Transcript D - Canvas

Why do roses cost more on Valentine’s Day?
Why do TV ads cost more during the Super Bowl ($2.8
million for 30 sec.) than during Nick at Nite reruns?
Why do hotel rooms in Sun Valley, Idaho cost
more in the winter than in the summer?
Why do surgeons earn more than butchers?
Why do pro basketball players earn more than pro hockey players?
“Econ, Econ”
Why do economics majors earn more than most other majors?
Why are some of you going to major in economics in college?
The answer to these and other economics questions boil down to the
workings of supply and demand – the subject of this chapter.
“Change in QD” [price change, point to point movement]
Demand – quantities of products that
consumers are willing and able to buy at
various prices during a given time period.
D
Because I’m willing
– WILLING, and
I’m able – ABLE.
P1
P2
P3
QD1 QD2 QD3
So, let’s put Prince on the “D” curve.
D
P1
[“Demand” is the whole curve] [all prices] P2
We have demand for something because QD1
QD2
we expect it to be useful to us in satisfying our
wants. Demand is constantly changing because
of price & non-price factors such as [“TIMER”].
iPhone
Taste
Income
Market size
Expectations
(future income,
price, & availability)
D3
D1
D2
“Change in Demand”
(curve)
Related good
QD3 QD1 QD2
price changes for substitutes complements
“I’ll buy at 5 cents
but not at 10 cents
If they are made from
real lemons.”
10¢
“Not much business
so I’m going to lower
my price to 5 cents.
D
10¢
5¢
QD1 QD2
“Movement, just
movement, no shift”
Demand does not refer to a
numerical amount but to a
behavior. Our “willingness
to buy at various prices.”
QD is a numerical amount
based on a “particular price.”
“Change in QD”
“Price change”
“Point to point”
“Movement”
Lower the price & increase QD
Consumers “willingness to buy”
Price decreases; QD increases
P QD
$5
4
3
2
1
10
20
35
55
80
$5
D
$4
$3
$2
$1
0 10 20
35
55
80
Quantity Demanded
…a specified time period
…other things being equal
QD – how much will be purchased at a specific price [& date].
Individual Demand
Market
D
D
+
$2
$3
$2
Demand
“JO”
“Mo”
“Bo”
$3
To
D1 D2
D
+
$3
= $3
$2
$2
[Total]
115
100 115
26 30
39 45
From “individual” demand to “market” demand
And, what if the price of this product decreases from $3 to $2?
A point to point movement on the same “D” curve is a “Change in QD”
35 40
And – what if this good prevents cancer, so we have an increase in “D” for it.
D
iPhone 3G
$199.00
[with 2 yr contract]
[8GB]
Reasons For Downsloping “D” Curve
1. Income Effect –current buyers buy more.
2. Substitution Effect– new buyers now purchase.
3. Diminishing Marginal Utility - because buyers
of successive units receive less marginal utility,
they will buy more only when the price is lowered.
Change in QD
1. Price change
2. Movement
Price
QD
$99.00
[up/down the demand curve]
3. Point to point [along the curve]
Inverse
relationship
QD2 curve”. [“all prices”]
“D” refers toQD
the1“whole
“QD” refers to a “point on the curve”
based on a “particular price.”
D
1. Income Effect
•
•
When things are expensive, money buys less
When things are cheap, money buys more
P1
P2
QD1 QD1
2. Substitution Effect
•
When apples are expensive and their
substitutes (pears) are relatively cheap,
I buy fewer apples and more pears
3. Diminishing Marginal Utility
•
•
Each additional unit of an item purchased gives less marginal utility
(happy points) than the previous unit. Therefore, the only way I will buy
more is if the price is lower.
Ex. When I’m hungry, I typically will buy 2 breakfast tacos. The
reason I don’t buy a third taco is because the marginal utility of the
third taco is less than the price of the taco. But, if the price of the taco
is less than the marginal utility of the taco, then I will buy the third taco
Disutility [or negative utility]?
I ate one hamburger, and it tasted
great. The next two tasted okay. I
wish I hadn’t have eaten the 5th. I
can’t finish the 6th.
.
About this time
there is toilet trauma.
DIMINISHING MARGINAL UTILITY
Utility (satisfaction) decreases as more of the same product
is consumed.
American Beats The Japanese “Tsunami”
.
66 Hot Dogs in 12 minutes v. 63
Quantity Demanded
vs. Demand
Quantity Demanded [QD] is triggered by a price chg.
The quantities of a good or service that people will
purchase at a specific price at a given time.
Demand [D] is triggered by “TIMER” [non-price].
A schedule of the total quantities of a good or service
that purchasers will buy at different prices at a
given time.
Demand is a bunch of QD’s strung together.
“Demand Shifters” [TIMER]
1.
2.
3.
4.
Taste [direct]
Income [normal-direct] [inferior-inverse]
Market Size [number of consumers-direct]
Expectations [of consumers about future *price-direct,
about future availability-inverse, or about future income–direct.
5. Related Good *Prices [substitutes-direct] [complements-inverse]
D1 D2
D3 D1 D2
P
Butter
D1
D2
P
P2
Complement
[inverse]
P
P1
D
QD1 QD2
Bread
Substitute
[Direct]
Bagels
Change in “D” [curve]
1. Non price change [“TIMER”]
2. Whole “D” curve shifts
QD3 QD1 QD2
[There is a change in “QD” but it is
not caused by a change in “price.”
[QD-”single price”; D-”all prices”]
D 1 D2
P
D3
QD3 QD1QD2
Bell Bottoms
Mini
Hip Huggers
Skirts Platforms
1. An “Increase in Taste” shifts the D curve right
a. The Nehru jacket came & went in 6 months.
Jordache
b. Jordache jean demand created by TV
c. Leisure suits and bell bottoms.
d. Technological change may cause
consumer taste to change[slide rules].
D1 D2
Steak
More income
results in
more demand
for steak;
less demand
for spam.
P
QD1 QD2
Spam
Less income
results in
more demand
for spam;
less demand
for steak.
2. Change in Income
Normal Good – goods whose demand
varies directly with income.
Inferior Good – goods whose demand
varies inversely with income.
Butter, filet, steel-belts, new clothing & new cars
v.
Margarine, spam, used tires, old clothing & old cars
Income
Demand
For
Spam
Demand
For
Steak
D1 D2
P
More demand
for both spam
and steak.
QD1 QD2
can increase/decrease from
economic decisions, advertising, and
government political decisions (China).
Ex: The large “baby boom” of 1946-64
increased the demand for baby supplies.
An increase in life expectancy increased
demand for for medical care, retirement
communities, and nursing homes.
Increase in # of consumers
car
Consumer expectations about future product
price, future availability, & future income.
Ex: When the Korean War broke out in the
summer of 1950, new car sales boomed (also
washers and refrigerators) out of the
expectation of a production stoppage like
during WWII. None occurred but it was the
expectation that affected new car demand.
There are three types of goods.
1. Independent goods – price change
of one has no impact on the other.
Ex: fishhooks & pantyhose or salt & shoelaces
2. Substitute goods(“competing goods”)
- price change of one affects the
demand of the other directly.
Ex:
7Up & Coke or Miller & Bud
D1
D2
QD2 QD1
3. Complementary goods(“go together”)
- price change of one affects the
demand for the other inversely.
Peanut butter & jelly
D1 D2
Camera
QD1 QD2
Film
Cereal & milk Coffee & donuts
[Increase in price of one; increase in “D” of the other]
D1 D2
D
P
P2
QD
QD
P1
QD2
Price
Of
7UP
QD1
Demand
for
Dr Pepper
[Decrease in price of one; increase in the “D” for the other]
P1
P2
D 1 D2
QD1 QD2
Car Prices
P
QD
QD
Gasoline Demand
No change
in price
I’m making more
money without
dropping my prices.
They are so cheap that
even dogs are buying cars
Increase in “QD”
Decrease in “QD”
[caused by a “decrease in price”]
[caused by an “increase in price”]
D
D
1. Price change
2. Movement
3. Point to point
P1
P2
[“Snap
shot of 1 pt in time]
P2
P1
QD2 QD1
QD1 QD2
D1 D2
P
Change in “D” [“TIMER”]
1. Non-price
2. Whole curve
3. Shift
D1
P
D2
[“Time passes”]
“Increase in D”
What could cause an “increase in Demand?”
1. Increase in taste
2 .Increase in income [normal good]
3. Decrease in income [inferior good]
4. Increase in market size [# of consumers]
“Decrease in D”
5. Expectations of a shortage
6. Expectations of a price increase
7. Expectations of positive future income
8. Incr in price of a substitute for product “X”
9. Decr in price of a complement of product “X”
[D – “TIMER; QD – price change [inverse]
MP3 Player Phone
[stereo sound, downloadable
sound games and ring tones]
A
__1.
Which will cause an “Increase in D”
for
MP3 Player phones?
a. increase in income
c. increase in the price of MP3 Player phones
b. decrease in income
d. decrease in the price of MP3 Player phones
___2.
Which will cause an “Increase in QD” for MP3 Player phones?
C
a. decrease in income
c. decrease in the price of MP3 Player phones
b. increase in income
d. increase in the price of MP3 Player phones
___3.
Which will cause a “Decrease in D” for Projectors?
C
a. increase in the price of projectors
c. decrease in # of consumers
b. decrease in the price of projectors
d. increase in projector taste
A
___4.
Which will cause a “Decrease in QD” for Projectors?
a. increase in the price of projectors
c. decrease in # of consumers
b. decrease in the price of projectorsd. increase in projector taste
QD & D Practice Quiz[Snickers]
1. What would cause an “increase in QD” for Snickers?
a. increase in price of Snickers b. decrease in price of Snickers
c. decrease in income
d. increase in number of consumers
2. What would cause an “increase in D” for Snickers?
a. increase in taste
c. decrease in income
b. decrease in price of Snickers
d. increase in the price of Snickers
3. What would cause a “decrease in QD” for Snickers?
a. increase in taste b. decrease in price of Snickers c. increase in price of Snickers
4. What would cause a “decrease in D” for Snickers?
a. decrease in income b. increase in taste c. decrease in price of Snickers
5. An “increase in the price of Butterfingers would
cause a(n) (increase/decrease) in (QD/D) for Snickers?
NS 1-10
1. (Demand/Supply) is identified as quantities consumers are willing
and able to buy at various prices during a given time period.
2. The law of demand says that price & QD are (directly/inversely) related.
3. The most important variable influencing decisions to produce and
purchase goods is (technique/price). (Price/income) is not held
constant when moving along a stable demand curve.
4. Income effect-the increase or decrease in purchasing power
brought on by a change in (taste/market size/price).
5. Substitution effect – tendency to substitute a (higher/lower)
-priced product for a more expensive product.
6. Diminishing marginal utility – utility, or (determination/anger/satisfation)
decreases as more of the same product [Snickers] is consumed.
7. The law of demand refers to a (movement/shift) along a demand curve.
8. Substituting chicken as the price of steak goes up is an example
of the (income/substitution) effect.
9. When the price of caviar falls, the purchasing power of our money income
rises & thus permits us to purchase more caviar. This is the (income/substitution) effect.
10. The demand (curve/schedule) is a numerical tabulation showing QD at each price.
The demand (curve/schedule) is a graphical representation of the law of demand.
“Let’s make more.”
- As price increases
…Q S also increases
-As price decreases
… QS also decreases
“Take it. We are losing money.”
S
P2
P1
QS1 QS2
S
P1
P2
QS2 QS1
Direct relationship between P & QS
Consumers and Producers Feel
Differently About High & Low prices
Producers supply more at the higher price because
the opportunity cost increases if they don’t.
Consumers consume less at the higher price
because they now have less money to spend.
Producers supply less at the lower prices because
the opportunity cost decreases if they don’t.
Consumers consume more at the lower price
because they now have more money to spend.
I was going to buy a
Honda but this car is
$4,000 cheaper.
I’m saving money
at the lower price.
I normally eat
one, but at this
low price, I’m
having two.
Price increases; QS increases
Price decreases; QS decreases
.
Direct
“S” refers to the “whole supply curve” and refers to what
producers will supply at “different prices”.
“QS” refers to a “point on the curve” and refers to what
producers will supply at a “particular price”.
S
More of you would
supply your labor
for $12 than if labor
were getting just $6
an hour.
Change in “QS”
P2
1. Price change
2. Movement
(up/down “S” curve)
P1
Producers want the
highest price possible.
3. Point to point
(along “S” curve)
QS1 QS2
Reasons For Upsloping “S” Curve
1. There is increasing opportunity cost if you don’t produce.
2. Current producers produce more [overtime/more shifts]
3. New producers are attracted to the market.
Deriving Market Supply from Individual Firm Supply Curves
Firm A’s Supply
S
Firm B’s Supply
$3
$3
$2
$2
10,000 30,000
QS1
QS2
Soybeans [bushels]
S
Firm C’s Supply
S
$3
$2
10,000 25,000
QS1
QS2
5,000 10,000
QS1 QS2
Soybeans [bushels]
Soybeans [bushels]
Direct – both variables move in same direction.
S
$3
“Particular Price”
$2
25,000
QS1
65,000
QS2
Soybeans [bushels]
Decrease in “QS”
Increase in “QS”
[caused by a “decrease in price”]
S
P1
P2
[caused by an “increase in price”]
1. Price change
2. Movement
3. Point to point
[“Snap
S
P2
P1
shot of 1 pt in time]
QS1 QS2
QS2 QS1
Change in “S” [RATNEST]
S1
S2
P
“Increase in S”
1. Non-price
2. Whole curve
3. Shift
[“Time passes”]
What could cause an “increase in supply?”
1. Decrease in resource cost [wages/raw materials]
2. Decrease in the price of an alternative output for “X”
3. Producer expectations of a price decrease
P
S2 S1
“Decrease in S”
4. Increase in number of producers
5. Increase in technology
6. Increase in subsidies
7. Decrease in taxes
I only
have
200
acres
Change in “Supply” [Curve]
1. “Non-price change” [RATNEST]
2. Whole supply curve “shifts”
.
[There was a QS change but it was not caused by a change in price]
Alternative Output Price Change
Corn S1
Broccoli
S2
S
[INVERSE]
P2
P
“Substitutes in production”
P1
“Things that can be supplied
QS1 QS2
with the same resources.”
S1 S2
“Supply Shifters” [RATNEST] [capital cost]
P
1. Resource Cost [wages
/raw materials
] [INVERSE]
2.
3.
4.
5.
6.
7.
P
Alternative Output Prices [INVERSE]
Technology [DIRECT]
Number of Suppliers [DIRECT] [new football league- bigger “S” of games]
Expectations [about future price] [INVERSE]
Subsidies [DIRECT]
S3 S1 S2
Taxes [INVERSE]
Don’t confuse these
two with Chg in QS.
“Suppliers produce smaller/
larger quantities at each price.”
QS3 QS1 QS2
1.Resource Cost [wages & raw materials] [Inverse]
Raw Materials
Wages
If resource cost
decreases
supply
Increases
[making more $]
S
P
If resource cost
S
S
increases
supply
Decreases
[making less $]
S2
S1
S3
P
Resource Cost [wages & raw materials] [inverse]
58. Increase in wages (increases/decreases) supply.
Ex: A decrease in the price of computer chips
(increases/decreases) the supply of computers.
These are “things that can be supplied with the same resources”.
I only have
200 acres
P2
Broccoli
Corn
S
S2
S1
P
P1
QS1 QS2
Producers want to produce more of the good where price is increasing,
P1
Corn
Broccoli S
S1
S2
P
P2
QS2 QS1
or at least, where the price is not going down.
“Substitutes in production” [Remember, productive resources are scarce]
S3
S1
S2
P
Alternative Output price changes [inverse]
57. If the price of corn decreases, the
supply of broccoli
(increases/decreases).
S1
S2
P
Supply of broccoli
“Can’t wait till
milking time.”
This lowers production costs & increases “S”.
Ex: Suppose a new milking machine called
“The Invisible Hand” has a very soothing
effect on cows; cows find the new machine
so “udderly” delightful that they produce
30% more milk. This technological advance
will cause a shift to the right. 54
S3
S1
S2
P
56. If more firms enter an industry, the supply
curve will shift to the (left/right).
• When the American Basketball League
began play in 1968, there was a (bigger/smaller)
supply of basketball games each week.
60. A new professional football league will
(increase/decrease) the supply of football games.
NFL
P
S1
S2
XFL
in 2001
$50
8 new teams
Because of the
XFL’s cheerleaders
many called this
league, not the
XFL, but the
XXXFL
More games
each year
QS1
QS2
Q
Supply of FB games each week
XFL [Extreme Football League]
Supply of FB games increased when the XFL was formed.
P
S2
S1
S3
$2.00
Supply decreased when the
number of suppliers was
reduced.
If the number of firms in the
market increases, supply
will also increase.
QS2
QS1
QS3
Q
[“INVERSE”]
S2
Oil Prices
expected P
to decrease
S1
S2
Oil Prices
expected
to increase
59. If oil producers expect future oil prices to
decline, they will (increase/decrease) current
production.
If oil producers expect future oil prices to
increase, they will (increase/decrease) current
production.
For example, if the cattle farmer expects higher prices for beef
in the future, he will send (more/less) cattle to market now.
He will keep them on the farm now and would send the cattle to
the market in the future when prices are expected to be higher.
S3
[Direct]
S1
S2
P
Free money from the government (subsidies)
induces suppliers to supply more.
If subsidies are taken away, then suppliers are
losing money and will decrease supply.
S3
I’m losing
profits.”
[Inverse]
S1
S2
P
If business have their taxes decreased,
it moves the supply curve to the right.
55. If business have their taxes increased,
it moves the supply curve to the (left/right).
P
$1200
D2
D1
S
$900
$600
QS=80
Shortage
QD=160
$300
40
80
120
160
Q
P
D1
$40 D
2
$30
QD=10
Surplus
S
QS=30
$20
$10
10
20
30
40
Q
P
D
S1
$4
S2
QD=40
$3
Surplus
QS=80
$2
$1
20
40
60
80
Q
P
D
$800
S2
S1
$600
$400
QS=20
Shortage
QD=60
$200
20
40
60
80
Q
D
P
D1
Q
D1
[TIMER]
A
“D” for flag
after 9/11
D
D1
P2
P1
P1
S
B
S
Q
P
D2
Slide Rule
After introduction
of calculator
P2
After “Looking
For Nemo”
Q2 Q1 “Decrease in Demand”
Q1 Q2
“Increase in Demand”
S
P
Q
Four Possibilities
[RATNEST] D
D
C
Increase in
supply of gas
S
S1
S1
$1.85
P
D
$1.85
S2
S1
$1.00
Decrease in
“S” of gas
$1.00
“Increase in Supply”
Q
Q1 Q2
Q2 Q1
“Decrease in Suppy”
“Increase in
D1
D”
S
D2
P2
P1
“Decrease in
D1
S
P1 D2
P2
QD1 QD2
(A)
QD2 QD1
TIMER
(B)
D”
“Increase in S”
D
S1
S2
P1
P2
“Decrease in S”
S2
D
S1
P2
P1
QD1 QD2
QD2 QD1
(C)
RATNEST (D)
A
___1.
Decrease in income on market for used cars.
B
___2.
Decrease in income on market for new cars.
B
___3.
Consumer expectations about a price decrease.
C
___4.
Producer expectations about a price decrease.
C
___5.
Increase in # of producers on the market for computers.
A
___6.
Increase in # of consumers on the market for used cars.
A
___7.
Increase in # of consumers on the market for new cars.
A
___8.
Decrease in the price of iPods upon the market for iTune songs.
C
___9.
Decrease in business taxes on the market for computers.
A
___10.
Consumer expectations of a shortage of apples.
C
___11.
Decrease in resource cost on market for computers.
D
___12.
Increase in price of wheat upon market for corn.
A
___13.
Consumer expectations of a shortage of cell phones.
D
___14.
Producers expectations about a price increase.
A
___15.
Increase in income on the market for iPod videos.
Bushels
Demanded
26
32
37
43
48
Corn Price
$5
$4
$3
$2
$1
Bushels
Supplied
46
41
37
32
29
$5
D
S
$3
$2
26 32 37 43 46
61. Equilibrium price will be ($1/$2/$3/$4/$5).
62. If the price in this market were $2, farmers
(would/would not) be able to sell all their corn.
63. If the price were initially $5, we would expect
the price of corn supplied to (increase/decrease)
as a result of the price change.
64. A price of $36 will result in a (shortage/surplus) of (50/100).
65. Price & quantity will gravitate toward ($12 & 150/$24 & 100).
66. The highest price that buyers will be willing & able to pay
for 50 units is ($12/$24/$36).
67. A price of $12 in this market will result in a (surplus/shortage) of (50/100).
D
S
$36
$24
E
$12
0
50
100
150
Price
Floor
–
minimum price [creates surpluses]
[“When the G runs the economy, it turns everything upside down.”]
Such as:
Minimum Wage P
Agricultural
Price Supports
S
D
Price Floor-minimum price
$2.50
The price has to be
IN the house. It can’t
be below the floor.1.90
QS exceeds QD
Surplus
Price per gallon
Equilibrium price for milk
.
Some call agricultural price
supports “udder insanity.”
0
14
19
24
Millions of gallons per month
Q
Wage
WWMD?:
Labor
Demand
Surplus of Labor
= Unemployment
Labor
Supply
Minimum
wage
WE
0
LD
LE
LS
Quantity of Labor
Price Ceiling - maximum price [creates shortages]
Such as:
Rent controls in NYC
Wartime price controls
Rock concert prices
Super Bowl tickets
P
S
D
The price has to be
in the house. It can’t
be above the ceiling.
University of Phoenix Stadium
$2,000
NYC
1,200
Price Ceiling-maximum price
Rent Controls
University of Phoenix Stadium
Super Bowl Ticket Prices
E-Bay
1967 - $12.00
2008-$7-900.oo $2,500-19,450
[end zone - mid-field]
QD exceeds QS
Shortage
2.5
3
7
3.5 Millions of Dwellings Rented
NFL could raise the price & make another $150 M but the average man couldn’t attend.