4 Last chapter illustrated scarcity using the PPF Societies need a mechanism to allocate scarce resources Markets are the most popular mechanism that allocates scarce resources Most of the ID: 560211
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Slide1Slide2
Why does tuition keep rising?Slide3
4
Last chapter illustrated scarcity, using the PPF. Societies need a mechanism to allocate scarce resources.
Markets are the most popular mechanism that allocates scarce resources.
Most of the
effort
of
economic research is devoted to the study of markets; how they operate, under what conditions do markets lead to efficient allocation, how can government regulations fix market failure, etc.
CHAPTER CHECKLIST
Demand and Supply – Model of a Competitive MarketSlide4
4
In this chapter we present a benchmark model of a
competitive
market
, characterized
by many
buyers and many sellers, each taking the market price as given. In this model buyers are represented with a demand curve and sellers are represented with a supply curve.
CHAPTER CHECKLIST
Demand and Supply – Model of a Competitive MarketSlide5
4
When you have completed your
study of this chapter, you will be able to
1
Distinguish between quantity demanded and demand, and explain what determines demand.
2
Distinguish between quantity supplied and supply, and explain what determines supply.3 Explain how demand and supply determine price and quantity in a market, and explain the effects of changes in demand and supply. 4
Explain
how price floors, price ceilings, and sticky prices create surpluses, unemployment, and shortage
CHAPTER CHECKLIST
Demand and SupplySlide6
COMPETITIVE MARKETS
A market is any arrangement that brings buyers and sellers together.
A market might be a physical place or a group of buyers and sellers spread around the world who never meet.Slide7
COMPETITIVE MARKETS
In this chapter, we study a
competitive market that has so many buyers and so many sellers that no individual buyer or seller can influence the price
.
Supply and Demand
model is a model that economists use to illustrate and analyze competitive markets. In such model buyers are represented by a demand curve (or schedule) and sellers are represented with a supply curve (or schedule).Slide8
4.1 DEMAND
Demand curve is the graph that shows, at any given price, the
quantity that buyers want to buy, when all the other influences on buying plans remain the same.Demand
schedule
is a
list of the quantities that buyers want to buy at different given prices, when all the other influences on buying plans remain the same. Slide9
4.1 DEMAND
Demand curve is downward slopping, i.e. when price is higher, buyers want to buy less – an assumption called
law of demand
.Slide10
4.1 DEMAND
Law of DemandAn assumption that, other
things remaining the same,If the price of the good rises, the quantity demanded of that good decreases.If the price of the good falls, the quantity demanded of that good increases.Slide11
4.1 DEMAND
Changes in Demand
Change in demand is a change in the quantity that buyers plan to buy at any given price, when any influence other than the price of the good
changes
.
A change in demand means that there is a new demand schedule and a new demand curve.Slide12
4.1 DEMAND
Increase in demand
When demand increases, buyers want to buy more at any given price – a shift to the right of the demand curve.Slide13
4.1 DEMAND
The main influences on buying plans that change demand are
IncomePrices of related goodsNumber of buyers
Preferences
Expected
future pricesExpected future income and creditSlide14
4.1 DEMAND
Income
A normal good is a good for which the demand increases if income increases and demand decreases if income decreases.An inferior good
is a good for which the demand decreases
if income increases and demand increases if income decreases.Slide15
4.1 DEMAND
Prices of Related Goods
A substitute is a good that can be consumed in place of another good.For example, rice and
noodle
are substitutes.
The demand for a good increases, if the price of one of its substitutes rises.The demand for a good decreases, if the price of one of its substitutes falls.Slide16
4.1 DEMAND
A complement
is a good that is consumed with another good.For example, milk and cereal are complements.The demand for a good
increases
, if the price of
one of its complements falls.The demand for a good decreases, if the price ofone of its complements rises.Slide17
4.1 DEMAND
Number of Buyers
The greater the number of buyers in a market, the larger is the demand for any good. PreferencesWhen preferences
change, the demand for one item increases and the demand for another item (or items) decreases.
Preferences change when: People become better informed. New goods become available.Slide18
4.1 DEMAND
Expected Future Prices
A rise in the expected future price of a good increases the current demand for that good.A fall in the expected future price of a good decreases
current
demand for that good.
For example, if the price of a computer is expected to fall next month, the demand for computers today decreases.Slide19
4.1 DEMAND
Expected Future Income and Credit
When income is expected to increase in the future, or when credit is easy to get and the cost of borrowing is low, the demand for some goods increases.When income is expected to decrease in the future, or when credit is hard to get and the cost of borrowing is high, the demand for some goods decreases.Changes in expected future income and the availability and cost of credit has the greatest effect on the demand for big ticket items such as homes and cars.
Slide20
4.1 DEMAND
Figure 4.2
illustrates and summarizes the distinction.Slide21Slide22
4.2 SUPPLY
A supply curve
is a graph that shows, at any given price, the quantity that sellers want to sell, when
all other influences on
selling
plans remain the same.A supply schedule is a list of the quantities supplied at different given prices, when all other influences on selling plans remain the same.Slide23
4.2 SUPPLY
Supply curve is upward slopping, i.e. when price is higher, sellers want to sell more – an theorem called
law of supply
.Slide24
4.2 SUPPLY
The
Law of Supply A theorem (can be proved mathematically), that other things remaining the same,
If the price of a good rises, the quantity supplied of that good increases
.
If the price of a good falls, the quantity supplied of that good decreases.Slide25
4.2 SUPPLY
Changes in Supply
A change in supply is a change in the quantity that suppliers plan to sell when any influence on selling plans other than the price of the good changes.A change in supply means that there is a new supply schedule and a new supply curve.Slide26
4.2 SUPPLY
Increase in supply
When supply increases, sellers want to sell more at any given price – a shift to the right of the supply curve.Slide27
4.2 SUPPLY
The main influences on selling plans that change supply are
Prices of resources and other inputsProductivityNumber of sellers
Prices
of related goods
Expected future pricesSlide28
4.2 SUPPLY
Prices of Resources and Other Inputs
Resource and input prices influence the cost of production. And the more it costs to produce a good, the smaller is the quantity supplied of that good.Slide29
4.2 SUPPLY
Productivity
Productivity is output per unit of input. An increase in productivity lowers costs and increases supply. For example, an advance in technology increases supply.
A decrease in productivity raises costs and decreases supply. For example, a severe hurricane decreases supply
.
Number of Sellers The greater the number of sellers in a market, the larger is supply. Slide30
4.2 SUPPLY
Prices of Related Goods
A change in the price of one good can bring a change in the supply of another good.A substitute in production is a good that can be produced in place of another good.
For example, a truck and an SUV are substitutes in production in an auto factory.
The supply of a good
increases if the price of one of its substitutes in production falls.The supply a good decreases if the price of one of its substitutes in production rises.Slide31
4.2 SUPPLY
A complement in production
is a good that is produced along with another good. For example, cream is a complement in production of skim milk in a dairy.The supply of a good increases if the price of one of its complements in production
rises
.
The supply a good decreases if the price of one of its complements in production falls.Slide32
4.2 SUPPLY
Expected
Future Prices Expectations about future prices influence supply. Expectations of future prices of resources also influence supply.Slide33
4.2 SUPPLY
Illustrating a Change in Selling Plans
A change in quantity supplied is a change in the quantity of a good that suppliers plan to sell that results from a change in the price of the good.A change in supply
is a change in the quantity that suppliers plan to sell when any influence on selling plans other than the price of the good changes.Slide34
4.2 SUPPLY
Figure 4.4
illustrates and summarizes the distinction.Slide35Slide36
4.3 MARKET EQUILIBRIUM
Market equilibrium
occurs when the quantity demanded equals the quantity supplied. At market equilibrium, buyers’ and sellers’ plans are consistent.
Equilibrium price
is the price at which the quantity demanded equals the quantity supplied. Equilibrium quantity is the quantity bought and sold at the equilibrium price.Slide37
4.3 MARKET EQUILIBRIUM
Figure
4.5 shows theequilibrium price and
equilibrium quantity.
1.
Market equilibrium at the intersection of the demand curve and the supply curve.
2. The equilibrium price is $1 a bottle.3. The equilibrium quantity is 10 million bottles a day.Slide38Slide39
4.3 MARKET EQUILIBRIUM
Price: A Market’s Automatic Regulator
Law of market forcesWhen there is a shortage, the price rises.When there is a surplus, the price falls.Shortage (excess demand) occurs when the quantity demanded exceeds the quantity supplied.
Surplus (excess supply)
occurs when the quantity supplied exceeds the quantity demanded. Slide40
4.3 MARKET EQUILIBRIUM
Figure
4.6(a) marketachieves equilibrium.
At $1.50 a bottle:
1.
Quantity supplied is 11 million bottles.3. There is a surplus of 2 million bottles.
4. Price falls until the surplus is eliminated and the market is in equilibrium. 2. Quantity demanded is 9 million bottles.Slide41Slide42
4.3 MARKET EQUILIBRIUM
Figure
4.6(b) marketachieves equilibrium.
At 75 cents a bottle:
1.
Quantity demanded is 11 million bottles.3. There is a shortage of 2 million bottles.
4. Price rises until the shortage is eliminated and the market is in equilibrium. 2. Quantity supplied is 9 million bottles.Slide43Slide44
4.3 MARKET EQUILIBRIUM
Predicting Price Changes: Three QuestionsWe can work out the effects of an event by answering:
Does the event change demand or supply?Does the event increase or decrease
demand or supply—shift the demand curve or the supply curve
rightward
or leftward?What are the new equilibrium price and equilibrium quantity and how have they changed?Slide45
4.3 MARKET EQUILIBRIUM
Effects of Changes in Demand
Event: A new study says that tap water is unsafe. In the market for bottled water:With tap water unsafe, demand for bottled water changes.The demand for bottled water
increases,
the demand curve
shifts rightward.What are the new equilibrium price and equilibrium quantity and how have they changed?Slide46
4.3 MARKET EQUILIBRIUM
Figure
4.7(a) illustrates the outcome.
1.
An increase in demand shifts the demand curve rightward.
3. The quantity supplied increases along the supply curve.
4. Equilibrium quantity increases.
2. At $1.00 a bottle, there is a shortage, so the price rises.Slide47Slide48
4.3 MARKET EQUILIBRIUM
Event: A new zero-calorie sports drink is invented.
In the market for bottled water:The new drink is a substitute for bottled water, so the demand for bottled water changesThe demand for bottled water decreases,
the demand curve
shifts leftward.
What are the new equilibrium price and equilibrium quantity and how have they changed?Slide49
4.3 MARKET EQUILIBRIUM
Figure
4.7(b) shows theoutcome.
1.
A decrease in demand shifts the demand curve leftward.
2. At $1.00 a bottle, there is a surplus, so the price falls.
3. Quantity supplied decreases along the supply curve.4. Equilibrium quantity decreases.Slide50Slide51
4.3 MARKET EQUILIBRIUM
When demand changes:
The supply curve does not shift. But there is a change in the quantity supplied.Equilibrium price and equilibrium quantity change in the same
direction as the change in demand.Slide52
4.3 MARKET EQUILIBRIUM
Effects of Changes in Supply
Event: European water bottlers buy springs and open plants in the United States. In the market for bottled water:With more suppliers of bottled water, supply changes.
The supply of bottled water
increases,
the supply curve shifts rightward.What are the new equilibrium price and equilibrium quantity and how have they changed?Slide53
4.3 MARKET EQUILIBRIUM
Figure
4.8(a) shows theoutcome.
1.
An increase in supply shifts the supply curve rightward.
2. At $1 a bottle, there is a surplus, so the price falls.
3. Quantity demanded increases along the demand curve.4. Equilibrium quantity increases.Slide54Slide55
4.3 MARKET EQUILIBRIUM
Event: Drought dries up some springs in the United States.
In the market for bottled water: Drought changes the supply of bottled water. The supply of bottled water
decreases,
the supply curve
shifts leftward. What are the new equilibrium price and equilibrium quantity and how have they changed?Slide56
4.3 MARKET EQUILIBRIUM
Figure
4.8(b) shows theoutcome.
1.
A decrease in supply shifts the supply curve leftward.
2. At $1.00 a bottle, there is a shortage, so the price rises.
3. Quantity demanded decreases along the demand curve.4. Equilibrium quantity decreases.Slide57Slide58
4.3 MARKET EQUILIBRIUM
When supply changes:
The demand curve does not shift. But there is a change in the quantity demanded.
Equilibrium price changes in the
opposite
direction to the change in supply.Equilibrium quantity changes in the same direction as the change in supply.Slide59
4.3 MARKET EQUILIBRIUM
Effects
of Changes in Both Demand and SupplyWhen two events occur at the same time, work out how
each event influences the market:
Does each event change demand or supply?
Does either event increase or decrease demand or increase or decrease supply?What are the new equilibrium price and equilibrium quantity and how have they changed?Slide60
4.3 MARKET EQUILIBRIUM
The figure shows the
effects of an increase inboth demand and supply.
1.
An increase in demand shifts the demand curve rightward; an increase in supply shifts the supply curve rightward.
2.
Equilibrium price might rise or fall.3. Equilibrium quantity increases.Slide61Slide62
4.3 MARKET EQUILIBRIUM
Both
Demand and Supply IncreaseIncreases the equilibrium quantity. The change in the equilibrium price is ambiguous because the:
Increase in demand
raises
the price.Increase in supply lowers the price.Slide63
4.3 MARKET EQUILIBRIUM
This figure shows the
effects of a decrease inboth demand and supply.
1.
A decrease in demand shifts the demand curve leftward; a decrease in supply shifts the supply curve leftward.
2.
Equilibrium price might rise or fall.3. Equilibrium quantity decreases.Slide64Slide65
4.3 MARKET EQUILIBRIUM
Both
Demand and Supply DecreaseDecreases the equilibrium quantity. The change in the equilibrium price is ambiguous because the:
Decrease in demand
lowers
the priceDecrease in supply raises the price.Slide66
4.3 MARKET EQUILIBRIUM
This figure shows the effects
of a decrease in demandand an increase in supply.
1.
A decrease in demand shifts the demand curve leftward; an increase in supply shifts the supply curve rightward.
2.
Equilibrium price falls.3. Equilibrium quantity might increase, decrease, or not change.Slide67Slide68
4.3 MARKET EQUILIBRIUM
Demand Decreases and Supply Increases
Lowers the equilibrium price. The change in the equilibrium quantity is ambiguous because the:Decrease in demand decreases
the quantity.
Increase in supply
increases the quantity.Slide69
4.3 MARKET EQUILIBRIUM
The figure shows the effects
of an increase in demandand a decrease in supply.
1.
An increase in demand shifts the demand curve rightward; a decrease in supply shifts the supply curve leftward.
2.
Equilibrium price rises.3. Equilibrium quantity might increase, decrease, or not change.Slide70Slide71
4.3 MARKET EQUILIBRIUM
Demand Increases and Supply Decreases
Raises the equilibrium price. The change in the equilibrium quantity is ambiguous because the:Increase in demand increases
the quantity.
Decrease in supply
decreases the quantity.Slide72
4.4 PRICE RIGIDITIES
Price adjustments bring market equilibrium, but suppose that for some reason, the price in a market does not adjust. What happens then?
The answer depends on why the price doesn’t adjust. There are three possibilities:Price floorPrice ceiling or price capSticky price
Slide73
4.4 PRICE RIGIDITIES
P
rice Floor A
price floor
is a government regulation that places a lower limit on the price at which a particular good, service, or factor of production may be traded.An example is the minimum wage in labor markets.A minimum wage law is a government regulation that makes hiring labor for less than a specified wage illegalTrading
below the price floor is illegal.Slide74
Figure 4.11 shows a market for fast-food servers.
1.
The demand for and supply of fast-food servers determine the market equilibrium.
7.2 PRICE FLOORS
2.
The equilibrium wage rate is $5 an hour.
3.
The equilibrium quantity is 5,000 servers.Slide75Slide76
A minimum wage is set
above
the equilibrium wage.
1.
The quantity demanded decreases to 3,000 workers.
2.
The quantity supplied increases to 7,000 people.
3.
4,000 people are unemployed.
7.2 PRICE FLOORS
Figure
4.12
shows
how
a minimum wage creates unemployment.Slide77Slide78
4.4 PRICE RIGIDITIES
Price Ceiling or Price Cap
A price ceiling or price cap
is a government regulation that places an
upper limit on the price at which a particular good, service, or factor of production may be traded.An example is a ceiling on apartment rents.To see how a price cap works, let’s look at the market for campus parking.Slide79
Figure 4.13 shows a market for campus parking.
1.
The demand for and supply of parking spaces determine the market equilibrium.
4.4
PRICE FLOORS
2. The equilibrium price is $80 a month.
3. The equilibrium quantity is 2,000 parking spaces.Slide80Slide81
1.
The quantity supplied decreases to 1,000 spaces.
2.
The quantity demanded increases to 3,000 spaces.
3.
There is a shortage of 2,000 parking spaces.4.4 PRICE FLOORSSuppose that the college caps the price at $40 a month. The figure shows that a price cap set below the equilibrium price creates a shortage.Slide82Slide83
4.4 PRICE RIGIDITIES
Sticky Price
In most markets, a law or regulation does not restrict the price, but in some markets, the buyer and seller agree on a price for a fixed period.
In other markets, the seller
sets a price that changes
infrequently.In these markets, prices adjust, but not quickly enough to avoid shortages or surpluses.Slide84
Tuition has risen every year since 1980 and at the same time enroll-ment has steadily increased.
Figure 1 shows the facts.Slide85
Figure 2 shows the demand and supply of college education services.
The law of market forces determines the tuition at the level that makes the quantity demanded equal the quantity supplied.Slide86
In a given year other things remains the same, but over time things change.
Population grows, incomes increase, new jobs require workers with more education, and subsidized student loans expand.
The changes increased the demand for college.
Both the tuition and the enrollment increased.Slide87
Supply and Demand QuizSlide88
Question 1
Suppose Taylor has a downward slopping demand curve for milk. An increase in the market price of milk will
Decrease Taylor’s quantity demanded of milk Increase Taylor’s quantity demanded of milkDecrease Taylor’s demand for milk
Increase Taylor’s demand for milk Slide89
Question 2
What is the effect of a rising price of cereal on the demand curve for milk, assuming that the two goods are complements?
The demand curve for milk will shift to the right.The demand curve for milk will shift to the left.The demand curve for milk will not change.Slide90
Question 3
Suppose that Domino’s Pizza has an upward slopping supply curve of pizza. An increase in the market price of pizza will
shift the supply curve of Domino’s Pizza to the right.shift the supply curve of Domino’s Pizza to the left.increase the quantity supplied by Domino’s Pizza.
decrease the quantity supplied by Domino’s Pizza. Slide91
The table shows the demand and supply schedules for milk.
The equilibrium price of milk is $1 per carton.
At the price of $1.75, there is excess demand of 45 cartons.At the price of $1.25 there is excess supply of 45 cartons.
The equilibrium price is $1.5 per carton.
Question 3Slide92
Question 6
Consider the following market for some good.
D :
S
: Find the equilibrium in the market.Describe the market graphically.At the price of $25, there is an excess demand/supply in the market (circle the correct answer) of _____ units.
Slide93
Describe the effect of the Warriors winning the NBA championship on the market for Steph Curry's T-shirts
.A new potato cutting machine works twice as fast as the old machine. Describe the effect of adopting the new technology on the market for
French fries.Baby boomers are approaching retirement age. Describe the effect of this demographic change on the market for health care.
News announcement: mad cow disease is back. Analyze the effects of the announcement on the market for beef and chicken
.
New oil reserves were discovered in China. Analyze the effect of this event on the market for oil.Slide94
In the last 20 years the demand for personal computers increased dramatically. At the same time the prices of computers decreased. Use the supply and demand diagram to reconcile these facts
.A
study shows that chocolate significantly improves the learning ability of students. At the same time, a tsunami destroys many Cocoa Beans crops in Indonesia (second largest cocoa beans producer in the world). Describe the effect of these events on the market for chocolate.Suppose that both buyers and sellers in a market expect higher price next period. Describe the effect of these (inflationary) expectations on the market in the current period.