A demand curve is a function that shows the quantity demanded at different prices.

The Quantity Demanded is the quantity that buyers are willing (and able) to purchase
at a particular price.
Important Demand Shifters:
1. Changes in income
2. Changes in population
3. Price of substitutes
4. Price of complements
5. Expectations
6. Tastes
Effect of changes in income on demand depends on nature of good:
Normal good demand increases when income increases (and vice versa)
Inferior Good demand decreases when income increases (and vice versa)
Substitutes: Two goods are substitutes if an increase in the price of one good leads to
an increase in demand for the other good (or vice versa)
Complements: if an increase in price of one good leads to an decrees in the demand for
the other (or vice versa).
Supply Curve: function that shows the quantity supplied a different prices.
The Quantity Supplied is the quantity that producers are willing and able to sell at a
particular price.
Producer Surplus: is the producers gain from exchange. Didffeence between market
price and minimum price at which producers would be willing to sell a given quantity.
Total producer surplus is the sum of the producer surplus of each seller. Graphically,
TPS is measured by the area above the supply curve and below the price. Eg below.

Important Supply Shifters:

1. Changes in Costs
Technological innovations
Input prices
Taxes and Subsidies
Expectations
Entry or Exit of Producers
Changes in Opportunity Costs
Entry implies more sellers in market, increasing supply. Exit implies fewer sellers in the
market, decrease in supply.
Unexploited gains from trade: eg below.

Waste (Quantity above Equilibrium Quantity(:

Simple shit. You know all of this so far.

A free marker maximizes gains from trade, which can be broken into two parts:
Consumer surplus and producer surplus.

Supply and Demand Terminology:

Change in demand refers to shift in demand curve which is caused by a change in
one of the shifters of the demand curve.
Change in quantity demanded refers to a movement along the same demand curve
which is caused by a change in price.
eg below.

Change in Supply refers to a shift in the supply curve cause by a change in of this
shifters of supply curve.
Change in quantity supplied refers to a movement along the same supply curve caused
by a change in price.
eg below

Q. When supply falls, what happens to quantity demanded in equilibrium?

A. b. Quantity demanded decreases
Q. If oil executives read in the newspaper that massive new oil supplies
have been discovered under the Pacific Ocean but will likely only be useful
in 10 years, what is likely to happen to the supply of oil today?
A. a. The supply of oil will rise today

Q. If oil executives read in the newspaper that new solar-power

technologies have been discovered but will likely only become useful in 10
years, what is the likely equilibrium impact on the price and quantity of oil
today?
A. b. the price of oil will decrease, the quantity of oil will increase
Q. If we learn today about promising future energy sources, todays price of
energy will _______ and todays quantity of energy will __________.
A. b. fall, rise
Elasticity of Demand
How much does quantity demanded change when price changes?
A demand curve is said to be elastic when an increase in price reduces the
quantity demand by a lot (and vice versa).
When the same increase in price reduces the quantity demanded by just a
little, then the demand curve is said to be inelastic.
E of D is a measure of how responsive the QD is to a change in price.
If two linear demand (or supply) serves run through a common point, then
at any given quantity the curve that is flatter is more elastic.
1. Availability of substitutes. More subs the more elastic the curve. if theres
hella subs for a good, when the price of that good goes up, ppl will switch
to another sub, so demand is elastic. But goods with few subs, demand is
inelastic. Oil is inelastic.

2. Time horizon. Longer time horizon will make it more elastic. short run,
inelastic, but long run it becomes elastic since consumers adjust their
behavior by finding subs.
3. category of product. Broad category less elastic. specific category more
elastic. eg. there are more subs for bare aspirin than just aspirin alone.
demand for food (broad classification) is less elastic than demand for
lettuce (narrow classification).
4. Necessities vs luxuries. Luxuries are more elastic. necessity is less
elastic.
5. Bigger purchase sizes are going to be more elastic. consumers are
much less concerned about price changes when the product is cheap. price
of toothpaste goes up, no one really will even notice. But automobile yes
they notice, making demand more elastic.

Elasticity of demand = % change in QD divided by % change in price

The elasticity of demand is about the relationship between price and quality
and so it will also have implications for revenue. R = P x Q
If P goes up and Q goes down by just a little bit, then R goes up. We call
this an inelastic demand curve. When you have an inelastic demand curve,
when P goes up, R goes up too.
So revenue rises as price rises if demand is inelastic.
Revenue falls as Price Rises with Elastic Demand Curves. So P goes up
by a bit, but Q goes down by a LOT, then R must also be falling. So this is
an elastic demand curve.
Watch video on elasticity of supply again.

Notice the D curve is flatter. if it was steep it would be inelastic.

Elasticity of Supply
Elasticity of supply measures how responsive the quantity supplied is to a change in
price. A supply curve is elastic when an increase in price increases the quantity supplied
by a lot (and vice versa).
When the same increase in price increases quantity just by a little, then the supply
curve is said to be inelastic.

Determinants of e of s:
1. Change in per-unit costs with increased production. If increased production requires
much higher costs, then the supply curve will be inelastic. If production can increase
with constant costs, then supply curve will be elastic.
2. Time horizon. Immediately following a price increase, producers can expand output
only using their current capacity (making supply inelastic).
3. Share of market for inputs
4. Geographic scope.
The narrow were the scope of the market of a good, the more elastic its supply. The
wider the scope of the market of a good the less elastic its supply.

its impossible to get an increase in production of picasso patinings since hes dead. So
supply of picasso paintings is highly inelastic. price can keep going up and youre not
going to any more supply of picasso paintings. But if price of tooth picks goes up a bit,
ur gonna get a lot more supply of toothpicks.
One of the reasons toothpicks have an elastic supply, is because we can easily double
the supply of toothpicks and have just a tiny impact on the demand for wood on the
input to toothpicks. so we can double the supply of toothpicks and it wont really affect
demand for wood since its such a tiny product.
Supply is inelastic when the industry is big demander in its input markets. (cars are a
big demander for steel. so when we wanna increase S of cars, were gonna use a lot
more steel, which will push up the price of Steel, which will increase the price of input
into making cars , which is gonna push the price of cars up. therefore the supply of cars
will tend to be more inelastic because when we try and increase the supply of
automobiles, were gonna increase the price of steel, which increases the cost of
producing automobiles.
Supply is elastic when the industry is a small demander in its input markets b/c supply

can be expanded without causing a big increase in the demand for the industrys inputs
(toothpick and wood example).

How inelastic supply looks with d curve:

So if price of slaves went up, not many slaves would be captured. But this is only a
better case scenario. But in reality supply is more elastic, flatter curve. and QS will
increase a lot by a higher price.

Applications Using Elasticity

More local the supply, more elastic the supply curve. So local buybacks of guns
wouldnt affect the number of guns on the street (nor affect their price).

A buyback is only effective if its increases the price of guns, decreasing the QD of guns.
In this case, it doesnt happen. People could just sell their old guns and buy new ones.
Think of it about sneakers. If gov offered to buyback sneakers no questions asked, ppl
will just sell spare or old seekers, and use that money to buy new ones.