Discussion 3 1.

Demand and Quantity demanded (1) Quantity demanded is a scalar, which can be influenced by many variables, mainly including price, price of related goods (substitutes, complements), income, preference, government policy, expectation, etc. (2) Demand is the relationship between quantity demanded and price. (3) Change in price implies a movement along demand curve. Law of Demand: a drop in price results in an increase in quantity demanded, holding other factors constant. (4) Change in variables other than price implies a shift of demand curve. An increase in income will shift the demand curve to the right if the good is normal, and to the left if the good is inferior. An increase in a substitutes price will shift the demand curve to the right. An increase in a complements price will shift the demand curve to the left. We call these variables demand shifters. 2. Supply and Quantity supplied (1) Quantity supplied is a scalar, which can be influenced by many variables, mainly including price, prices of inputs, technology, government policy, expectation, etc. (2) Supply is the relationship between quantity supplied and price. (3) Change in price implies a movement along supply curve. Law of Supply: a drop in price results in a decrease in quantity supplied, holding other factors constant. (4) Change in variables other than price implies a shift of supply curve. An increase in an inputs price will shift the supply curve to the left. A technology progress will shift the supply curve to the right. We call these variables supply shifters. 3. Market Equilibrium (1) Market Equilibrium is reached when quantity demanded equals quantity supplied. (2) Price rises if it is below the equilibrium price, falls if above, and remains constant when it is at the equilibrium.

(3) When price is below the equilibrium price, there is a shortage in the market; when price is above the equilibrium price, there is a surplus in the market. (4) Shock to the equilibrium in a demand-supply context When a demand (or supply) shifter changes, demand (or supply) curve will shift and result in a new equilibrium. Some examples (Yis prediction, you can have your own answer):
Shock Market Demand shifter? (Y/N) Iraq War Katrina World oil market Local clean water market Ban on car smuggle Christmas Day Incoming Mid 1 of Econ 1A Domestic car market Pine market Market of ticket for Harry Potter 3 Y N Left Down Down Y N Right Up Up N Y Left Up Down N Y Left Up Down Y Supply shifter? (Y/N) Y Demand curve shifts ___ Right Left Up ?1 Supply curve shifts ___ Equilibrium price goes ___ Equilibrium quantity goes ___

4. Government Intervention (1) Price Ceiling (Maximum Price) Example: oil price control in USA after OPECs cutting off oil export (Figure 1)
P S

Pc D Shortage Q

Figure 1

If both demand and supply curves shift downward, we cannot say anything about how equilibrium

quantity changes unless we have enough information.

a) A price ceiling has no effect if it is set above the equilibrium price. b) An enforced price ceiling will result in a shortage. c) In an equilibrium with a shortage, quantity demanded does not equal quantity supplied. (2) Price Floor (Minimum Price) Example: minimum wage (Figure 6)
W Wm S

D Unemployment L

Figure 2 a) A price floor has no effect if it is set below the equilibrium price. b) An enforced price floor will result in a surplus (unemployment in this case). c) In an equilibrium with a surplus, Quantity demanded does not equal quantity supplied. 5.The difference between positive and normative statements: Containing value Objective or Can be tested? judgment? subjective? Positive No Objective Yes Normative Yes Subjective No

Wording Be Should be