Chapter3 - Learned: (1) How to map out PPC. |slope| = O.C....

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Unformatted text preview: Learned: (1) How to map out PPC. |slope| = O.C. of x-good (2) Why do people trade? consume outside of PPC => CPC is above PPC (trade) J F (1) mark the production points (32,0) (12,18) (2) Find out a few trade possibilities a trade: 5 lbs of fish for 15lbs of coconuts trade J F (1) (-15,+5) (+15,-5) comsumption(17,5) (27,13) (2) b trade 3lbs of fish for 9 lbs of coconuts trade J F (-9,+3) (+9,-3) consumption (23,3) (21, 15) trace out the CPC (3) What determines specialization and trade pattern? opportunity cost / comparative advantage (4) Where does C.A come from? resources 9/29/2009 Where does comparative advantage come from? . . . . climate and natural resources relative abundance of labor and capital technology External economies: lower production costs that result from increases in the size of the industry in an area. 4(.) eg switzerland having C.A. in watches Chapter 3 Supply and Demand What, How, and For Whom? Price &Quanitity Demanded WHAT: Which good will be produced? How much of each? Law of Demand HOW: "change in quantity demanded" Which technology? Which resources are used? both individual & market "Income, Preferences, prices of related goods, expectations demand. # WHOM: FOR of buyers only about the future" affect market demand How to distribute? Price & Hotdogs (subs.) 1 9/29/2009 Central Planning v. Market Central Planning • Decisions by a few individuals or small groups bureaucrats The Market • Buyers and sellers signal wants and costs – Interaction of supply and demand answer the three basic questions ________ economies use both the market & central Mixed planning The Market • Market: a group of buyers and sellers of a particular product. • Two sides: – Buyers want to benefit from the good Demand Supply – Sellers want to make a profit • Market price balances – The value buyers derive from the good – The cost to produce one more unit of the good 2 9/29/2009 Demand • You demand something if – You want it. – You can afford it. – You have a definite plan to buy it. • Quantity Demanded (Qd): The quantity consumers demand at a specific price. • Demand: the entire relationship between price and quantity demanded. We can graphically describe the demand relationship using what is called the demand curve. Demand • Demand curve is downward sloping – Negative relationship between P and Q Demand for Pizzas P P = 6 – 0.25Q (Q in 000s) • The Law of Demand: All else equal, the higher is the price of a good, the smaller is the quantity demanded. • Two interpretations – Horizontal – Vertical Q (000s of slices/day) 3 9/29/2009 Demand Slopes Downward • Higher prices drive some buyers out of the market. – Reservation price: the highest price an individual is willing to pay for a good. • Higher prices cause remaining buyers to buy less. Subsitution – ____________ Effect: Buyers switch to substitutes when price goes up. Income – ____________ Effect: Buyers' overall purchasing power goes down. Change in Demand • Change in the entire relationship between price and quantity demanded. • An increase in demand means that the quantity demanded is higher at every price. shift to the right • A decrease in demand means that the quantity demanded is lower at every price shift to the left When there is a change a demand, we can see a shift in the demand curve 4 9/29/2009 An An Increase in Demand Demand Demand for Canned Tuna P $2 A D 8 (000s of cans/day) Q Factors that Increase Demand affects market / individuals 1. 2. 3. 4. An increased preference for the good or service. When someone buys a book when An increase in income (normal goods) A decrease in income (inferior goods) income increases then its considered a An decrease in the price of a complementary good normal good, if income or services. increases and the person buys less books 5. An increase in the price of a substitute good or then its considered an inferior good service. Increasing hotdogs would increase the demand for hamburgers. 6. An increase in expected future prices 7. An increase in the number of buyers only affects market demand ** Demand will decrease when these factors move in the opposite direction note that current prices do not demand 5 9/29/2009 What could have caused this? Demand for Canned Tuna P a decrease in the price of canned beef ( substitues) - income increases ( inferior) - income decrease ( normal good) -increase in the price of a complement ( frozen peas) A A’ $2 D D’ 8 10 (000s of cans/day) Q Change in Quantity Demanded see a movement along the curve Demand for Canned Tuna P P = 6 – 0.5Q (Q in 000s) no change in relationship D Q (000s of cans/day) 6 9/29/2009 Supply • A firm supplies a good or service if it 1. Has the resources to produce it. 2. Can profit from producing it 3. Has a definite plan to produce it. • Quantity Supplied (Qs): The quantity producers supply at a specific price. • Supply: the entire relationship between price and quantity supplied. Supply • Supply curve is upward sloping. – Positive relationship between P and Q. Supply of Pizzas P $4 $2 P = 0.25Q (Q in 000s) • Two interpretations: – Horizontal – Vertical 8 16 Q (000s of slices/day) 7 9/29/2009 Change in Supply • Change in the entire relationship between price and quantity supplied. • An increase in supply means that the quantity supplied is higher at every price. • A decrease in supply means that the quantity supplied is lower at every price An Increase in Supply Supply of Pizzas P $4 P = 0.25Q (Q in 000s) S price of flour decreased A $2 8 8.7 9 9.7 Q (000s of slices/day) 8 9/29/2009 Factors that Increase Supply 1. A reduction in the price of inputs used in the production process . -> reduce production costs 2. An improvement in technology that reduces production costs. 3. A decrease in expected future prices. 4. An improvement in weather. agricultural products or outdoor entertainment 5. An increase in the number of suppliers. only affect the market **Supply will decrease when these factors move in the opposite direction. s' s Change in Quantity Supplied Supply of Pizzas P $4 P = 0.25Q (Q in 000s) S $2 8 16 Q (000s of slices/day) 9 9/29/2009 Market Equilibrium • Equilibrium: Quantity supplied equals quantity demanded • Equilibrium price (P*): the price at which quantity supplied = quantity demanded. • Equilibrium quantity (Q*): the quantity bought and sold at the equilibrium price. Market for Pizzas P P* $3 S market equilibrium D 12 Q* Q (000s of slices/day) Deviate from Equilibrium P $4 Market for Pizzas Excess Supply Qs > Qd Surplus = Qs - Qd S $3 8 12 16 D Q (000s of slices/day) 10 9/29/2009 What next? Market for Pizzas Surplus = Qs- Qd P $4 $3.5 $3 Surplus S Equilibrium D (000s of slices/day) Qd 8 10 12 1416 Qs Q Deviate from Equilibrium P Market for Pizzas Excess Demand Qd>Qs 000 Shortage = Qd - Qs = 16000-8000 =8000 S $3 $2 Qs 8 12 16 Qd Shortage D Q (000s of slices/day) 11 9/29/2009 What next? shortage = Qd-Qs =14000-10000 Market for Pizzas =4000 P S $3 $2.50 $2 8 1012 1416 Qs Qd market forces will push the prices into equilibrium Equilibrium D (000s of slices/day) Q Price Ceilings & Rent Controls • Price ceiling a maximum allowable price specified by law. • Rent controls are a type of price ceiling. P Above Equ. Price S P Below Equ. Price S $1200 $1000 $1000 $900 D D won't affect the market, market price will still be at the equilibrium level Q* Q Qs 1 Q* 3 Qd Q quantity supplied will be lowered Qd>Qs : Excess demand -> shortage 12 9/29/2009 Negative Negative Implications of Rent Controls Controls 1. Long waiting lists and increased search activity --> waste of resources 2. bribes and black markets 3. Quality of product ( housing) decreases 4. Allows producers to discriminate efficiency loss efficiency loss the government keeps this for equity Labor Market Price Floors & Minimum Wages a key difference is that firms are the demanders instead W of the suppliers $6 • Price floor a minimum allowable price specified by law. • Minimum wages are a type of price floor. Below Equ. Price workersW S Above Equ. Price $7 $6 unemployment S $5 firms D Q* Q D Q* Qd Qs excess supply( labor) Q will not affect the market 13 9/29/2009 Negative Negative Implications of Minimum Minimum Wage Laws 1. Lower employment level 2. Increase search activity from potential workers 3. work "under the table" 4. Allows employers to discriminate Making Prediction • If the price of hotdogs decreases, what would happen to the price and quantity of hotdog buns? P P2 P1 Hotdog buns S shortage D Qs=Q1 Q3 = Qd = Q2 Qd Q 14 9/29/2009 Rule #1 • When demand curve shifts, equilibrium price and quantity change in the same direction. – When demand shifts to the right, both price and quantity ____________. increase – When demand shifts to the left, both decrease price and quantity ____________. Making Making Prediction • What will happen to the equilibrium price and quantity of candy if the price of sugar increases? 1. supply is affected P 2. supply decreases P* P1 E' S 3.P increases Q increases shortage Q* Q1 D Q 15 9/29/2009 Rule #2 • When supply curve shifts, equilibrium price and quantity change in opposite directions. – When supply curve shifts to the right, quantity decreases _increases ____________ but price _______________. – When supply curve shifts to the left, quantity _decreases ____________ but price _______________. increases Making Prediction • If you are a gold analyst, how would you expect the price of gold to change if people start to regard gold as a reliable store of value and there is a new technological improvement in the production of gold? P S P* P1 s' 1. D is affected 2. S is affected D increases S increases 3. D increases rule 1 price increases quantity increases Supply increases rule 2 price decreases quantity increases D d' Q1 Q P uncertain Q increases 16 9/29/2009 Changes Changes in Supply and Demand Demand Supply Demand Increases Increases P Depends Q Increases P Decreases Q Depends Decreases P Increases Q Depends P Depends Q Decreases Decreases P>P* P* P<P* shortage(excess demand) Equilibrium: Qd= Qs P* & Q* Q* Price Regulation Price ceiling : max price possible Price Floor: set min price possible P.C would create a shortage in the market only if P.C< P* P.F. would create a surplus in the market only if P.F.>P* 1. Demand changes and supply doesnt 17 ...
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This note was uploaded on 12/07/2009 for the course ECON ECON 1 taught by Professor Foster during the Fall '08 term at UCSD.

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