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Recap: Absolute Advantage
Bake Bread
Sew Clothes
Maureen
15
5
Joseph
4
4
Who has the absolute advantage in baking bread?
Maureen
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Recap: Absolute Advantage
Bake Bread
Sew Clothes
Maureen
15
5
Joseph
4
4
Who has the absolute advantage in sewing
clothes?
Maureen
© 2011 Thomson South-Western
Recap: Comparative Advantage
Bake Bread
Sew Clothes
Maureen
15
5
Joseph
4
4
Who has the comparative advantage in baking
bread?
Cost of baking bread?
Maureen -- 5 outfits/15 loaves of bread = 1/3 outfits
Joseph – 4 outfits/4 loafs of bread = 1 outfit
© 2011 Thomson South-Western
Recap: Comparative Advantage
Bake Bread
Sew Clothes
Maureen
15
5
Joseph
4
4
Who has the comparative advantage in sewing
clothes?
Cost of sewing clothes?
Maureen -- 15 loaves of bread/5 outfits = 3 loaves of bread
Joseph – 4 loafs of bread/4 outfits = 1 loaf of bread
© 2011 Thomson South-Western
Recap: Terms of Trade
Bake
Bread
Sew
Clothes
Opp. Cost Opp. Cost
Bread
Clothes
Maureen
15
5
1/3 outfit
3 loaves
Joseph
4
4
1 outfit
1 loaf
At what price would they be willing to trade with
one another?
Maureen willing to buy outfits for at most 3 loaves of bread
Joseph willing to sell outfits for at least 1 loaf of bread
Both would agree to 1 outfit for 2 loaves of bread
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© 2011 Thomson South-Western
What Is a Market?
• A market is a group of buyers and sellers of a
particular good or service.
• The buyers as a group determine demand for a product
• The sellers as a group determine supply of a product
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What Is a “Market”?
• Markets can take many forms:
• Market for agricultural commodities
• Buyers and sellers meet at a particular time and place
where an auctioneer helps set the prices and arrange sales
• Market for gaming devices:
•
•
•
•
Buyers do not meet together
Sellers are in different locations
No auctioneer to set prices
Yet buyers are choosing from a selection of gaming
devices and sellers are all competing to offer the best
product
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What Is a “Competitive Market”?
• A competitive market is a market in which:
• there are many buyers and many sellers so that;
• each has a negligible impact on the market price.
(no one is able to control the price)
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Spectrum of Competition
Max competition
Competitive
Market
Many
Sellers
Least competition
Monopolistic
Competition
Oligopoly
More
Sellers
Few Sellers
Monopoly
One Seller
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What Is “Perfect Competition”?
• We begin by assuming we have perfect
competition:
• Products are the same
• Numerous buyers and sellers so that each has no
influence over price
• Buyers and Sellers are price takers
(no one controls the price)
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DEMAND
• Quantity demanded is the amount of a good
that buyers are willing and able to purchase.
• Law of Demand
– The law of demand states that, other things equal,
the quantity demanded of a good falls when the
price of the good rises.
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The Demand Curve: The Relationship
between Price and Quantity Demanded
• Demand Schedule
• The demand schedule is a table that shows the
relationship between the price of the good and the
quantity demanded.
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Catherine’s Demand Schedule
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The Demand Curve: The Relationship
between Price and Quantity Demanded
• Demand Curve
• The demand curve is a graph of the relationship
between the price of a good and the quantity
demanded.
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Figure 1 Catherine’s Demand Schedule and Demand Curve
Price of
Ice-Cream Cone
$3.00
2.50
1. A decrease
in price ...
2.00
1.50
1.00
0.50
0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of
Ice-Cream Cones
2. ... increases quantity
of cones demanded.
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Market Demand versus Individual Demand
• Market demand refers to the sum of all
individual demands for a particular good or
service.
• Graphically, individual demand curves are
summed horizontally to obtain the market
demand curve.
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The Market Demand Curve
When the price is $2.00,
When
themarket
price is $2.00,
The
demand
curve is the
Nicholas
will demand 3
Catherine will demand
4
of thecones.
individual
demand
ice-cream
cones. curves!
ice-cream
Catherine’s Demand
Price of IceCream Cone
+
Nicholas’s Demand
Price of IceCream Cone
2.00
2.00
1.00
1.00
4
8
Quantity of Ice-Cream Cones
The market demand at
horizontal
sum
$2.00 will be 7 ice-cream
=
cones.
Market Demand
Price of IceCream Cone
2.00
1.00
3
5
Quantity of Ice-Cream Cones
When the price is $1.00, When the price is $1.00,
Catherine will demand 8 Nicholas will demand 5
ice-cream cones.
ice-cream cones.
7
13
Quantity of Ice-Cream Cones
The market demand at
$1.00, will be 13 icecream cones.
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Shifts in the Demand Curve vs.
Movements along the Demand Curve
• Shift in the demand curve
• When an outside factor changes the demand for a
product
• Blizzard increases the demand for snow shovels
• Movement along the demand curve
• Caused by a change in the price of the product
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Changes in Quantity Demanded
Price of IceCream
Cones
B
$2.00
A tax on sellers of icecream cones raises the
price of ice-cream
cones and results in a
movement along the
demand curve.
A
1.00
D
0
4
8
Quantity of Ice-Cream Cones
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Shifts in the Demand Curve
• A change that increases the quantity demanded
at any given price shifts the demand curve to
the right
• A new diet fad increases the popularity of gluten
free food
• A change that decreases the quantity demanded
at any given price shifts the demand curve to
the left
• A decline in the price of Netflix will cause a shift in
the demand for Amazon Prime
© 2011 Thomson South-Western
Figure 3 Shifts in the Demand Curve
Price of
Ice-Cream
Cone
Increase
in demand
Decrease
in demand
Demand
curve, D2
Demand
curve, D1
Demand curve, D3
0
Quantity of
Ice-Cream
Cones
© 2011 Thomson South-Western
What factors shift the demand curve?
• Consumer Income
• As income increases the demand for a normal good
will increase.
• When we get a job our demand for Martinis increases
• As income increases the demand for an inferior
good will decrease.
• If we are unemployed we increase our demand for PBRs
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Consumer Income, Normal Good
Price of IceCream Cone
$3.00
An increase
in income...
2.50
Increase
in demand
2.00
1.50
1.00
0.50
D1
0 1
2 3 4 5 6 7 8 9 10 11 12
D2
Quantity of
Ice-Cream
Cones
© 2011 Thomson South-Western
Consumer Income, Inferior Good
Price of IceCream Cone
$3.00
2.50
An increase
in income...
2.00
Decrease
in demand
1.50
1.00
0.50
D2
0 1
D1
2 3 4 5 6 7 8 9 10 11 12
Quantity of
Ice-Cream
Cones
© 2011 Thomson South-Western
What factors shift the demand curve?
• Prices of Related Goods
• When a fall in the price of one good reduces the
demand for another good, the two goods are called
substitutes.
• Xbox vs. Play Station
• When a fall in the price of one good increases the
demand for another good, the two goods are called
complements.
• Lift tickets and snowboards
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What factors shift the demand curve?
• Tastes
Michelle Obama wore a coat by Thom Browne, what do you
think happened to the demand for his coats?
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What factors shift the demand curve?
• Expectations
• You find out you are going to inherit your
grandfather’s fortune, how does that change your
demand for Maseratis?
• You learn that Apple is going to come out with a
new iPhone 6 in a few months, how will that affect
the likelihood you will upgrade to an iPhone 5 now?
© 2011 Thomson South-Western
What factors shift the demand curve?
• Number of buyers
• If we opened the border between the US and
Mexico for a few weeks, border towns would
experience large changes in population and shifts in
the demand for housing (or medical services for
example) in those towns.
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Table 1 Variables That Influence Buyers
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A C T I V E L E A R N I N G 1:
Demand curve
Draw a demand curve for music downloads. What
happens to it in each of the following scenarios?
Why?
A. The price of iPods
falls
B. The price of music
downloads falls
C. The price of
compact discs falls
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A C T I V E L E A R N I N G 1:
A. Price of iPods falls
Music downloads
and iPods are
complements.
Price of
music
downloads
A fall in price of
iPods shifts the
demand curve for
music downloads
to the right.
P1
D1
Q1
Q2
D2
Quantity of
music downloads
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A C T I V E L E A R N I N G 1:
B. Price of music downloads falls
Price of
music
downloads
The D curve
does not shift.
Move down along
curve to a point with
lower P, higher Q.
P1
P2
D1
Q1
Q2
Quantity of
music downloads
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A C T I V E L E A R N I N G 1:
C. Price of CDs falls
CDs and
music downloads
are substitutes.
Price of
music
downloads
A fall in price of CDs
shifts demand for
music downloads
to the left.
P1
D2
Q2
Q1
D1
Quantity of
music downloads
© 2011 Thomson South-Western
A C T I V E L E A R N I N G 1:
Demand curve
A. Increase in the price of gasoline last summer led
to what type of change for gasoline?
A.
Decline in Qd, movement along demand curve
B. Lower income associated with the recession
would lead to what type of change for gasoline?
B.
At all prices Qd declines, so shift in demand curve to
the left
C. Improvement in public transportation leads to
large decline in the number of people driving in
Boston
C.
At all prices Qd declines, so shift in the demand curve
to the left
© 2011 Thomson South-Western