PAM_2000_Spring_2009_Lecture_4

PAM_2000_Spring_2009_Lecture_4 - PAM 2000 Lecture 4 Agenda:...

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    PAM 2000 Lecture 4 Agenda: Remarks on market equilibrium Policy interventions: price floors and ceilings Price Elasticity of demand Income elasticity of demand Cross price elasticity of demand Prelim 1 is in two weeks from today
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    Reading for PAM 2000 P. Ch. 4, 5 M, B, N. Ch. 5-8, 10
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    Orange Market Equilibrium p , $ per Lb 220 176 D S e 233 246 194 207 Q , Million lbs of oranges per ye 0 3.95 3.30 2.65 Excess supply = 39 Excess demand = 39 Price signals - if price increases, it tells demanders to demand less and vice versa; market is determining that there is enough resources to produce 220 million lbs oranges/year
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    Effects of a Shift of the Demand Curve D 1 D 2 S 176 0 220 228 232 Q , Million Lbs of Og. per year Excess demand = 12 3.30 3.50 e 2 e 1 p , $ per Lb This shift would occur if for example there is a prediction that oranges will improve health; This is a price signal which is saying to allocate more resources to the production of oranges because demanders are saying they want more because they are healthy for you.
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  Market Equilibrium “Prices allocate resources” (Use orange ex.) Price system determines how the following resources are allocated (“invisible hand” - automatic response to price system) What “resources” are being allocated here? More land will be used to produce oranges, shipping increases,labor increases, money (capital) increases, machines increase Recall the basic economic problem Limited amount of stuff, price is one allocation mechanism because it decides who can get what; Prices are one mechanism to allocate resources based on who pays for the good What are other ways to allocate resources? Government allocation (rationing, price min/max, etc.), Random lottery
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This note was uploaded on 03/08/2009 for the course PAM 2000 taught by Professor Evans,t. during the Spring '07 term at Cornell University (Engineering School).

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PAM_2000_Spring_2009_Lecture_4 - PAM 2000 Lecture 4 Agenda:...

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