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MICROECONOMICS
BU 224
Seminar
Three
Agenda




Course Issues and Questions
Chapters Three and Four: Questions
and Problems from the text.
Review of Market Allocation
Mechanisms
Homework Review
Demand
Schedule or curve
Amount consumers are willing
and able to purchase at a given
price
Other things equal
Individual demand
Market demand
The Demand Curve
P
P Qd
$5 10
4 20
3 35
2 55
Price (per bushel)
6
5
4
3
2
1
1 80
0
LO1
D
Q
10
20
30
40
50
60
Quantity
70
80 Demanded (bushels per week)
3-4
Determinants of Demand
•
•
•
•
•
•
•
•
•
Tastes
Number of Buyers
Income
- Normal Goods
- Inferior Goods
Price of Related Goods
- Substitute Good
- Complementary Good
Consumer Expectations
Determinants of Supply
• Resource Prices
• Technology
• Taxes and Subsidies
• Prices of Other Goods
• Producer Expectations
• Number of Sellers
Chapter 3 Questions
1. What are some examples of inferior products?
2. Who does the demanding and the supplying in the
labor market? The loanable funds market?
3. Is the price system a "just" or "fair" way to allocate
products? What about medical services?
4. What can we say about the demand and supply
curves for products which are "free", like matches,
toothpicks, and kittens?
5. Why do you think "rock" stars charge concert ticket
prices below what they could charge and still sell out
their performances?
Chapter 3 Questions
1. A survey indicated that chocolate ice cream is America’s
favorite ice-cream flavor. For each of the following, indicate
the possible effects on demand and/or supply and equilibrium
price and quantity of chocolate ice cream.
a. A severe drought in the Midwest causes dairy farmers to
reduce the number of milk-producing cattle in their herds by
a third. These dairy farmers supply cream that is used to
manufacture chocolate ice cream.
b. A new report by the American Medical Association reveals
that chocolate does, in fact, have significant health benefits.
c. The discovery of cheaper synthetic vanilla flavoring lowers
the price of vanilla ice cream.
d. New technology for mixing and freezing ice cream lowers
manufacturers’ costs of producing chocolate ice cream.
Market Allocation Mechanisms

Inputs or factors of production need
to be used to produce goods and
services. The ways such inputs can
be utilized to serve the needs of
consumers are called the allocation
mechanisms.
Market Allocation Mechanisms
Four Market Allocation Mechanisms:
1. The market (price),
2. Government,
3. Random choice, and
4. First-come, first-served
Market Allocation Mechanisms

Efficiency: If an allocation mechanism
is efficient, it means that it best
satisfies the needs and wants of a
society compared to the other
allocation mechanisms. A system of
markets and prices is generally the
most efficient way of allocating
scarce resources. As a result, it is
predominantly used in most industrial
countries today.
Consumer Surplus
Difference between what a
consumer is willing to pay for a
good and what the consumer
actually pays
Extra benefit from paying less
than the maximum price
5-14
Consumer Surplus
Consumer Surplus
(2)
Maximum
Price Willing
to Pay
(3)
Actual Price
(Equilibrium
Price)
Bob
$13
$8
$5 (=$13-$8)
Barb
12
8
4 (=$12-$8)
Bill
11
8
3 (=$11-$8)
Bart
10
8
2 (=$10-$8)
Brent
9
8
1 (= $9-$8)
Betty
8
8
0 (= $8-$8)
(1)
Person
LO2
(4)
Consumer
Surplus
5-15
Price (per bag)
Consumer Surplus
Consume
r Surplus
Equilibriu
m Price
P1
D
Q
1
Quantity (bags)
LO2
5-16
Producer Surplus
Difference between the actual
price a producer receives and
the minimum price they would
accept
Extra benefit from receiving a
higher price
LO2
5-17
Producer Surplus
Producer Surplus
(2)
Minimum
Acceptable
Price
(3)
Actual Price
(Equilibrium
Price)
Carlos
$3
$8
$5 (=$8-$3)
Courtney
4
8
4 (=$8-$4)
Chuck
5
8
3 (=$8-$5)
Cindy
6
8
2 (=$8-$6)
Craig
7
8
1 (=$8-$7)
Chad
8
8
0 (=$8-$8)
(1)
Person
LO2
(4)
Producer
Surplus
5-18
Price (per bag)
Producer Surplus
Producer
surplus
P1
S
Equilibriu
m price
Q
1
Quantity (bags)
LO2
5-19
Price (per bag)
Efficiency Revisited
Consumer
surplus
S
P1
Producer
surplus
D
Q
1
Quantity (bags)
LO2
5-20
Microeconomics
Questions?