Supply and Demand.
When you talk about people buying things, you are discussing demand. When you talk about firms making things, you are discussing supply. KEEP THEM SEPARATE!!!!
A demand curve for a good is the quantity of the good purchased as a function of its price, the price of other goods, income, and perhaps other variables. The graph of quantity and price is also called a demand curve and the graph is always drawn with price on the vertical axis. Economists do not use "demand" to mean the quantity purchased; they always mean the function, quantity is a function of price and other things.
Assume that D(p,y) where p is own price and y is income is a demand curve. Note that D( ) is just the name of a function. It gives quantity purchased as a function of p and y. Draw a downward sloping curve in price quantity space for this function. Note that you have, by convention put quantity on the horizontal (not vertical) axis. An increase in income (usually) increases the quantity purchased at every price. Thus it shifts the demand curve outwards. Draw a demand curve with higher income.
Lets work with two goods. A demand curve is D(p-own,p-other,y), where p-own is the price of the good being demanded and p-other is the price of some other good. If an increase in p-other causes consumers to buy more of the good whose demand curve we are looking at, then the two goods are said to be substitutes. (Price of Toyota's goes up by 3 percent and more Chevys are purchased.) If an increase in the price of the other good causes a consumer to buy less of the good whose demand curve we are looking at, then the two goods are complements. (Peanut Butter and Jelly.)
Now consider income. A good is called a normal good if an increase in income shifts the demand curve outward. It is an inferior good if an increase in income shifts the demand curve inward. I lived on frozen turbo (reputedly a fish) when I had an income of $105 per month (undergraduate days.) When I went to graduate school my income increased to $300 per month and I ate no more turbo. For me, turbo was an inferior good.
A supply curve is the quantity produced (supplied) as a function of own price, prices of inputs to production, and perhaps other things. (Weather for agricultural commodities.) Assume supply curves slope up or are flat in price-quantity space. Assume that an increase in the price of an input shifts the supply curve inwards: less quantity is produced for each output price.
Draw a supply and demand diagram. Label your curves D and S. The place where they intersect is called the equilibrium. Label the equilibrium E. We believe that markets are in (or at least tend toward) equilibrium. The reason: Imagine that an amount less than the equilibrium amount were being produced, q1. The demand curve shows how much consumers would pay for q1: it is p1. However if the price were p1, then suppliers would want to produce q2 (look at the supply curve to find q2, the supply at price p1) This is not equilibrium because q2 is not equal to q1.
From the demand cuvre we see that consumers would offer more than the equilibrium price for that amount. At the higher price offered by consumers firms would no longer wish to produce a below equilbrium amount
What happens if there is an increase in the price of an input to the production process? The supply curve shifts in. Call the new curve S'. The equilibrium quantity goes down and equilibrium price goes up. Call this point E'. The movement from E to E' along the demand curve is described as "a movement along the demand curve." Be clear on what shifts curves (things other than own price) and what causes a movement along a curve (a shift in the other curve!).
Example: Loan Rate
Now lets consider the case of wheat. Gov’t sets a loan rate, which is a price at
which it is willing to buy any and all wheat. I call it PL. Now look at the
diagram.
How much of more is produced than would be the case without a policy? How much is bought by the government? What do they do with it? What happens to consumers? How much money does the government pay to buy the wheat. How do consumers feel about that? What happened to quantity consumed?
Let us now draw two other graphs. First one: No loan policy and set aside. Set aside means that some percent, lets say 20% of acres are idled by law. What happens. Second one: set aside and loan policy. compare.
Another example of this ilk: rent control. draw the picture. discuss. what happens if the supply curve is real steep (inelastic for reasons explained in section)
Harder (though I don’t know why) example: Target price. Gov’t guarantees farmer that somehow, either through the market or by a gov’t check, they will receive Pt. The mechanics. S(Pt)) is produced and consumed. Consumers pay much lower price, Pc, and then a deficiency payment d = (Pt - Pc) per bushel is sent to farmer by government. No storage and no government purchase.
Try drawing the target price diagram with a set-aside.
Adding demand curves: Suppose that demand is sum of less developed country and us. Show horizontal addition for total demand. Pin heads view of world hunger-- draw supply curve so that we ship them nothing. Draw supply curve so we ship them something.
Mechanics: Choose a price. Find Q from curve one and add to curve two. Do again. Connect the dots. We do this visually
Q= 3p. supply
Q = 12 - 4p demand
To Graph:
y = mx + b. Slope and intercept form of line.
slope of line is rise over run.
Ps (which is on vertical axis) = 1/3 Q. intercept 0 slope 1/3
Pd = 3 - 1/4 Q intercept is 3 slope -1/4
Equilibrium P = Ps = Pd: 1/3 Q = 3 - 1/4 Q
7/12 Q = 3. Q = 36/7.
P = 3 - 1/4 (36/7) = 12/7
P = 1/3 ( 36/7) = 12/7