Supply and Demand
Supply and Demand: Wood
P
Q
Equilibrium
“equilibrium does not preclude desire. The desire that (…) equilibrium allows to subsist, however, is a plantonic desire, which does not tend to be translated into an act under the circumstances in which such an act could be performed. When equilibrium is reached, although certain objects remain desirable, none of the acts necessary to obtain these objects is desirable any longer.”
– Jacques Rueff (The Social Order)
Supply and Demand Adjustments: Shortage
D1
S1
Price
Quantity
D2
A
B
A’
Shortage
Supply and Demand Adjustments: Surplus
D1
S1
Price
Quantity
D2
A
B
A’
Surplus
“You buy from other consumers, not from producers.”
-Mike Munger (AIER – November 15th, 2022)
Supply is Determined by Final Demand in the Long Run
D1
S1
Price
Quantity
D2
A
S2
B
Isolated Shifts in Supply and Demand�(Summary)
Demand | Supply | Equilibrium Price | Equilibrium Quantity |
Increase | No Change | | |
Decrease | No Change | | |
No Change | Increase | | |
No Change | Decrease | | |
Isolated Shifts in Supply and Demand�(Summary)
Demand | Supply | Equilibrium Price | Equilibrium Quantity |
Increase | No Change | Increase | Increase |
Decrease | No Change | Decrease | Decrease |
No Change | Increase | Decrease | Increase |
No Change | Decrease | Increase | Decrease |
Demand | Supply | Equilibrium Price | Equilibrium Quantity |
Increase | No Change | Increase | Increase |
D1
S1
Price
Quantity
D2
A
B
Demand | Supply | Equilibrium Price | Equilibrium Quantity |
Decrease | No Change | Decrease | Decrease |
D1
S1
Price
Quantity
D2
A
B
Demand | Supply | Equilibrium Price | Equilibrium Quantity |
No Change | Increase | Decrease | Increase |
D1
S1
Price
Quantity
S2
A
B
Demand | Supply | Equilibrium Price | Equilibrium Quantity |
No Change | Decrease | Increase | Decrease |
D1
S1
Price
Quantity
S2
A
B
For an inferior good, what would happen to the equilibrium price and quantity of it if consumers’ incomes rise?�
Both the equilibrium price and quantity would decrease.
Graph the effect in the market for huskies resulting from the introduction of a popular new television show called “Game of Thrones”?
One of the forgotten American Founding Fathers, Robert Morris, made the money that he used to help finance the American Revolution in shipping. In one commercial venture, he learned that the price of flour had jumped substantially in foreign markets due to a supply shock. In response, Morris purchased up all the available flour in Philadelphia, where the price had not risen yet, and shipped it over to Europe.
A
B
C
D
Labor Law Example – Mine Safety
What happens to the supply and/or demand for mining labor when legislation is passed that mandates the implementation of costly safety procedures for coal miners? What happens to equilibrium wages? Can we definitively conclude miners are made better off?
Wages
Quantity of Labor
S
D
S2
Shortages
A reduced supply does not necessarily mean that a shortage will emerge. Shortages and surpluses are eliminated by adjustable prices. Shortages are caused solely by restraints on prices.
“the most effectual way to turn a scarcity into plenty is to raise the price for the article wanted.”
– Robert Morris & Pelatiah Webster
"The price of butter, while certainly volatile, has never reached such a level before," the group said in a statement. "Butter shortages appear to be a real threat by the end of the year."
Joseph and the Seven Years of Abundance and Seven Years of Severe Famine
Railroads and the Demise of Famine in Colonial India�Burgess, Robin and Dave Donaldson (2012).
“In this paper we exploit the expansion of railroads across India between 1861 to 1930—a setting in which agricultural technologies were rain-fed and risky, and regional famines were commonplace—to examine whether real incomes be-came more or less sensitive to rainfall shocks as India’s district economies were opened up to domestic and international trade. Consistent with the predictions of a Ricardian trade model with multiple regions we find that the expansion of railroads made local prices less responsive, local nominal incomes more responsive, and local real incomes less responsive to local productivity shocks. This suggests that the lowering of transportation costs via investments in transportation infrastructure played a key role in raising welfare by lessening the degree to which productivity shocks translated into real income volatility. We also find that mortality rates became significantly less responsive to rainfall shocks as districts were penetrated by railroads. This finding bolsters the view that growing trade openness helped protect Indian citizens from the negative impacts of productivity shocks and in reducing the incidence of famines.”
Also see: Amartya Sen’s Poverty and Famines: An Essay on Entitlement and Deprivation
Venezuela
Elephant Ivory
Basic Geometry Refresher: Area of a Triangle
Area of a Triangle = ½ * Tri-Base * Tri-Height
Area of Triangle = ½ * Tri-Base * Tri-Height
½ * 4 * 6
½ * 24
12
Consumer Surplus
Consumer Surplus:
The difference between the price that a consumer is prepared to pay and the actual price paid in the market.
Consumer Surplus = ½*Tri-Base*Tri-Height
½ *(Q1-0)*(P2-P1)
0
P2
Breakfast at the Downtown Marriott in Chicago
Calculate the dollar amount of consumer surplus being earned in this market:
A. $4,500
B. $9,000
C. $18,000
D. $450
�
½*Base*Height
½ *(300-0)*(60-30)
½*300*30
=4,500
Answer A
0
The market price of the product is $20 per unit. Calculate the dollar amount of consumer surplus being earned in this market:
A. $120,000
B. $60,000
C. $100,000
D. $80,000
½ *Base*Height
½ * (4,000-0)*(50-20)
½*4,000*30
=60,000
Answer B
How Much Would You Pay for a Ticket to Markets?
Producer Surplus
Producer Surplus:
The difference between the amount the producer is willing to supply goods for and the actual amount received by the producer when they make the trade.
Producer Surplus = ½*Tri-Base*Tri-Height
½*(Q1-0)*(P1-PM)
Refer to the figure. Calculate the total dollar amount of producer surplus earned in this market if the market price is $60.
A. $800
B. $1,600
C. $2,400
D. $1,200
½*Base*Height
½*(40-0)*(60-20)
½*40*40
=$800
Answer A