Changes

==Supply and Demand==

==Supply and Demand==

The '''''supply''''' of a good is how much of it (the quantity), and at what price, is provided by a seller of the good.  Grocery stores, factories, malls, amazon.com, and candy stores all '''''supply''''' goods.  Services, like entertainment, are supplied by Hollywood, Major League Baseball, the NFL and also doctors, lawyers, accountants, and so on.  The supply side is made up of the producers, providers and sellers of goods and services.

The '''''supply''''' of a good is how much of it (the quantity), and at what price, is provided by a seller of the good.  Grocery stores, factories, malls, amazon.com, and candy stores all '''''supply''''' goods.  Services, like entertainment, are supplied by Hollywood, Major League Baseball, the NFL and also doctors, lawyers, accountants, and so on.  The supply side consists of the producers, providers and sellers of goods and services.

The '''''demand''''' for a good is how much of it, and at what price, is wanted by the public seeking to buy it.  Shoppers, moviegoers, baseball and football fans, and people needing medical care are on the demand side.  Often buyers of goods and services are called "consumers".

The '''''demand''''' for a good is how much of it, and at what price, is wanted by the public seeking to buy it.  Shoppers, moviegoers, baseball and football fans, and people needing medical care are, on the demand side.  Often buyers of goods and services are called "consumers".

For any given good or service, there is a supply and demand.  The supply can be described in terms of the possible availability of different quantities at different prices.  The demand can be described separately as the willingness of the public to purchase different quantities at different prices.  The price is the key to both the supply and demand side; it is the price that determines the quantity transacted.

For any given good or service, there is a supply and demand.  The supply can be described in terms of the possible production of different quantities at different prices.  The demand can be described separately as the willingness of the public to purchase different quantities at different prices.  The price is the key to both the supply and demand side; it is the price that determines the quantity transacted.

No company can afford to build cars (supply them) if the sales price is only $1.  But at a sales price of $30,000, a vast number of cars can be built.  '''''The cause is price, and the effect is quantity.'''''

No company can afford to build cars (supply them) if the sales price is only $1.  But at a sales price of $30,000, a vast number of cars can be built.  '''''The cause is price, and the effect is quantity.'''''

[[File:Red Lamborghini.png|200px|thumb|right|Impress your friends with this Lamborghini sports car, at a cost of $350,000.  Not much demand at that high price!]]

[[File:Red Lamborghini.png|200px|thumb|right|Impress your friends with this Lamborghini sports car, at a cost of $350,000.  Not much demand at that high price!]]

The demand for a good is also described in terms of price and quantity.  At a given price, there is a specific quantity in demand by the public for the good.  A billion people might buy a car if the price were only $1 (unrealistic).  At a much higher price of $30,000, the demand drops to a quantity of only millions sold (realistic).  At a still higher price of more than $100,000, the demand falls much further to the range of only a few thousand that can be sold (these are the very luxurious cars, like the Lamborghini sports car shown at the right).

The demand for a good is also described in terms of price and quantity.  At a given price, there is a specific quantity demanded by the public for the good.  A billion people might buy a car if the price were only $1 (unrealistic).  At a much higher price of $30,000, the demand drops to a quantity of only millions sold (realistic).  At a still higher price of more than $100,000, the demand falls much further to the range of only a few thousand that can be sold (these are the very luxurious cars, like the Lamborghini sports car shown at the right).

Because supply and demand can both be expressed in terms of price and quantity, they can be plotted on the same graph.  '''''The y-axis is typically price, and the x-axis is usually quantity'''''.  Just memorize this rule and stick with it:  price is on the y-axis, and quantity is on the x-axis.<ref>You might think it would be more natural to place the price on the x-axis and the quantity on the y-axis, since the price is more of the "cause" and quantity is more of the "effect", particularly for the buyer.  But economists often do things slightly backwards!  P is always on the y-axis and quantity on the x-axis, and just memorize that.</ref>  This might help you remember:  "p" for price is lower in the alphabet than "q" for quantity, and "p" appears first on the graph as one reads from left to right.  Put another way, the graph is of "Ps and Qs," in that order from left to right (P on the y-axis to the left, and Q on the x-axis to the right).

Because supply and demand can both be expressed in terms of price and quantity, they can be plotted on the same graph.  '''''The y-axis is typically price, and the x-axis is usually quantity'''''.  Just memorize this rule and stick with it:  price is on the y-axis, and quantity is on the x-axis.<ref>You might think it would be more natural to place the price on the x-axis and the quantity on the y-axis, since the price is more of the "cause" and quantity is more of the "effect", particularly for the buyer.  But economists often do things slightly backwards!  P is always on the y-axis and quantity on the x-axis, and just memorize that.</ref>  This might help you remember:  "p" for price is lower in the alphabet than "q" for quantity, and "p" appears first on the graph as one reads from left to right.  Put another way, the graph is of "Ps and Qs," in that order from left to right (P on the y-axis to the left, and Q on the x-axis to the right).

The supply curve is always '''''upward sloping''''': '''the higher the sales price, the higher the quantity that companies will produce for sale'''.  That is because higher sales prices bring in greater revenue -- and greater profits -- to provide the incentive to increase the supply quantity.

The supply curve is always '''''upward sloping''''': '''the higher the sales price, the higher the quantity that companies will produce for sale'''.  That is because higher sales prices bring in greater revenue -- and greater profits -- to provide the incentive to increase the supply quantity.

The demand curve is always '''''downward sloping''''': the higher the sales price, the '''''lower''''' the quantity the public is willing to buy.  Few people will buy a candy bar if it costs $5: if that price is lowered to $2, then more people will want to buy it, and if its price is lowered to $1, then even more will want to buy it, and if its price is lowered to 50 cents, then the demand by the public for that candy bar will be greater still.  As the price for something goes down, the demand goes up.  That results in a downward-sloping demand curve:  as the price goes down the slope of the curve, the '''''quantity''''' demanded (sought) by the public goes up.

The demand curve is always '''''downward sloping''''': the higher the sales price, the '''''lower''''' the quantity the public is willing to buy.  Few people will buy a candy bar if it costs $5: if that price is lowered to $2, then more people will want to buy it, and if its price is lowered to $1, then even more will want to buy it, and if its price is lowered to 50 cents, then the demand by the public for that candy bar will be even greater.  As the price for something goes down, the demand goes up.  That results in a downward-sloping demand curve:  as the price goes down the slope of the curve, the '''''quantity''''' demanded (sought) by the public goes up (see the curve labeled "Demand" on the graph below).

The supply and demand is the most basic relationship in all of economics.  They are independent of each other, but are placed on the same graph so that it becomes easy to find "equilibrium":<ref>The dictionary (Merriam Webster's Collegiate 10th Edition) tells us that an "equilibrium" is "a state of balance between opposing forces" - in this case, the opposing forces of the supplier wanting a higher price, and the public (consumers) wanting a lower price.</ref> the point where supply and demand have the same value for their price, '''''and''''' the same value for their quantity (the point of the intersection of their curves).   

The supply and demand form the most basic relationship in all of economics.  They are independent of each other, but are placed on the same graph so that it becomes easy to find "equilibrium":<ref>The dictionary (Merriam Webster's Collegiate 10th Edition) tells us that an "equilibrium" is "a state of balance between opposing forces" - in this case, the opposing forces of the supplier wanting a higher price, and the public (consumers) wanting a lower price.</ref> the point where supply and demand have the same value for their price, '''''and''''' the same value for their quantity (the point of the intersection of their curves).   

If the price is higher than the equilibrium price, then there will be unsold goods due to fewer people wanting to pay the higher price.  The sellers then need to lower their price in order to sell these leftover or unsold goods, and that forces the price downward to the equilibrium price.  Conversely, if the price is lower than the equilibrium price, then the sellers will not have enough goods to satisfy the higher demand by the public.  The sellers will then increase their price (and their revenue) to take advantage of the higher demand.  These market forces both above and below the equilibrium price are what push the final price to the point where the supply curve intersects the demand curve.  At this point the price and quantity for the supply are precisely equal to the price and quantity for the demand.

If the price is higher than the equilibrium price, then there will be unsold goods due to fewer people wanting to pay the higher price.  The sellers then need to lower their price in order to sell these leftover or unsold goods, and that forces the price downward to the equilibrium price.  Conversely, if the price is lower than the equilibrium price, then the sellers will not have enough goods to satisfy the higher demand by the public.  The sellers will then increase their price (and their revenue) to take advantage of the higher demand.  These market forces both above and below the equilibrium price are what push the final price to the point where the supply curve intersects the demand curve.  At this point the price and quantity for the supply are precisely equal to the price and quantity for the demand.

[[Image:Supply_and_demand.gif]]

[[Image:Supply_and_demand.gif]]

The point where supply equals demand can be found either by graphing the two curves and seeing the point of intersection or, if you have the equation for each curve, by solving the equations algebraically.  For example, if the supply curve is P = 100 + Q and the demand curve is P = 500 - Q, then the point of intersection can be found by solving these two equations:  when the P in the first equation equals the P in the second equation, then 100 + Q = 500 - Q, thus 2Q = 400, and thus Q = 200.  From there you can solve for P by plugging Q back into one of the two original equations:  

The point where supply equals demand can be found either by graphing the two curves and seeing the point of intersection or, if you have the equation for each curve, by solving the equations algebraically.  For example, if the supply curve is P = 100 + Q and the demand curve is P = 500 - Q, then the point of intersection can be found by solving these two equations:  when the P in the first equation equals the P in the second equation, then 100 + Q = 500 - Q, thus 2Q = 400, and thus Q = 200.  From there you can solve for P by plugging Q back into one of the two original equations:  

=== Changes in Supply and Demand ===

=== Changes in Supply and Demand ===

The above model for supply and demand helps us to consider the effect of changes or shifts in supply and demand.  First consider an increase in demand by the public for a particular good:

The above model for supply and demand helps us to consider the effect of changes or shifts in supply and demand.  First consider an increase in demand by the public for a particular good, from demand curve 1 (D₁) to demand curve 2 (D₂):

[[Image:Demand_curve_shift.gif]]

[[Image:Demand_curve_shift.gif]]

   

   

An increase in demand causes the price to rise.  The new equilibrium is at a point with higher price and greater quantity than before.  What could cause an increase in demand?  For gasoline, more people driving would cause an increase in demand.  For heating oil, a colder winter would cause an increase in demand.  For sports entertainment, a close rivalry (as in a close pennant race between the Yankees and Red Sox) can cause an increase in demand (spectators).  In all these cases, price and quantity tend to rise.  Conversely, if there is a decrease in demand by the public, then the opposite is generally true:  prices and quantity decrease.   

An increase in demand causes the price to rise from P₁ to P₂.  The new equilibrium is at a point with higher price and greater quantity than before.  What could cause an increase in demand?  For gasoline, more people driving would cause an increase in demand.  For heating oil, a colder winter would cause an increase in demand.  For sports entertainment, a close rivalry (as in a close pennant race between the Yankees and Red Sox) can cause an increase in demand (spectators).  In all these cases, price and quantity tend to rise.  Conversely, if there is a decrease in demand by the public, then the opposite is generally true:  prices and quantity decrease.   

Next consider an increase in supply by the producers.  Suppose farmers have better weather, for example, causing more crops at the harvest.  Or suppose there is discovery of huge new oil reserves underground.  Or suppose a new invention, such as Eli Whitney’s cotton gin, increases the production of a good (cotton).  This curve shows what happens when there is an increase in supply:

Next consider an increase in supply by the producers.  Suppose farmers have better weather, for example, causing more crops at the harvest.  Or suppose there is discovery of huge new oil reserves underground.  Or suppose a new invention, such as Eli Whitney’s cotton gin, increases the production of a good (cotton).  This curve shows what happens when there is an increase in supply, from supply curve S<ref>1</ref> to supply curve S<ref>2</ref>:

[[Image:Supply_curve_shift.gif]]

[[Image:Supply_curve_shift.gif]]

Can you interpret that?  When the supply curve shifted to the right as supply increased, the price decreased but the quantity increased.  The new equilibrium is at lower price and greater quantity than before.  Consumers are happier as supply increases.  The discovery of new oil reserves, or inventions like the cotton gin, make consumers (the public) better off.

Can you interpret that?  When the supply curve shifted to the right as supply increased, the price decreased but the quantity increased.  The new equilibrium is at a lower price and greater quantity than before.  Consumers are happier as supply increases.  The discovery of new oil reserves, or inventions like the cotton gin, make consumers (the public) better off.

== Example:  The Tyndale Bible ==

== Example:  The Tyndale Bible ==

That decline of marginal profit towards zero is due to the inevitable difficulties in selling additional goods.  For example, the first SUV produced by Ford could sell at a high price, but Ford does not want to get stuck with making too many SUVs and not being able to sell them at a profit.  Ford doesn’t want to make any more SUVs in a given year that it might have to take a loss on.  Ford keeps producing SUVs until its marginal revenue falls to its marginal cost, and its marginal profit falls to zero.  Do not worry if you do not completely understand these last two paragraphs; we'll discuss this again in greater detail in a future lecture.

That decline of marginal profit towards zero is due to the inevitable difficulties in selling additional goods.  For example, the first SUV produced by Ford could sell at a high price, but Ford does not want to get stuck with making too many SUVs and not being able to sell them at a profit.  Ford doesn’t want to make any more SUVs in a given year that it might have to take a loss on.  Ford keeps producing SUVs until its marginal revenue falls to its marginal cost, and its marginal profit falls to zero.  Do not worry if you do not completely understand these last two paragraphs; we'll discuss this again in greater detail in a future lecture.

==Example: the National Debate over Health Care==

==Discussion: the National Debate over Health Care==

By far the single biggest industry in the United States is health care (medical care).  It represents a massive one-sixth of our entire economy -- including annual expenditures of more than $2.2 ''trillion'' --  and costs are increasing each year.  It has three major components: government-controlled (Medicare and Medicaid), insurance-controlled, and private pay or uninsured.  Many are unhappy with our system, yet it is in many ways the best in the world.  For example, the survival rate for the most prevalent form of cancer in men -- prostate cancer -- is 92% in the United States, but the survival rate for the same disease in England is only 51% under its government-controlled system.

By far the single biggest industry in the United States is health care (medical care).  It represents a massive one-sixth of our entire economy -- including annual expenditures of more than $2.2 ''trillion'' --  and costs are increasing each year.  It has three major components: government-controlled (Medicare and Medicaid), insurance-controlled, and private pay or uninsured.  Many are unhappy with our system, yet it is in many ways the best in the world.  For example, the survival rate for the most prevalent form of cancer in men -- prostate cancer -- is 92% in the United States, but the survival rate for the same disease in England is only 51% under its government-controlled system.