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110lec5 - ECON 110 ECON Introductory Introductory...

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Unformatted text preview: ECON 110 ECON Introductory Introductory Microeconomics Microeconomics Lecture 5 Spring, 2009 William Chow Highlight Highlight Factors affecting supply Market Equilibrium Change in demand and supply Applications Prices of related goods produced Prices A substitute in production for a good is another good that can be produced using the same resources, e.g. residential flats and industrial complexes Goods are complements in production if they must be produced together, e.g. beef and leather The supply of a good increases and its supply curve shifts rightward if the price of a substitute in production falls or if the price of a complement in production rises Other factors Other Expected future prices: If the price of a good is expected to fall in the future, current supply increases and the supply curve shifts rightward The number of suppliers: The larger the number of suppliers of a good, the greater is the supply of the good. An increase in the number of suppliers shifts the supply curve rightward Technology: Advances in technology create new products and lower the cost of producing existing products, so they increase supply and shift the supply curve rightward Market Equilibrium Market When demand and supply come to meet one another, a market equilibrium can be achieved An equilibrium is a state at which things have no tendency to change This shows the unique price (equilibrium price) at which QD = QS Market Equilibrium Market The buying and selling plans are hence balanced The equilibrium quantity is the quantity bought and sold at the equilibrium price This indicates the prevailing market price and the amount of transactions dealt in the market Market Equilibrium – Important Note Note Price regulates buying and selling plans Price serves as signals for buyers and sellers to adjust their plans Changes in Demand and/or Supply Supply Application Application Event: The WSJ reports that the prices of PC components are expected to fall by 5­8 percent over the next six months. Scenario 1: You manage a small firm that manufactures PCs. Scenario 2: You manage a small software company. Application Application Use Comparative Static Analysis to see the Big Picture. Comparative static analysis shows how the equilibrium price and quantity will change when a determinant of supply or demand changes. Big Picture: Impact of decline in component prices on PC market component Price of PCs S S* P0 P* D Q 0 Q* Quantity of PC’s Scenario 2 Scenario More complicated chain of reasoning to arrive at the “Big Picture.” Step 1: Use analysis like that in Scenario 1 to deduce that lower component prices will lead to • a lower equilibrium price for computers. • a greater number of computers sold. Step 2: How will these changes affect the “Big Picture” in the software market? Scenario 2 Scenario Price of Software S P1 P0 D* D Q0 Q1 Quantity of Software Conclusion Conclusion Scenario 1: Equilibrium price of PCs will fall, and equilibrium quantity of computers sold will increase. Scenario 2: Software prices are likely to rise, and more software will be sold. ...
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