expected
            profit are directly related
           1. As price goes up, quantity supplied goes up
           2. As price goes down, quantity supplied goes down
       C. Supply schedule

              

      D. What determines supply
           1. Product costs as affected by
               a. Technology
               b. Resource prices
               c. Government involvement with taxes and subsidies
           2. Price of related goods
                a. If 2 goods are substitutes, price up for one will
                    increase supply of the other as companies see
                    more potential profit
                b. Example price of gasoline up, supply of
                    alternative fuels increases
       E. An increase in supply shifts the supply curve to the right
       F. Explorations in Economic Supply from Dr. Kim Sosin
           of the University of Omaha has good examples.

V. Equilibrium is where suppliers and demanders agree on price
     and quantity as depicted by the intersection of their supply and
     demand curves. 
     A. If the price is too high, a surplus results and price must be
         lowered as when the world economic slowdown in 1999
         required lowering price to work down supply. 
     B. If the price is too low, a shortage results. This happens
         with toys every Christmas i.e. Cabbage Patch Craze
     C. If they can not agree, as happened with Beta videotape
          machines, then the curves do not intersect and the 
          goods are not sold.
     
D. Disequilibrium yields a Surplus, and Shortage video
     E. Rationing function of price
         1. When competitive forces of supply and demand result in
             an equilibrium, a rationing function of goods produce to
             consumers has occurred.
           2. Competition caused an efficient allocation of resources.

V. Government imposed price ceilings and floors
      A. A price ceiling keeps prices from rising (rent control) helping
           renters but often resulting in a shortage of housing as
           investors seek higher returns elsewhere.
      B. A price floor keeps prices from falling (farm price supports)
           helps farmers though a surplus often results as more of
           supported crops are produced.
      C. Econ in 60 Seconds :Government Price Controls

Image result for Supply and Demand cartoons

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

byte cartoon 22  lead to gold (1)

 

Political Cartoons Analyze Supply and Demand

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Image result for Demand and Supply cartoons

 

 

 

 

 

 

 

 

 

 

 

 

The Free Market Does Work: How Pot Legalization Caused Its Price to Collapse

 

 

 

 

VI. Changes in supply and demand affect equilibrium
   
A. Econ Concepts in 60 Second Video on Double Shifts in Supply and Demand
       B Econ Concepts in 60 Seconds Video on Shifting Supply and Demand
  
   C. Another View
         D up and S up equally

         D up causes 
         P up
and Q up

         S up causes 
         P down
and Q up

         Result is 
         P same
and Q up

D up and S 
down equally  

D up causes 
P up
and Q up 

S down causes 
P up
and Q down 

Result is 
P up
and Q same

       D down and S up equally

      D down causes
      P down and Q down

      S up causes 
      P down
and Q up

      Result is
      P down and Q same
D down and S  
down equally 

D down causes 
P down
and Q down 

S down causes 
P up
and Q down 

Result is 
P same
and Q down

   D. View a dynamic model of Changes in Supply, Demand and Market Equilibrium
     by Dennis Kaufman University of Wisconsin-Parkside.

  E. Unequal Shifts in Demand and Supply

                            D up and S up more

D up and S down more

 

More Excellent Supply/Demand Practice from  ecedweb.unomaha.edu/home.cfm
 

VII. Valuing Bonds Using Supply and Demand
   
1. A bond is a promise to pay over time.
       2. Suppose you buy a twenty year, $10,000 bond paying 5% per year at face value
            of $10,000. Face value is called par value.
            a) A few years go by and you need money and one choice is to sell the bond.
            b) If the interest rates on a bond goes down, people will be very anxious to buy, 
                 demand will be high pushing price up and your will receive more than $10,000.
            c) If rate shave gone down, no one will give you $10,000, demand will be low, 
                 so if you need the money, it will sell for less, below par.
            d) You can hold for twenty years and receive par value.
       3. Therefore, interest rates and bond values (prices) go in the opposite direction, 
            if interest rates down, old bond price up because they are at the old higher rate.
       4. This is called the interest rate risk for bonds. Other risks have to do with issuer 
            default and  monetary inflation.
       5. Market Value of Issued Bond Kahn  Video from Khan Academy
       6. studyfinance.com  calculates the new bond value when interest rate drops.
VIII. How would the deportation of many illegal immigrants affect the minimum  wage?

 

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