Download Econ 103 Lab 3

Econ 103
Lab 3
•
Topic 2 Refreshers questions.
•
Topic 3 Intro
-
Assumptions of the competitive market model
-
Overview of demand, supply, and equilibrium
1
Competitive Market Model
•
Assumptions of the competitive market model:
1. Product homogeneity (all goods offered for sale are identical in the eyes
of all economic agents).
2. No single consumer has the power to influence the price at which he or
she can purchase a good. All consumers are price takers.
3. No single producer has the power to influence the price at which he or
she can sell a good. All producers are price takers.
•
Think: What are some examples of homogeneous good? What are some
examples of goods that are not homogeneous?
•
Think: Is the assumption that consumers are price takers realistic, in most of
the markets in which you participate?
•
Think: Is the assumption that producers are price takers realistic, in most of
the markets in which you participate?
2
Key Elements of the Competitive Market Model
•
The market demand curve:
- Tells us how many units of a good consumers are prepared to buy, at
each and every price, ceteris paribus.
‣ What does ceteris paribus mean?
- We draw the demand curve in price and quantity space, with price (P) on
the vertical axis and quantity (Q) on the horizontal axis.
- The demand curve is derived from individual consumers’ willingness to
pay for additional unit of the good.
‣ That is, the demand curve is derived from individual consumers’ MBs.
3
Demand Curve
•
The market demand curve is typically downward sloping. As price falls, more
units are purchased.
-
This is in part because individual consumer’s MBs diminish as they
consume more units of a good.
-
Other reasons too: we’ll look at this in more detail in Topic 6
•
P ($)
Two ways to “read” a demand curve.
•
The first is a “horizontal reading”.
•
For any given P, we can draw a horizontal line
across to the demand curve….
•
P1
Then we read down to the horizontal
axis to learn how many units will be
purchased at that price.
•
Demand (D)
Q1
Q
4
If the price is P1, consumers are
prepared to buy Q1 units.
Demand Curve
•
The market demand curve is typically downward sloping. As price falls, more
units are purchased.
-
This is in part because individual consumer’s MBs diminish as they
consume more units of a good.
-
Other reasons too: we’ll look at this in more detail in Topic 6
•
Two ways to “read” a demand curve.
P ($)
•
D
The second is a “vertical reading”.
•
For any given Q, we can draw a vertical line up
to the demand curve….
•
P1
Then we read across to the vertical
axis to learn what consumers’ MB is,
given the quantity being consumed.
•
Q1
Q
5
If the quantity is Q1, consumers’ MB
of the good is P1 dollars.
Demand Curve
•
You need to understand both the horizontal and vertical readings of
the demand curve.
•
Note that the vertical reading allows us to to also label the D curve as
the MB curve.
P
D (MB)
Q
6
Key Elements of the Competitive Market Model
•
The market supply curve:
- Tells us how many units of a good producer are prepared to sell, at each
and every price, ceteris paribus.
‣ What does ceteris paribus mean?
- We draw the supply curve in the same price and quantity space as the
demand curve.
- The supply curve is derived from individual producer’s willingness to
accept payment in order to sell an additional unit of the good.
‣ That is, the supply curve is derived from individual producers’ MCs.
‣ Producers must be paid at least a good’s MC of production, in order to
be willing to sell it.
7
Supply Curve
•
The market supply curve is typically upward sloping. As price rises, more
units are offered for sale.
-
This is largely due to the fact that the MC of producing units of the good is
increasing in production levels.
-
If MC is not increasing, S curve will not be upward-sloping (more later).
•
P ($)
Two ways to “read” a supply curve.
•
The first is a “horizontal reading”.
•
Supply (S)
For any given P, we can draw a horizontal line
across to the supply curve….
•
P1
Then we read down to the horizontal
axis to learn how many units will be
offered for sale at that price.
•
Q1
Q
8
If the price is P1, producers are
prepared to sell Q1 units.
Supply Curve
•
The market supply curve is typically upward sloping. As price rises, more
units are offered for sale.
-
This is largely due to the fact that the MC of producing units of the good is
increasing in production levels.
-
If MC is not increasing, S curve will not be upward-sloping (more later).
•
Two ways to “read” a supply curve.
P ($)
•
The second is a “vertical reading”.
•
For any given Q, we can draw a vertical line up
to the supply curve….
•
P1
Then we read across to the vertical
axis to learn what producers’ MC is,
given the quantity being produced.
•
S
Q1
Q
9
If the quantity is Q1, producers’ MC
of the good is P1 dollars.
Supply Curve
•
You need to understand both the horizontal and vertical readings of
the supply curve.
•
Note that the vertical reading allows us to to also label the S curve as
the MC curve.
P
S (MC)
Q
10
Key Elements of the Competitive Market Model
•
The interactions of all buyer and sellers of a good, in aggregate determines
the equilibrium price and equilibrium quantity in a market.
•
Equilibrium: a state in which there is no tendency for change in a system.
•
In a market system, there is no tendency for the price to change if the price is
at exactly the level that makers buyers and sellers choices consistent.
•
That is, the equilibrium price is such that the quantity of units demanded by
consumers is exactly equal to the quantity of units offered for sale by
producers.
•
Graphically, this is at the intersection of the S and D curves.
11
Equilibrium
•
At any price other than $4, buyer and seller choices are not consistent.
•
Consider P = $6.
•
Consumers only want to buy 200 units.
•
Producers wish to sell 600 units.
There is an excess of quantity
supplied over quantity demanded.
•
$
8
We call this either excess supply (XS) or
a surplus. (Prefer you to use the term XS)
•
D
S
7
6
•
5
Here, XS = 400 units.
4
•
3
XS puts pressure on price to fall below $6.
2
1
Q
100
200
300
400
500
600
700
800
XS = 400
12
Equilibrium
•
At any price other than $4, buyer and seller choices are not consistent.
•
Consider P = $3.
•
Consumers now want to buy 500 units.
•
Producers only wish to sell 300 units.
$
•
There is an excess of quantity
demanded over quantity supplied.
•
We call this either excess demand (XD)
or a shortage.
8
D
S
7
6
•
5
4
•
XD puts pressure on price to rise above $3.
3
2
1
Q
100
200
300
400
500
600
700
Here, XD = 200 units.
800
XD = 200
13
Equilibrium
•
Only at P = $4, is the amount that consumers wish to by equal to amount that
producers wish to sell.
•
Only at P = $4 is there no pressure on price to move up or down.
$
•
8
D
S
7
6
This is why $4 is the equilibrium
price.
Given P = $4, consumers want to buy 400
units and producer want to sell 400 units.
•
5
4
•
3
So 400 units is the equilibrium quantity
traded.
2
1
Q
100
200
300
400
500
600
700
800
14
Other determinants of D and S
•
Each D and S curve is drawn holding constant all the other factors (other
than the price of the good in question) that might influence the decision to
buy or sell units.
•
Price is not the only thing that influences buying and selling decisions.
•
There are other determinants of demand and supply.
•
Important to understand that if any of these other (other than price)
determinants change, the entire curve will shift.
•
Know and understand all these determinants.
•
Know and understand what shifts each of the curves, and in what direction.
15
Other determinants of Demand
•
We know that the price of the good in question (which we call own price) is
one determinant of demand.
•
Other determinants of market demand are:
-
Income
-
Prices of related goods
-
Tastes/preferences
-
Expectations about the future
-
The number of buyers or potential buyers of the good
16
Other determinants of Supply
•
We know that own price is one determinant of supply.
•
Other determinants of market supply are:
-
The prices of the things that we needed to buy in order to produce the
good in question (input prices).
-
The available technology used to produce the good
-
Expectations about the future
-
The number of sellers or potential seller of the good
17