McConnellMicro13_Ch03.ppt

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 * Interaction between buyers and sellers Markets may be: Local National International Price is discovered in the interactions of buyers and sellers ©2013 McGraw-Hill Ryerson Ltd. Chapter 3, LO1 * LO1 3-* LO1 3-* 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 * LO1 3-* 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 ©2013 McGraw-Hill Ryerson Ltd. Chapter 3, LO1 * 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-* ©2013 McGraw-Hill Ryerson Ltd. Chapter 3, LO1 * 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-* ©2013 McGraw-Hill Ryerson Ltd. Chapter 3, LO1 * ©2013 McGraw-Hill Ryerson Ltd. Chapter 3, LO1 * 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 ©2013 McGraw-Hill Ryerson Ltd. Chapter 3, LO1 * 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 ©2013 McGraw-Hill Ryerson Ltd. Chapter 3, LO1 * Change in consumer tastes and preferences Change in number of buyers Change in income Normal goods Inferior goods ©2013 McGraw-Hill Ryerson Ltd. Chapter 3, LO1 * LO1 LO1 Change in prices of related goods Complements Substitutes Change in consumers’ expectations Future prices Future income ©2013 McGraw-Hill Ryerson Ltd. Chapter 3, LO1 * 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 ©2013 McGraw-Hill Ryerson Ltd. Chapter 3, LO2 * 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 ©2013 McGraw-Hill Ryerson Ltd. Chapter 3, LO2 * 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 ©2013 McGraw-Hill Ryerson Ltd. Chapter 3, LO2 * 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 ©2013 McGraw-Hill Ryerson Ltd. Chapter 3, LO2 * 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 ©2013 McGraw-Hill Ryerson Ltd. Chapter 3, LO2 * 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 ©2013 McGraw-Hill Ryerson Ltd. Chapter 3, LO2 * LO2 3-* 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 ©2013 McGraw-Hill Ryerson Ltd. Chapter 3, LO3 * 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 ©2013 McGraw-Hill Ryerson Ltd. Chapter 3, LO3 * The ability of the competitive forces of demand and supply to establish a price at which selling and buying decisions are consistent. ©2013 McGraw-Hill Ryerson Ltd. Chapter 3, LO3 * 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 ©2013 McGraw-Hill Ryerson Ltd. Chapter 3, LO3 * 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 ©2013 McGraw-Hill Ryerson Ltd. Chapter 3, LO3 * 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 ©2013 McGraw-Hill Ryerson Ltd. Chapter 3, LO3 * 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 ©2013 McGraw-Hill Ryerson Ltd. Chapter 3, LO3 * LO5 Price Ceilings Set below equilibrium price Rationing problem Black markets Example: Rent control ©2013 McGraw-Hill Ryerson Ltd. Chapter 3, LO4 * LO5 S P Q D P0 PC Q0 Shortage Qd Qs ceiling $1.25 0.75 ©2013 McGraw-Hill Ryerson Ltd. Chapter 3, LO4 * Price Floors Prices are set above the market price Chronic surpluses Example Supported price for agricultural products Minimum wage laws ©2013 McGraw-Hill Ryerson Ltd. Chapter 3, LO4 * LO5 LO5 S P Q D P0 Pf Q0 Surplus Qs Qd floor 3.00 $4.00 ©2013 McGraw-Hill Ryerson Ltd. Chapter 3, LO4 * Waiting list for transplants Demand for organs Supply of organs—two possibilities Market eliminates shortage Moral objections Legalize and regulate? ©2013 McGraw-Hill Ryerson Ltd. Chapter 3, LO4 * 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 ©2013 McGraw-Hill Ryerson Ltd. Chapter 3 * Supply of Organs 3.1 Demand 3.2 Supply 3.3 Supply and Demand: Market Equilibrium 3.4 Application: Government-set Prices ©2013 McGraw-Hill Ryerson Ltd. Chapter 3 *