Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Download Chapter 3 (not so briefly)
Document related concepts
Transcript
Chapter 3 (not so briefly) An Introduction to Supply and Demand What is a market? Where do prices come from? What happens if prices are set “too high”? What happens if prices are set “too low”? Do markets really achieve equilibrium? 1 Questions All economies must answer the following questions: What should be produced? How should it be produced? For whom will it be produced? 2 Central Planning Agrarian society Former Soviet Union Cuba, North Korea China Bureaucracy A small number of individuals address these concerns: Establish production targets for factories and farms Plan how to achieve the goals Distribute the goods and services produced 3 Market Forces Free market Capitalist economies Individuals decide for themselves Which careers to pursue Which products to produce or buy When to start businesses Who gets what is decided by individual preferences and purchasing power 4 Markets A market for any good consists of all buyers and sellers of that good Includes individuals who either do sell or might sell = suppliers (usually firms) Includes individuals who either do buy or might buy = demanders (usually people) 5 Prices Why are some goods cheap and others expensive? Through most of history, individuals had no idea Most thought that it was because of the cost of production Others thought only of the value people received from consumption Answer: both supply and demand determine prices 6 Supply Shows the quantity of a good or service that sellers wish to sell at each price On a graph = supply curve In a schedule = supply schedule Positive relationship between P and QS As price rises, a higher quantity can be sold because more opportunity costs can be covered Application of the “low-hanging fruit principle” Reflects the rising marginal costs of producing additional units 7 Supply Schedule Price Quantity Supplied $4 16 $3 12 $2 8 $1 4 8 Supply Curve - Fig. 4.1 Daily Supply Curve of Hamburgers in Greenwich Village 9 Demand Shows the total quantity of a good or service that buyers wish to buy at each price On a graph = demand curve In a schedule = demand schedule Inverse relationship between P and QD As price rises, consumers want fewer items People switch to substitutes People cannot afford as much At higher quantities, consumers are willing to pay less (application of the principle of diminishing marginal utility/benefit) 10 Demand Schedule Price Quantity Demanded $4 8 $3 12 $2 16 $1 20 11 Demand Curve - Fig. 4.2 Daily Demand Curve for Hamburgers 12 Market Equilibrium When all buyers and sellers are satisfied with their respective quantities at the market price There is a stable, balanced, unchanging situation The supply and demand curves intersect This results in the equilibrium price The price the good sells for This results in the equilibrium quantity The quantity that will be sold 13 Market Equilibrium - Fig. 4.3 The Equilibrium Price and Quantity of Hamburgers in Greenwich Village 14 Do markets really exist in equilibrium? What would be evidence that a particular market is in equilibrium? Stable prices Stable quantities Can you name a good for which price has not changed in a long time? Can you name a good for which price changes daily? Can you name a good for which price changes every second? 15 Does equilibrium mean all wants are satisfied ? Market equilibrium does not mean that everyone has what they want E.G. a poor person may not be able to afford the item at the equilibrium price 16 Disequilibrium Excess supply Market Surplus Price is higher than equilibrium price Sellers are dissatisfied Excess demand Market Shortage Price is lower than equilibrium price Buyers are dissatisfied 17 Fig. 4.4 Excess Supply 18 Fig. 4.5 Excess Demand 19 Free Markets and Equilibrium Free markets have an automatic tendency to eliminate excess supply and excess demand A market surplus serves as a signal to sellers that price is too high and therefore leads producers to decrease the price A market shortage serves as a signal to sellers that price is too low and therefore leads producers to increase the price 20 Legislation and Markets Legislators protect producers and consumers by using price controls Price ceilings Price floors 21 Price controls price ceilings – intended to help consumers A maximum allowable price specified by law because the true equilibrium price was deemed “too high” Price ceiling price < P* so now consumers want too much e.g. rent controls, limits on the price of gasoline Result in permanent shortages 22 Price Controls price floors – intended to help producers A minimum allowable price specified by law For example, agricultural price supports, minimum wages Price floor price is > P* so now sellers want to sell more Result in surpluses 23 Fig. 4.6 An Unregulated Housing Market 24 Fig. 4.7 Rent Controls 25 Markets and Social Welfare Social optimal quantity of a good The quantity that results in the maximum possible economic surplus (net gains) The socially optimal quantity will occur where the marginal cost equals the marginal benefit Economic efficiency Occurs when all goods and services are produced and consumed at their respective socially optimal levels 26 Markets and Efficiency Efficiency Principle Efficiency is an important social goal Everyone can have a larger slice of a larger pie Equilibrium Principle A market in equilibrium leaves no unexploited opportunities for individuals No “cash on the table” remains All opportunities for profit have been exploited Efficiency occurs when the market-demand curve captures all the marginal benefits of the good the market-supply curve captures all the marginal costs of the good 27 Terminology If the good’s price changes, you have a “change in quantity demanded” A movement along the demand curve “change in quantity supplied” A movement along the supply curve If something else changes, you have a “change in demand” A shift of the entire demand curve change in supply” A shift of the entire supply curve 28 Fig. 4.9 An Increase in the Quantity Demanded Versus an Increase in Demand 29 Shifts in Supply Favorable changes to the producer shift supply curve rightward lower equilibrium price higher equilibrium quantity Unfavorable changes to the producer shift supply leftward higher equilibrium price lower equilibrium quantity 30 Fig. 4.10 The Effect on the Skateboard Market of an Increase in the Price of Fiberglass 31 Shifts in Supply Changes in the Cost of Production Changes in Technology Changes in Weather Changes in Expectations 32 An Increase in Supply Sequence of events: 1. Conditions become more favorable to firms. Eg: lower cost of inputs 2. Firms now can earn higher per-unit profits at any price, so they wish to sell more units at all prices. 3. Firms increase Qs for all Prices = shift right in the supply curve (along demand). 4. Shift results in lower P* and higher Q* 33 Fig. 4.11 The Effect on the Market for New Houses of a Decline in Carpenters’ Wage Rates 34 Fig. 4.12 The Effect of Technical Change on the Market for Manuscript Revisions 35 Shifts in Demand Complements Substitutes Income Preferences Demand curve shifts rightward higher equilibrium price higher equilibrium quantity Demand curve shifts leftward lower equilibrium price lower equilibrium quantity 36 An Increase in Demand Sequence of events: 1. Conditions change such that consumers want more units at any price. Egs: lower price of complement good, higher price of a substitute, higher income, … 2. Higher Qd at all prices means rightward shift in the demand curve 3. Demand shifts right (along supply) resulting in higher P* and Q* 37 Fig. 4.13 The Effect on the Market for Tennis Balls of a Decline in Court Rental Fees 38 Complements Goods that are more valuable when used in combination--e.g. tennis balls and tennis courts Two goods are complements in consumption if an increase in the price of one causes a leftward shift in the demand curve for the other 39 Substitutes Goods that replace each other--e.g. email messages and overnight letters Two goods are substitutes in consumption if an increase in the price of one causes a rightward shift in the demand curve for the other 40 Fig. 4.14 Effect on the Market for Overnight Letter Delivery of a Decline in the Price of Internet Access 41 Income Normal good One whose demand curve shifts right when the incomes of buyers increase Inferior good One whose demand curves shifts left when the incomes of buyers increase 42 Fig. 4.15 The Effect of a Federal Pay Raise on the Rent for Conveniently Located Apartments 43 Simultaneous Shifts If, at the same time, Demand decreases and Supply increases Demand shifts left Lower price, lower quantity Supply shifts right Lower price, higher quantity We can predict that price will fall But, what happens to quantity? We must know the magnitude of the shifts 44 Fig. 4.17 The Effects of Simultaneous Shifts in Supply and Demand 45 Naturalist Question Why did you pay $60 for a Christmas tree in 2000 which only cost $40 in 1999? Assume: Inflation was not 50% The number of Christmas trees sold year to year in the United States is fairly stable. It takes six to eight years to grow a tree to the right size for Christmas trees. There are over 15,000 Christmas tree farms in the US Recall: there were significant forest fires in the northwest in 2000 46
