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Session _4 Supply & Demand

Session _4 Supply & Demand - Supply& Demand...

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Unformatted text preview: Supply & Demand Supply & Demand Review The Basics Objectives Objectives Draw a supply & demand curve, apply business terms to area under each curve Draw shifts in supply & demand and know what causes the shifts Explain the Coase Theorem (see Coase Theorem problem: Blackboard/course readings) Explain what problems are solved by markets Explain what problems are solved by firms Supply and Demand Review Supply and Demand Review Marginal Personal Value ­ what one is willing to pay for one more unit of X MPV drives supply and demand (relation between “person & thing” important) MPV depends on: Example: If I eat 100 ripe bananas, I won’t pay very much to get one more to eat. The amount of X possessed One’s total wealth Supply and Demand Review Supply and Demand Review • • • Demand curve­­amount of some good consumers are willing to buy at various prices Supply curve­­amount of some good sellers are willing to offer at various prices Interaction of supply and demand yields a market­clearing price Note: A supply curve is an reverse demand curve Supply and Demand – PC Industry Supply and Demand – PC Industry The demand curve shows the number of PCs that consumers want to purchase at each price. The supply curve shows the number producers want to sell at each price. Only the market­clearing price avoids surpluses or shortages. Homework Question Homework Question 3-21. The rent control agency of Rochester has found that 3-21. aggregate demand is P=500– 5QD. Quantity, QD, is measured in thousands of apartments. Price, P, equals the monthly rental rate in dollars. The city’s board of realtors acknowledges that this is a good demand estimate and has shown that supply can be expressed as P =5QS. be a. If the agency and the board are right about demand and a. supply, respectively, what is the free-market price? How many apartments are rented? apartments b. If we assume an average of 3 persons per apartment, what is b. the expected change in city population if the agency sets a maximum average monthly rent of $100 and all those who cannot find an apartment leave the city? cannot Effects of demand shifts Effects of demand shifts Effects of supply shifts Effects of supply shifts Homework Question Homework Question 3–17. Suppose that the U.S. government begins charging a $1 sales tax to all consumers for each dress shirt they buy. a. What is likely to happen to the price (not including the tax) and quantity demanded of dress shirts? Show using supply and demand graphs. b. What is likely to happen to the demand for sport shirts (not taxed) and undershirts (which are worn primarily with dress shirts)? Explain. Consumer and producer surplus Consumer and producer surplus Minimum wage laws Minimum wage laws economic effects Externalities and the Coase theorem Externalities and the Coase theorem • Externalities occur when the actions of one party impose a benefit or cost on another party outside an exchange relationship, e.g. pollution Justification for government intervention Coase argued intervention may be unnecessary or the resource allocation will be efficient if Property rights are assigned clearly, well enforced, and can be traded Transactions costs are sufficiently low Coase Theorem Problems Coase Theorem Problems See Blackboard 3–13. In certain professional sports, team owners "own" the 3–13. players. Owners can sell or trade players to another team. However, players are not free to negotiate with other team owners on their own behalf. The team owners initially obtain the rights to players through an annual draft that is used to allocate new players among the teams in the league. They can also obtain the rights to players by purchasing them from another team. Players do not like this process and often argue that they should be free to negotiate with all teams in the sporting league. In this case, they would be free to play for the team that offers the most desirable contract. Owners argue that this change in rights would have a negative effect on the distribution of talent across teams. In particular, they argue that all the good players would end up on rich, media-center teams such as New York or Los Angeles (because these teams could afford to pay higher salaries). The inequity of players across teams would make the sport less interesting to fans and thus destroy the league. Do you think the owners' argument is correct? Explain. correct? Question Question ...
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