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More Markets
Relative Scarcity
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How scarce is one good or service
compared to all other goods and services?
Relative scarcity is the relationship
between supply and demand.
Price is the measurement of relative
scarcity.
What determines the price of a work of
art, an antique, an old stamp or coin?
What is an equilibrium price?
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The measure of relative scarcity.
Relative scarcity is the relation between
supply and demand.
How scarce is one product compared to all
others?
The unit of measurement is the price in
the domestic currency. (e.g. $43.37)
Relative prices: why?
Diamond
$50,000
Insulin $5
Price: indicator of relative
scarcity
(Units on the Scarcometer)
Order these products in terms of
relative scarcity
yacht
 candy bar
 nice dinner for two in San Francisco
 mini truck
 laptop computer
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Order these products in terms of
relative scarcity
1
5
4
2
3
yacht
candy bar
nice dinner for two in San Francisco
mini truck
laptop computer
Equilibrium Price
The measure of Relative Scarcity
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Feet and inches measure distance.
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Pounds and ounces measure weight.
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Degrees Fahrenheit measure heat.
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Cups and pints and quarts measure volume.
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Dollars and cents measure relative scarcity in
the U.S.
Relative Scarcity
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Not the same as rare
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Rare tropical disease is not scarce (no
demand).
Gold is more scarce than water even though
water is essential for life. (Supply of water is
greater than the supply of gold.)
Some collectors’ items are more scarce than
others depending upon supply and demand.
Their prices go up or down depending upon
changes in supply and demand.
Relative Scarcity
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Relative scarcity is not a subjective evaluation of worth
or value or social contribution even though some of
those considerations are included in the demand
function.
To the extent that some can manipulate supply or
demand, they may influence relative scarcity and price
but price remains the measurement of relative scarcity.
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OPEC
Advertising
In a market with CIIP, price is the accurate measure of
the relative scarcity of a good or service.
Relative Scarcity
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The relationship between supply and
demand.
Measured by the equilibrium price
Not the same as rare
Not a matter of supply alone
Not fair or unfair
The Law of Supply
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Once all other factors (WAGTIPS) have been
considered, the quantity supplied of a good or service
varies directly with the price of the good or service;
price goes up, quantity supplied goes up.
The influence of price on quantity supplied is a short
run phenomenon and assumes no change in
WAGTIPS.
The Principle of Exchange – if the price received by
the supplier is greater than all production costs, the
supplier will supply the product.
Price is an incentive to suppliers
Diminishing Marginal Returns
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Given some fixed inputs, additions of the
variable inputs will yield lower additional
products.
Since each of the variable inputs are paid the
same, marginal costs increase as production
increases.
Marginal resource costs rise as production
increases.
Therefore, suppliers must receive a higher price
to supply a greater quantity, assuming no
change in WAGTIPS.
Price Elasticity of Supply
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Measures the strength of sellers’
reactions to a price change.
How much will quantity supplied change
as a result of a price change?
Depends upon suppliers’ ability to increase
or decrease production in the short run.
How flexible are resources used in
production?
The Law of Demand
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Once all other factors have been considered, the
quantity demanded of a good or service varies
inversely with the price of the good or service.
Price rises, quantity demanded falls; price falls,
quantity demanded rises.
The Principle of Exchange – if the price asked is
greater than the expected benefit, the demander will
not buy the product; if the price asked is less than
the expected benefit, the demander will buy the
product. Price is a disincentive to buyers.
Higher prices send buyers in search of substitutes.
Diminishing Marginal Utility and
Demand
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Utility is the benefit that consumers get from
consuming goods and services
As consumers consume more of a product,
the additional utility from additional units of
the product decreases – the law of
diminishing marginal utility
To entice buyers to buy more as their
marginal utility falls, price must also fall,
making the price lower than the expected
benefit. (The principle of exchange)
Price Elasticity of Demand
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Measures the strength of buyers’
reactions to a price change.
How much will quantity demanded change
as a result of a price change?
Depends upon
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availability of substitutes
Percentage of total expenditures
time
Allocative Efficiency
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At the equilibrium price, the marginal utility of
consuming the product is equal to the marginal
resource cost of producing the product.
From society’s perspective, this is the optimal
resource allocation to this particular activity
Attempts to change the price of a product
through regulation will distort incentives and
cause resource misallocation.
A Price Above Equilibrium
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If a price is above equilibrium, a surplus exists.
(The quantity supplied is greater than the
quantity demanded at the higher price.)
With no barriers, price will begin to fall towards
equilibrium
As price falls, quantity supplied will decrease and
quantity demanded will increase.
Eventually, price will fall to the equilibrium where
quantity supplied is equal to quantity demanded,
which is the quantity exchanged.
A Price Below Equilibrium
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If a price is below equilibrium, a shortage exists.
(The quantity demanded is greater than the
quantity supplied at the lower price.)
With no barriers, price will begin to rise towards
equilibrium
As price rises, quantity demanded will decrease
and quantity supplied will increase.
Eventually, price will rise to the equilibrium
where quantity demanded is equal to quantity
supplied, which is the quantity exchanged.
Surplus and Shortage
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Surplus: at a price above equilibrium, quantity
supplied is greater than quantity demanded.
Shortage: at a price below equilibrium, quantity
demanded is greater than quantity supplied.
Surpluses and shortages are always in reference
to specific non-equilibrium prices.
They will be automatically eliminated by price
changes if there are no barriers to price
movements.
Price Floors and Ceilings
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A legislated price
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A price floor is a minimum price. Prices can be
higher, but not lower than a floor. (Minimum
wage) If the floor is above the equilibrium, a
surplus is created.
A price ceiling is a maximum price. Prices can
be lower, but not higher than a ceiling. (Rent
controls) If the ceiling is below the
equilibrium, a shortage is created.
Price Floors and Price
Ceilings
Price cannot fall below a floor
Price cannot rise above a ceiling
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Who gains?
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Politicians
Those who get the goods and services
Those who police the ceiling
Who loses?
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Those who supply the good or service
Those who can’t get the good or service
Taxpayers
A Price Ceiling - shortage
A Price Floor - surplus
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Who gains?
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Politicians
Those who supply the goods and services
Those who police the floor
Those who store the surplus
Who loses?
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Those who demand the good or service
Taxpayers
Price Controls - The Message
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Price controls distort market incentives
They can not change the relative
scarcity of the product
They cause over allocation or under
allocation of resources
They cause arbitrary distributive effects
But they are great politics!
Markets during Disasters
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What happens to markets for wood, tools,
and even water during a disaster?
Can’t get products in; supply decreases.
 More people want these products. Demand
increases.
 Product is relatively more scarce.
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Markets during Disasters
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What happens to markets for wood, tools,
and even water during a disaster?
What incentive would cause suppliers to
supply more of the product?
 A price ceiling prevents the price from rising.
 The shortage worsens.
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Disasters usually cause shortages
Price ceilings make the shortages
worse.
Government price controls can’t change relative
scarcity, but they do distort incentives
The Market in Disasters
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Considering the market, what happens to
products like wood, tools, and even water
during a disaster?
Trucks can’t bring products in, therefore
supply is decreased
 More people need these products than
normal- Demand increases.
 So why do people cry price gouging?
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Price Gouging???
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If the government felt sorry for these
people and imposed a price floor on
certain products, we, as economists, know
that there will be a shortage.
Other people feel that the prices are
“made high” to take advantage of the
affected people- simply not true.
PRICE CONTROLS
DISTORT MARKET
INCENTIVES and
CAUSE RESOURCE
MISALLOCATION
Main Points
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Relative scarcity for a particular product is the
relationship between supply and demand.
With CIIP, supply and demand determines the
relative scarcity of a product, which is accurately
measured by the price of the product.
The Law of Supply states that price and quantity
move in the same direction. This assumes no
change in WAGTIPS.
Price elasticity of supply measures the strength
of suppliers’ response to price changes.
Main Points
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The Law of Demand states the price and
quantity demanded move in the opposite
direction. This assumes no change in
TIPSE.
Price elasticity of demand measures the
strength of buyers’ reactions to price
changes.
Main Points
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Supply represents the marginal opportunity cost
of producing different quantities of a product.
Demand represents the marginal utility of
consuming different quantities of a product.
Allocative efficiency occurs at the equilibrium
where the marginal opportunity cost of
producing a quantity is just equal to the
marginal utility of consuming that quantity.
Main Points
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A surplus exists at a price above the equilibrium
where the quantity supplied is greater than the
quantity demanded.
A shortage occurs at a price below the
equilibrium where the quantity demanded is
greater than the quantity supplied.
With no price floor, a surplus will correct itself as
the price falls.
With no price ceiling, a shortage will correct
itself as the price rises.