Download BUAD 200 Week 4

ECON 160
Week 4
• The functioning of Markets: The interaction
of buyers and sellers. (Chapter 4)
Review
• Economic competition: We compete for
goods by offering to trade $ dollars.
• Circular flow diagram: Shows the
interaction of households and firms in two
kinds of markets.
Circular Flow Diagram of the Exchange Economy
Goods &
Services
Goods &
Services
Product
Markets
$'s
$'s Revenue
HOUSEHOLDS
FIRMS
$'s
$'s Income
Inputs
Resources
Resource
Markets
NEW: Study of Markets
• Markets are the interaction of buyers and sellers.
• Some markets are local, some worldwide.
• Focus on buyers and sellers separately: Separate
graphs for each group.
• Ceteris paribus: look at one thing at a time; All
other things held equal.
Marginal Value
• Focusing on a buyer, we measure the
personal marginal value of a good as the
most $’s you are willing to give up to
acquire an additional unit. (How much you
are willing to trade)
• Graph the marginal value as a height above
each additional unit per time period.
Marginal Value Declines
• Plot the marginal value as a height above
additional units.
• As you have more of any good, the
marginal value declines.
Marginal Value = The Most you are willing
to pay for each additional unit
80
70
60
50
40
Marginal Value
30
20
10
0
1
2
3
4
MVx
$ 10
$ 9
$ 8
$ 7
$ 6
$ 5
$ 4
$ 3
$ 2
$ 1
Marginal Value
Marginal Value
The height above each
additional unit = the
most you are willing to
pay
1 2 3 4 5 6 7 8 9 10
Qtyx/T
How much are you willing to
Buy?
• By comparing the marginal value with the $
Price at which the good is available, we can
read the quantity you are willing to buy at
each $ price. (horizontal distance)
• Demand: A schedule of the alternative
quantities that an individual is willing and
able to buy at alternative $ prices.
$Price
x
Demand Curve
$ 10
$ 9
$ 8
$ 7
$ 6
$ 5
$ 4
$ 3
$ 2
$ 1
MVx = Demand X
1 2 3 4 5 6 7 8
9 10
Qtyx/T
Demand for X
$Px
$ 10
$ 9
$ 8
$ 7
$ 6
$ 5
$ 4
$ 3
$ 2
$ 1
Dx
Demand shows the amounts
purchased at alternative prices
(horizontal distances at each price)
Demand x
Dx
1 2 3 4 5 6 7 8 9 10
Qtyx /T
First Law of Demand
• The higher the price of a good, the smaller
the quantity demanded; the lower the price
of a good, the greater the quantity
demanded.
• Demand is downward sloping.
• A change in price leads to a change in
quantity demanded = a movement along the
function
Change in Price Vrs. Change in
Demand
• A change in price is a move on the demand
schedule.
• A change in demand is a shift of the
function due to something else changing.
$Px
$ 10
$ 9
$ 8
$ 7
$ 6
$ 5
$ 4
$ 3
$ 2
$ 1
Increase in Demand
Dx
Dx’
Increase in demand
is a rightward shift
(greater quantity
demanded at each
price.)
Dx
Dx’
1 2 3 4 5 6 7 8 9 10 11 12
Qtyx /T
Determinants of Demand
• What factors determine the position of
demand ?
• What changes in other factors will cause
demand to increase (shift right) or decrease
(shift left)?
Determinants of Demand:
(Shift Factors)
• Taste & preference: how much you like
the good. If T&P increase, demand
increases. (Rightward shift).
• Income: a change in income affects
demand.
– Normal good: increase in income increases
demand. (Right Shift)
– Inferior good: increase in income decreases
demand. (Left Shift)
Determinants of Demand,
Continued
• Price of other goods:
– Substitutes: most other goods are substitutes;
An increase in the price of a substitute increases
demand (rightward shift).
– Complements: Goods used together; an
increase in the price of complements decreases
demand (leftward shift).
Determinants of Demand,
Continued
• Future Price Expectations: an increase in
the expected future price will increase
demand today.
Market Demand
• The market demand is the sum of the
individual demands of the buyers.
• An increase in the number of buyers will
increase market demand.
Market Supply
• Supply is a schedule of the alternative
quantities which sellers are willing and able
to sell at alternative prices.
Market Supply
• Supply is a schedule of the alternative
quantities which sellers are willing and able
to sell at alternative prices.
• Supply is generally a positive relationship:
at higher prices the quantity supplied is
larger.
Supply Curve
$Price
$10
8
6
4
2
2
4
6
8
10
12 14
16
Qty x/ T
The Height of the Supply Curve is based
on
Marginal
Cost
of
Production
$Price
$10
8
6
4
2
2
4
6
8
10
12 14
16
Qty x/ T
Change in Quantity Vrs Shift in
Supply
• If sellers can get a higher price, the increase
in quantity supplied is a movement on the
supply curve.
• If some other factor changes, the supply
curve will shift.
• An increase in supply is a rightward shift.
• A decrease in supply is a leftward shift.
Determinants of Supply:
(Shift Factors)
• 1. Price of inputs: an increase in price of inputs
will decrease supply (leftward shift).
• 2. Value of Alternative Outputs: As the value of
alternative outputs increases, supply decreases.
• 3. Change in technology: an increase in
technology will increase supply (rightward shift).
• 4. Number of sellers: as more sellers enter a
market the supply shifts rightward.
$Price
$4
3
The Market
Demand
Surplus at this $ Price
2.50
Supply
2.00
1.50
1.00
.50
.25
100 200 300 400 500 600 700 800 900 1000 1100 Q x/ T
$Price
$4
The Market
Demand
3
2.50
Supply
2.00
1.50
1.00
.50
.25
Shortage at this $ Price
100 200 300 400 500 600 700 800 900 1000 1100 Q x/ T
$Price
4
3
2.50
Demand
Market Equilibrium
Dx = Sx at Pe
Supply
2.00
1.50
Pe 1.00
.50
.25
100 200 300 400 500 600 700 800 900 1000 1100 Q x/ T
Qe
$Px
$ 10
$ 9
$ 8
$ 7
Pe $ 6
$ 5
$ 4
$ 3
$ 2
$ 1
Market: Demand & Supply
Demand
Supply
At the equilibrium Price, the
Dx = Sx
Sx
Dx
1 2 3 4 5 6 7 8 9 10 11 12
Qe
Qtyx /T
$Px
$ 10
$ 9
$ 8
$ 7
Pe $ 6
$ 5
$ 4
$ 3
$ 2
$ 1
Effects of Increase in Demand on Price
and Quantity
Do
D1
Supply
Increases Price and
Quantity
Sx
D1
Do
1 2 3 4 5 6 7 8 9 10 11 12
Qe
Qtyx /T
Demand Determines Price
$Px
$ 10
$ 9
$ 8
$ 7
$ 6
$ 5
$ 4
$ 3
$ 2
$ 1
D3
Supply: Response
D2
Demand pulls forth
output
D1
D3
Sx
D2
D1
1 2 3 4 5 6 7 8 9 10 11 12
Qtyx /T
$Px
$ 10
$ 9
$ 8
$ 7
Pe $ 6
$ 5
$ 4
$ 3
$ 2
$ 1
Effects of an Increase in Supply on
Price and Quantity
S0
Demand
S1
Price decreases and
Quantity increases
S0
Dx
S1
1 2 3 4 5 6 7 8 9 10 11 12
Qe
Qtyx /T