Ch04Spring2011 - CHAPTER 4 MARKETS IN ACTION Spring 2011 1...

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Unformatted text preview: CHAPTER 4 MARKETS IN ACTION Spring, 2011 1 CHANGES IN DEMAND AND CHANGES MARKET EQUILIBRIUM: Increases in demand Create “excess” demand at Po Excess demand creates shortage at Excess the in initial price the Shortage is resolved by increasing Shortage price See Exhibit 1, page 88 Decreases in demand Create excess supply at Po Excess supply creates a surplus at Excess the original price Surplus is resolved by reduction in Surplus price price See Exhibit 1, page 88 2 THE EFFECTS OF SHIFTS IN THE DEMAND ON MARKET EQUILIBRIUM, P. 88 EQUILIBRIUM, Figure 4.1 CHANGES IN SUPPLY AND CHANGES MARKET EQUILIBRIUM: Increases in supply Increases Create excess supply at initial Create price price Excess supply creates surplus at Excess the original price. Surplus causes price to fall Surplus See Exhibit 2, page 89 Decreases in supply Creates excess demand at initial Creates price price Excess demand creates shortage Excess at the original price at Shortage causes price to rise Shortage See Exhibit 2, page 90 4 THE EFFECTS OF SHIFTS IN SUPPLY ON MARKET EQUILIBRIUM, P. 90 ON Figure 4.2 INCREASES IN BOTH DEMAND INCREASES AND SUPPLY: MARKET AND EQUILIBRIUM EQUILIBRIUM S1 S2 P(1) D2 D1 Q1 Q2 6 INCREASE IN DEMAND AND INCREASE AND DECREASE IN SUPPLY: MARKET EQUILIBRIUM MARKET S2 S1 P2 P1 D2 D1 Q(1) 7 PRICES FIXED BY LAW: PRICES PRICE CEILINGS PRICE Examples: Examples: Rent controls Rent See Exhibit 5, page 93 See Gasoline price controls Create excess demand at ceiling prices Create Excess demand creates shortage Shortage at ceiling price persists Shortage Some other rationing system required 8 RENT CONTROLS, P. 93 RENT Figure 4.3 Gasoline Prices Price of Gas S2 S1 4.00 1.50 D1 Q3 Q2 Q of gas Q1 10 PRICES FIXED BY LAW: PRICES PRICE FLOORS PRICE Minimum wage laws Creates excess supply at equilibrium Creates price price Excess supply creates surplus Surplus not eliminated by price Surplus reductions See Exhibit 6, text graph page 95 See Agricultural price supports Create excess supply at equilibrium Create prices See graph which follows 11 A MINIMUM WAGE RESULTS IN A SURPLUS OF LABOR, P. 95 P. Figure 4.4 PRICES FIXED BY LAW: PRICES AGRICULTURAL PRICE SUPPORTS SUPPORTS PRICE S P1 A B D Quantity 13 WHAT FUNCTIONS DO WHAT MARKETS PERFORM? MARKETS 1. Prices ration goods and services 1. 2. Prices provide “signals” to 2. households and business firms that alter their behavior. 3. Prices allocate resources among competing users and provide for maximum efficiency of resource use. maximum 14 CAUSES OF MARKET FAILURE CAUSES Lack of competition Lack Externalities in production Externalities production Externalities in consumption Externalities consumption Public goods Income inequality Income 15 LACK OF COMPETITION AS A LACK MARKET FAILURE MARKET Competitive Px SS Solution Monopoly Solution DD MR Monopolist sets MC = MR to set Q(x)Qx Note: Compare with Text graph, page 98. 16 DERIVING THE MARGINAL DERIVING REVENUE SCHEDULE (MR=ΔTR/ REVENUE TR/ ΔQx) P(x) Q(x) Q(x) 10 09 08 07 06 05 1 2 3 4 5 6 TR TR 10 18 24 28 30 30 MR MR -8 6 4 2 0 Note that MR declines more quickly than Note P(x)!! P(x)!! 17 MARKET FAILURE CAUSED BY MARKET PUBLIC GOODS PUBLIC Public goods are not subject to the Public “exclusion principle” “exclusion Example: National Defense Free Rider Problem. Result is underproduction of public Result goods by private market Not enough $ votes are cast for public Not goods goods Government provides public goods Government through a political process 18 Externalities in Production Text, page 100 s2 s1 Supply reflecting internal costs B A Demand reflecting utility to buyer S2 is supply schedule that includes all costs of eliminating negative externalities. 19 THE INCOME DISTRIBUTION THE PROBLEM PROBLEM Market allocates goods and services to Market those who are willing AND ABLE to pay AND the most the Payment assumed to reflect the value Payment placed on product placed Those who pay more must value the Those product most But income may not be distributed But “equitably” by the market economy Those with more income are able to Those cast more dollar votes Greater purchases may reflect ability Greater to pay, and not value to consumer to 20 END CHAPTER 4 LECTURE END NOTES NOTES 1. Questions? 2. Shifts of DD and SS A. Impact on equilibrium price B. Impact on equilibrium Q B. 3. Prices fixed by law 4. A. Maximum prices B. Minimum prices Market failures A. Lack of competition B. Externalities C. Public goods 21 ...
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