ECO 100 - Lecture 4 - F2026

Overview

Matthew Baker develops supply-and-demand diagrams into a framework for explaining equilibrium, shortages, surpluses, and how market shocks change prices and quantities. Examples include bottled water, Maine snowplow wages, New York taxi medallions after Uber and Lyft, and illicit-drug policy, where total spending is treated as a proxy for social harm and demand elasticity determines whether supply restrictions or legalization reduce it.

Key takeaways

A change in a good's own price moves quantity demanded or supplied along its curve; changes in income, tastes, input costs, or technology shift the entire curve.
A shortage occurs when quantity demanded exceeds quantity supplied and tends to raise price; a surplus occurs when quantity supplied exceeds quantity demanded and tends to lower price.
In the bottled-water example, a tap-water safety warning shifts demand outward, raising equilibrium from $1 and 10 million bottles per day to $1.50 and 11 million.
A fixed vertical supply, as with New York taxi medallions, means demand shocks change price rather than quantity; Uber and Lyft reduced medallion demand by creating a way to drive without one.
If illicit-drug harm is assumed proportional to total expenditure, price times quantity provides a visual proxy, but supply policies have ambiguous effects unless demand elasticity is known.
For steep, price-insensitive demand associated with addiction, legalization can reduce spending by lowering price with little change in quantity; for flatter, price-sensitive demand, supply restrictions can reduce spending by sharply lowering quantity.

Chapters

0:00 Course Logistics, Top Hat Attendance, and Exam Dates

The tentative first exam date is October 7; practice materials are scheduled for September 30 and a comprehensive review for October 5.
Homework must be physically completed by October 9, and Top Hat sign-up will be used to verify attendance.
Baker says the course begins with five problem sets and six chapters, with the workload expected to slow as topics become more involved.

5:31 Demand Curves, Ceteris Paribus, and Market Demand

A demand schedule lists quantities buyers want at different prices; holding other factors constant produces a downward-sloping demand curve.
Income, weather, tastes, and prices of complements or substitutes shift demand rather than causing movement along the curve.
Market demand is the horizontal sum of individual demand, illustrated with Tina and Tim buying bottled water at different prices.
A flatter demand curve indicates greater quantity responsiveness to price changes; a steeper curve indicates less responsiveness.

10:00 Supply Curves, Production Inputs, and Market Supply

A supply schedule records quantities firms offer at different prices, with technology, employee skills, and input costs held constant.
Wages, rents, and raw-material prices can shift supply; a change in the product's own price instead changes quantity supplied along the curve.
Aqua and Prima's individual bottled-water supply curves combine horizontally into upward-sloping market supply.
A flatter supply curve represents a larger supply response to a small price change.

13:29 Market Equilibrium as Consistent Buyer and Seller Plans

Equilibrium occurs where quantity demanded equals quantity supplied, giving a market-clearing price and quantity.
In the bottled-water example, the intersection represents 10 million bottles traded per day at $1 each.
At equilibrium, buyers' and sellers' plans are consistent, so neither side has an immediate incentive to change its intended transaction.
Baker presents equilibrium as a useful analytical concept while noting that observing a perfectly settled equilibrium in real markets can be difficult.

16:55 How Shortages and Surpluses Push Prices Toward Equilibrium

Below the $1 bottled-water equilibrium price, a price of 75 cents produces demand for 11 million bottles and supply of 9 million, a 2-million-bottle shortage.
A shortage creates upward price pressure as buyers compete for limited supply and sellers have an incentive to offer more.
Above equilibrium, a $1.50 price produces supply of 11 million bottles but demand of 9 million, creating a 2-million-bottle surplus.
A surplus creates downward price pressure as sellers try to sell unsold stock, moving the market toward the intersection.

23:50 Maine Snowplow Workers, Platinum, and the Cheese Surplus

Maine's transportation department struggled to hire snowplow drivers because its offered wage was too low relative to competing jobs, creating a labor shortage.
The wage adjustment was delayed because increases had to pass through the state legislature, showing how institutional constraints can prolong a shortage.
A forecast decline in platinum demand, attributed to weaker jewelry demand and changing tastes, creates a surplus at the quantity producers had planned to supply.
The U.S. cheese surplus illustrates storage incentives: excess milk can be turned into storable cheese; Baker cites a $1.4 billion surplus in 2017, equivalent to about 900,000 cubic yards.

33:00 Comparative Statics: A Tap-Water Safety Scare

Comparative statics compares the initial equilibrium with the new equilibrium after a market condition changes.
A report that tap water is unsafe increases demand for bottled water because consumers seek an alternative at every price.
The demand shift raises both equilibrium price and quantity in the example, from $1 and 10 million bottles per day to $1.50 and 11 million.
If stores initially keep the old $1 price, the demand shift creates a temporary shortage that encourages higher prices and greater stocking.

38:30 Input Costs and Labor Demand Shift Market Equilibria

Higher land rents raise avocado farmers' production costs and shift avocado supply inward, increasing equilibrium price and reducing quantity.
A new resort creates demand for fast-food workers, shifting labor demand outward and raising both wages and employment.
In a labor market, workers supply labor while businesses demand it, reversing the familiar roles in a goods market.
At the previous wage, a resort opening creates a worker shortage that puts upward pressure on wages.

44:30 Uber, Lyft, and the Fixed Supply of New York Taxi Medallions

New York City requires a medallion to operate a yellow cab, and the city government fixes the number available.
Because the medallion supply curve is vertical, price changes do not change the number of medallions unless the city issues more.
Uber and Lyft allowed drivers to enter ride-hailing without buying a medallion, shifting medallion demand inward around 2011 to 2012.
Baker describes medallion values rising to roughly $1.2 million before ride-sharing apps sharply reduced their price.

49:45 The Price-Times-Quantity Spending Rectangle

At a market equilibrium, total expenditure equals price multiplied by quantity, represented by a rectangle with price as its height and quantity as its base.
In the bottled-water example, the initial price of $1 and quantity of 10 million imply $10 million in daily expenditure.
When demand for bottled water increases, both price and quantity rise, making the expenditure rectangle unambiguously larger.
When avocado supply contracts, price rises while quantity falls, so the diagram alone does not establish whether total expenditure increases or decreases.

55:03 Using Drug-Market Expenditure as a Proxy for Social Harm

Baker introduces a simplifying assumption that drug-related violence, addiction-related health problems, and other harms are proportional to total spending on illicit drugs.
Under that assumption, a larger price-times-quantity rectangle means greater social harm, while a smaller rectangle means fewer problems.
An outward demand shift raises both price and quantity, enlarging the expenditure rectangle and worsening the assumed social outcome.
A demand-reduction campaign such as the historical 'Just Say No' campaign shifts demand inward, lowering price and quantity and shrinking the rectangle.

1:00:00 Why Supply-Side Drug Policies Have Ambiguous Effects

Legalization makes supplying drugs easier, shifting supply outward; the resulting lower price and higher quantity have opposing effects on total expenditure.
Enforcement policies such as a war on drugs raise the cost of supplying drugs and shift supply inward, increasing price while reducing quantity.
Because each supply policy moves price and quantity in opposite directions, the expenditure rectangle may grow or shrink depending on demand responsiveness.
The policy comparison cannot be resolved from the direction of price or quantity alone; it depends on the shape of the demand curve.

1:04:00 Flat Drug Demand: Supply Restrictions Can Shrink Spending

A relatively flat demand curve means consumers respond strongly to price changes: a small price decrease can generate a large increase in quantity demanded.
With flat demand, legalization lowers price enough to increase quantity substantially, making the total-expenditure rectangle larger in Baker's illustration.
A supply restriction raises price and sharply reduces quantity when demand is flat, shrinking the rectangle.
Under the assumed link between spending and harm, the war-on-drugs approach performs better than legalization in this high-elasticity case.

1:06:20 Steep Drug Demand, Addiction, and Policies for Different User Groups

A steep demand curve means quantity changes little when price changes; Baker connects this possibility to addicted users who may pay nearly any price for cigarettes or drugs.
With steep demand, legalization lowers price without greatly increasing quantity, shrinking total expenditure; supply restrictions instead raise spending while leaving consumption similar.
Experimenters or first-time users may be more price-responsive than addicted users, so one demand curve may not describe every group.
Baker proposes treating users and experimenters differently, such as pharmacy access for registered users and penalties for other buyers; he identifies this market segmentation as a form of price discrimination.

Transcript excerpt

0:00 Um anyways, okay. So I guess we'll uh get started here with lecture four. Um kind of exciting the new the projector here is suddenly working. Uh so we'll see how that goes. Um okay. And today even more excitingly we're going to talk a little bit about market equilibrium. Um and this is kind of where all of the the effort we've invested over the last couple of lectures uh starts to bear some fruit. So, I'm excited and uh let's get going. Oh, of course there's always the usual administrative stuff. Uh we settled in on uh October 7 as maybe our first exam date. Um I keep I'll I'll say this over and over again, but I'm going to say it here. What I'm going to do is precisely a week before uh that uh day,

0:50 I will hand out practice materials. that is to say a practice exam which is designed to resemble the actual exam as closely as I possibly uh can do it. Um and then we'll have a full review of class right before uh the exam. So I guess I think the 7th is a Wednesday and so the fifth there will there will be a comprehensive review. So already on top hat more on this in a second because I'm going to try to use top hat to take some attendance today. Uh we have five problem sets and six chapters up there to read. I know it seems like a lot, but it's kind of front-loaded. Um, so we can kind of get a lot of stuff out of the way. Um, and we're going to start slowing down with some of these chapters. They become a little bit more uh involved and then and take a little bit more time as we uh move along here.

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Related notes

Summary, takeaways, and chapters were generated by AI from the video's transcript and may contain errors. The video belongs to its creator, Matthew Baker.