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Lower Price
Lower
Output
Higher Price
Leftward
(downward)
Shift of Demand
Leftward
(upward)
Shift of
Supply
Higher
Output
Rightward
(downward)
Shift of
Supply
Rightward
(upward)
Shift of Demand
Breakdown all shifts into their output and price vectors
GENERALIZED DEMAND FUNCTION
f = f( Price:
Consumption Taxes,
Price of Complements
Price of Substitutes
Tastes for good/service
Income,
Buyer Expectations,
Number of buyers,
Consumption subsidies)
P
Q
GENERALIZED SUPPLY FUNCTION
f = f( Price:
Price of Resources,
Production Taxes
Technology,
Seller Expectations,
Number of Sellers,
Production Subsidies)
MARKET GOVERNMENT GOVERNMENT
FAILURE INTERVENTION FAILURE
EXTERNALITY PUBLIC ENTERPRISE
-PUBLIC GOODS-NATIONALIZATION
MARKET
-PRIVATIZATION
POWER
REGULATION
INEQUITIES
- OUTPUT
DYNAMIC
- PRICE
MKT. FAIL.
- STANDARDS
INDIVISIBILITY ANTITRUST
INFORMATION
-STRUCTURE
ASYMMETRY -CONDUCT
FAILURE TO
TAXES (SUBSIDIES)
RATION
PROVISION OF
INFORMATION
RATIONING (MONEY)
ADMINISTRATIVE
COST
COMPLIANCE
COST
EFFICIENCY COST
- NEGATIVE EXTER.
-PUBLIC BADS
- MKT POWER
- INEQUITIES
- DYNAMIC
- INDIVISIBILITY
- INFORMATION
COBWEB MODEL
Price
90
80
70
Bo
60
Ao
B1
50
A1
A3
40
A2
30
20
B3 Such a low price provides no incentive B2
10
to produce any product at all.
0
0
5
10
15
20
25
CHEMICALS (millions of pounds/year)
FOUR FAILURES TO RATION
P
Not a Problem
P
P
R
R
R
I
I
I
I
C
C
C
C
E
E
E
E
R
Glut
Severe
P
Infeasibility
Shortage
QUANTITY
Demand
QUANTITY
QUANTITY
Supply
QUANTITY
Tobacco Production:
Every pound sold builds sound community of the U.S.A.:
value of moral fiber= $1 per $2 sold (50% ad valorem)
Price
$3
per
pound
Private Demand
Private Supply
50% above private market price:
Ad valorem sales TAX
50% BELOW private market price:
Ad valorem sales SUBSIDY
Pounds of tobacco
Tobacco Production:
Every pound sold builds sound community of the U.S.A.:
value of moral fiber= $1 per $2 sold (50% ad valorem)
Price
$3
per
pound
Private Demand
Private Supply
50% above private market price:
Ad valorem sales subsidy
Pounds of tobacco
Regulation: The four types (price and output)
(A)
(B)
Current Price
P
Supply
Demand
(C)
Current Price
P
Demand
Supply
(D)
Current Price
P
P
Demand
Supply
Minimum
Output
Quota
Current Price
Demand
Supply
Minimum
Price
Control
Maximum
Output
Control
Maximum
Price
Control
Aggregate Income
Aggregate Income
Aggregate Income
Aggregate Income
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
% Change in Organ Transplants
per year
20
15
10
5
0
Yearly Remuneration
($thousands/year of service)
300
Supply Curve:
What Sellers are
Willing and able
To sell at different prices
200
160
Doctor Services (# of doctors/year)
Price
($thousands/organ transplant)
95
60
Supply Curve:
What Sellers are
Willing and able
To sell at different prices
40
36
Organ Transplants (number per year)
Doctor Remnueration
($thousands/service years)
300
200
160
Demand Curve:
What Buyers are
Willing and able
To buy at different
prices
Doctor Services (# of doctors/year)
Price
($thousands/organ transplant)
95
60
40
36
Demand Curve:
What Buyers are
Willing and able
To buy at different
prices
Organ Transplants (number per year)
Price
($thousands/organ transplant)
95
Supply Curve:
What Sellers are
Willing and able
To sell at different prices
40
Equilibrium @ Price=$40,000
Demand Curve:
What Buyers are
Willing and able
To buy at different
prices
Organ Transplants (number per year)
Markets Want to Work
• Markets = the process of procuring and
allocating a good
• The market can “fail” in that the resulting
allocation of goods is either inadequate
or viewed as inappropriate
Price
($thousands/organ transplant)
95
Surplus @ Price= $60,000
60
40
36
Supply Curve:
What Sellers are
Willing and able
To sell at different prices
Equilibrium @ Price=$40,000
Demand Curve:
What Buyers are
Willing and able
Shortage @ Price = $36,000
To buy at different
prices
Organ Transplants (number per year)
Price
($thousands/organ transplant)
95
Supply
40
36
Equilibrium @ Price=$40,000
PRICE CEILING
At $36 causes Shortage
Demand
Organ Transplants (number per year)
Quantity demanded exceeds quantity supplie
Price
($thousands/organ transplant)
95
Supply
40
36
Equilibrium @ Price=$40,000
PRICE CEILING
At $36 causes Shortage
Demand
Organ Transplants (number per year)
Price
Quantity demanded exceeds quantity supplied
($thousands/organ transplant)
Black market prices exceed legal prices
95
Supply
40
36
Equilibrium @ Price=$40,000
PRICE CEILING
At $36 causes Shortage
Demand
Organ Transplants (number per year)
Quantity demanded exceeds quantity supplied
($thousands/organ transplant) Black market prices exceed legal prices
95
Lines of people with first-come-first-served
rationing
Price
Supply
40
36
Equilibrium @ Price=$40,000
PRICE CEILING
At $36 causes Shortage
Demand
Organ Transplants (number per year)
Price
Quantity supplied exceeds quantity demanded
($thousands/organ transplant)
95
Supply
Price Floor of $60,000 CausesSurplus
Supply
60
40
Equilibrium @ Price=$40,000
Demand
Demand
Organ Transplants (number per year)
Quantity supplied exceeds quantity demanded
Price
($thousands/organ transplant)
Black market prices below legal prices
95
Supply
Price Floor of $60,000 CausesSurplus
Supply
60
40
Equilibrium @ Price=$40,000
Demand
Demand
Organ Transplants (number per year)
Quantity supplied exceeds quantity demanded
Black market prices below legal prices
($thousands/organ transplant)
Lines of product (inventories) can’t be sold and
95
Supply are dumped.
Price
Price Floor of $60,000 CausesSurplus
Supply
60
40
Equilibrium @ Price=$40,000
Demand
Demand
Organ Transplants (number per year)
Quantity supplied exceeds quantity demanded
($thousands/organ transplant) Black market prices below legal prices
Lines of product (inventories) can’t be sold and
95
are dumped.
Supply
Price
Price Floor of $60,000 CausesSurplus
Supply
60
40
Equilibrium @ Price=$40,000
Demand
Demand
Organ Transplants (number per year)
HOW TO BE SHERLOCK HOLMES
IN READING BETWEEN THE LINES
If You Know P and Q then you know whether demand or supply
is involved as well as the direction of the shift.
If You Know the shift in demand or supply, then you know what
is likely to happen to price and quantity
If You Know the determinant that has changed and price,
then you know what is happening to quantity demanded.
If You Know the determinant that has changed and quantity demanded,
then you know what is happening to price.
Figure 1. Shifts of Supply and Demand
(A)
(B)
SUPPLY SHIFTS:
LEFTWARD (up)
P
Supply
Q
(C)
RIGHTWARD (down)
DEMAND SHIFTS:
LEFTWARD (down)
P
P
Supply
Q
(D)
RIGHTWARD (up)
P
Demand
Q
Demand
Q
19
47
Percentage
20
15
10
5
0
-5
-10
-15
GDP%chg
Year
UnemplRate
20
01
19
95
19
89
19
83
19
77
19
71
19
65
19
59
19
53
Indexes
Prices,
Wages,
Interest
rates
Exchange
rates
1 to 2 years
GDP
Government.
Balance
Unemployment
Trade
Balance
Inventory
Change
6 mos.
Prices,
Wages,
Interest
rates
Exchange
rates
GDP
1 to 2 years
Prices,
Wages,
Interest
rates
Exchange
rates
Government.
Balance
Unemployment
Trade
Balance
Inventory
Change
6 mos.
Prices,
Wages,
Interest
rates
Exchange
rates
B
A
L
A
N
C
E
O
F
P
A
Y
M
E
N
T
S
Currrent account = trade balance= net exports
Real goods and services - imports
Money
Home
Abroad
Real goods and services - exports
CAPITAL ACCOUNT
Titles to foreign wealth sold to Americans
Money
Home
Abroad
Titles to American wealth sold to foreigners
Unilateral transfers
Home
Money
Abroad