Transcript
PART 2: PRICE, QUANTITY,
AND EFFICIENCY
©2013 McGraw-Hill Ryerson Ltd.
Prepared by Dr. Amy Peng
Ryerson University
Describe demand and explain how it can change.
Describe supply and explain how it can change.
Relate how supply and demand interact to determine market equilibrium.
Identify what government-set prices are and how they can cause surpluses and shortages.
©2013 McGraw-Hill Ryerson Ltd.
Chapter 3
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Interaction between buyers and sellers
Markets may be:
Local
National
International
Price is discovered in the interactions of buyers and sellers
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Chapter 3, LO1
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LO1
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LO1
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Schedule or curve
Amount consumers are willing and able to purchase at a given price
Other things equal
Individual demand
Market demand
©2013 McGraw-Hill Ryerson Ltd.
Chapter 3, LO1
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LO1
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Other things equal, as price falls, the quantity demanded rises, and as price rises, the quantity demanded falls.
Reasons:
Common sense
Law of diminishing marginal utility
Income effect and substitution effects
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Chapter 3, LO1
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6
5
4
3
2
1
0
10 20 30 40 50 60 70 80
Quantity Demanded (bushels per week)
Price (per bushel)
P
Qd
$5
4
3
2
1
10
20
35
55
80
P
Q
D
LO1
3-*
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Chapter 3, LO1
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LO1
Market Demand for Corn, Three Buyers
Price
per bushel
Quantity Demanded
Total
Qd
per week
Joe
Jen
Jay
$5
10
12
8
30
4
20
23
17
60
3
35
39
26
100
2
55
60
39
154
1
80
87
54
221
3-*
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Chapter 3, LO1
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©2013 McGraw-Hill Ryerson Ltd.
Chapter 3, LO1
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LO1
6
5
4
3
2
1
0
Quantity Demanded (bushels per week)
Price (per bushel)
P
Q
D1
2 4 6 8 10 12 14 16 18
D2
D3
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Chapter 3, LO1
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LO1
6
5
4
3
2
1
0
Quantity Demanded (bushels per week)
Price (per bushel)
P
Q
D1
2 4 6 8 10 12 14 16 18
D2
D3
Change in Demand
Change in Quantity Demanded
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Chapter 3, LO1
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Change in consumer tastes and preferences
Change in number of buyers
Change in income
Normal goods
Inferior goods
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Chapter 3, LO1
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LO1
LO1
Change in prices of related goods
Complements
Substitutes
Change in consumers’ expectations
Future prices
Future income
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Chapter 3, LO1
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LO1
Determinant
Examples
Change in buyers’ tastes
Physical fitness rises in popularity, increasing the demand for jogging shoes and bicycles; cell phone popularity rises, reducing the demand for land-line phones.
Change in the number of buyers
A decline in the birthrate reduces the demand for children’s toys.
Change in income
A rise in incomes increases the demand for normal goods such as restaurant meals, sports tickets, and MP3 players while reducing the demand for inferior goods such as cabbage, turnips, and inexpensive wine.
Change in the prices of related goods
A reduction in airfares reduces the demand for bus transportation (substitute goods); a decline in the price of DVD players increases the demand for DVD movies (complementary goods).
Change in consumer expectations
Political instability in South America creates an expectation of higher future coffee bean prices, thereby increasing today’s demand for coffee beans.
LO2
Schedule or curve
Amount producers are willing and able to sell at a given price
Individual supply
Market supply
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Chapter 3, LO2
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LO2
Other things equal, as the price rises, the quantity supplied rises and as the price falls, the quantity supplied falls.
Reason:
Price acts as an incentive to producers
At some point, costs will rise
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Chapter 3, LO2
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LO2
5
4
3
2
1
0
Price (per bushel)
Quantity supplied (bushels per week)
S
10 20 30 40 50 60 70
Supply of Corn
Price per Bushel
Qs
per Week
$5
60
4
50
3
35
2
20
1
5
P
Q
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Chapter 3, LO2
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LO2
$6
5
4
3
2
1
0
Price (per bushel)
S1
Quantity supplied (thousands of bushels per week)
2 4 6 8 10 12 14 16
P
Q
S2
S3
Increase
in supply
Decrease
in supply
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Chapter 3, LO2
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LO2
$6
5
4
3
2
1
0
Price (per bushel)
S1
Quantity supplied (thousands of bushels per week)
2 4 6 8 10 12 14 16
P
Q
S2
S3
Change in Quantity Supplied
Change in Supply
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Chapter 3, LO2
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LO2
A change in resource prices
A change in technology
A change in the number of sellers
A change in taxes and subsidies
A change in prices of other goods
A change in producer expectations
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Chapter 3, LO2
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LO2
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Determinant
Examples
Change in resource prices
A decrease in the price of microchips increases the supply of computers; an increase in the price of crude oil reduces the supply of gasoline.
Change in technology
The development of more effective wireless technology increases the supply of cell phones.
Change in taxes and subsidies
An increase in the excise tax on cigarettes reduces the supply of cigarettes; a decline in subsidies to state universities reduces the supply of higher education.
Change in prices of other goods
An increase in the price of cucumbers decreases the supply of watermelons.
Change in producer expectations
An expectation of a substantial rise in future log prices decreases the supply of logs today.
Change in the number of suppliers
An increase in the number of tattoo parlors increases the supply of tattoos; the formation of women’s professional basketball leagues increases the supply of women’s professional basketball games.
LO3
Equilibrium occurs where the demand curve and supply curve intersect.
Surplus and shortage
Rationing function of prices
Efficient allocation
Productive efficiency
Allocative efficiency
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Chapter 3, LO3
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LO3
6
5
4
3
2
1
0
2 4 6 8 10 12 14 16 18
Bushels of Corn (thousands per week)
Price (per bushel)
P
Qd
$5
4
3
2
1
2,000
4,000
7,000
11,000
16,000
P
Qs
$5
4
3
2
1
12,000
10,000
7,000
4,000
1,000
7
3
D
S
6,000 Bushel
Surplus
7,000 Bushel
Shortage
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Chapter 3, LO3
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The ability of the competitive forces of demand and supply to establish a price at which selling and buying decisions are consistent.
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Chapter 3, LO3
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LO3
LO3
Productive efficiency
Producing goods in the least costly way
Using the best technology
Using the right mix of resources
Allocative efficiency
Producing the right mix of goods
The combination of goods most highly valued by society
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Chapter 3, LO3
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LO4
0
P
D4
D3
LO4
0
P
D1
D2
S
Increase in demand
D increase:
P?, Q?
D decrease:
P?, Q?
Decrease in demand
S
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Chapter 3, LO3
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LO4
0
P
D
S4
LO4
S3
0
P
D
S2
S1
Increase in supply
S increase:
P?, Q?
S decrease:
P?, Q?
Decrease in supply
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Chapter 3, LO3
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LO4
TABLE 3-3 Effects of Changes in Both Supply and Demand
Change in Supply
Change in Demand
Effect on Equilibrium Price
Effect on Equilibrium Quantity
1. Increase
Decrease
Decrease
Indeterminate
2. Decrease
Increase
Increase
Indeterminate
3. Increase
Increase
Indeterminate
Increase
4. Decrease
Decrease
Indeterminate
Decrease
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Chapter 3, LO3
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LO5
Price Ceilings
Set below equilibrium price
Rationing problem
Black markets
Example: Rent control
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Chapter 3, LO4
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LO5
S
P
Q
D
P0
PC
Q0
Shortage
Qd
Qs
ceiling
$1.25
0.75
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Chapter 3, LO4
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Price Floors
Prices are set above the market price
Chronic surpluses
Example
Supported price for agricultural products
Minimum wage laws
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Chapter 3, LO4
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LO5
LO5
S
P
Q
D
P0
Pf
Q0
Surplus
Qs
Qd
floor
3.00
$4.00
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Chapter 3, LO4
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Waiting list for transplants
Demand for organs
Supply of organs—two possibilities
Market eliminates shortage
Moral objections
Legalize and regulate?
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Chapter 3, LO4
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P
Q
S2
S1
D1
P1
P0
Q1
Q2
Q3
Shortage at Zero Price
Q3 – Q1
At Price P1 the
Shortage is Reduced
By Q2 – Q1
Demand for Organs
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Chapter 3
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Supply of Organs
3.1 Demand
3.2 Supply
3.3 Supply and Demand: Market Equilibrium
3.4 Application: Government-set Prices
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Chapter 3
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