Transcript Relative prices

Demand and Supply
Lecture 4
In This Lecture
1. Prices and Competitive Conditions
2. The meaning of demand and demand schedules
and curves
3. The difference between a shift in demand and a
change in the the quantity demanded
4. The meaning of supply and supply schedules and
curves
5. The difference between shifts in supply and a
change in the quantity supplied
Prices
•
Prices represent the term of trade between individuals
•
In a barter economy, prices could be expressed as how many coconuts
are required in a trade for each fish.
•
In a monetary economy, prices are expressed as the number of units of
currency (dollar, euro, peso, etc.) required in trade for a unit of a
‘good.’
•
Note the ratio of the currency price of a fish to the currency price of a
coconut tells you how many coconuts you have to give up to get a fish
(same as in the barter economy)
•
Relative prices (ratios of one price to another) represent
opportunity costs!
Competitive Conditions
If trading relationships between individuals are
competitive, then no one individual or group of
individuals through their actions can influence
the price of a good.
Individuals in competitive situations will take the
price as given.
Trade: It takes two to tango
• At a given price, I could decide to acquire
ownership of a good -- I would be a
‘demander’ in this situation
• At a given price, I could decide to sell my
ownership of the good to another individual -in this situation I would be a ‘supplier’
ND Football Tickets
Value of Ticket to:
Peter
Paul
Mary
Jack
Jill
$200
$150
$100
$100
$50
The value to the potential buyer of the
good is the maximum amount he or she
is willing and able to pay to good.
Don’t currently have a ticket but will
demand a ticket only if the value to the
individual exceeds their opportunity cost
(relative price)
Demand a ticket if
Benefit ≥ Cost
ND Football Tickets
Demand Schedule
Price
Value of Ticket
Peter
Paul
Mary
Jack
Jill
$200
$150
$100
$100
$50
Peter
200
Paul
150
Mary and Jack
100
Jill
50
0
Demand Curve
5
1
2
3
4
Tickets
Donuts
Quantity of Donuts
Jill
Jack
Total
Price
$1
0
1
1
75¢
0
3
3
50¢
1
5
6
25¢
2
7
9
• Why must the price decline
for the individuals to demand
more?
– As the individual consumes
more of the good, the value
they place on the next unit
of consumption declines
(diminishing marginal utility).
– Individuals will increase
their demand only if the
price falls.
Donuts
Price
Quantity of Donuts
Jill
Jack
Total
$1
Price
$1
0
1
1
75¢
75¢
0
3
3
50¢
50¢
1
5
6
25¢
2
7
9
25¢
0
9
1
2
3
4
5
6
7
8
Donuts
When Price of the Good Falls
More of the good is demanded because
• Individuals who at the original price demanded the good may
demand more
• Individuals who at the original price didn’t demand any of the
good may start demanding the good
Remember this represents movement
along a Demand Curve
Continuous Demand
Price
Smooth Demand Curve Because:
Quantity
•
Many individuals
•
Ask at any price
•
Can demand fractions of units
Shifts in Demand Curve
Change in Other Factors:
•
Increase in Population
•
Changes in Income
–
–
•
Outward
Outward
Inward
Change in prices of other goods
–
–
•
•
•
Normal good (income rises)
Inferior good (income rises)
Shifts Demand
Substitutes (price rises)
Complements (price rises)
Changes in Tastes
Changes in Expectations
Changes in Weather
Outward
Inward
Supply
• In the football tickets example, ND allocates the
tickets according to some procedure but then the
individuals who receive tickets may sell them or keep
them
• In the donut example, donuts are produced and then
sold to customers
• In either example, the question is what quantity of the
goods will offered for sale at a given price
ND Football Tickets
Value to:
Professor W
$150
Professor X
$100
Professor Y
$50
Professor Z
$50
Value to an owner of an object or good is
the minimum price at which they would be
willing to part with the good.
They would ‘supply’ the good (be willing
and able to sell the good) if the price they
could get for the good exceeded the
value they placed on the good
Sell if:
PRICE ≥ Value to individual
ND Football Tickets
Price
Value to:
Professor W
$150
200
W
Professor X
$100
150
X
Professor Y
$50
100
Z and Y
Professor Z
$50
50
0
Supply Function
1
2
3
4
Tickets
Donuts
Quantity of Donuts
Tasty
Dunking
Total
Price
$1
4
6
10
75¢
3
5
8
50¢
2
4
6
25¢
0
0
0
•
Why do firms require a hirer
price to supply more?
– As they produce more, the cost
of production rises (diminishing
returns to scale).
– Consequently as their costs rise
they will only be willing to
supply more if the price rises.
Donuts
Price
Quantity of Donuts
Tasty
Dunking
Total
$1
Price
$1
4
6
10
75¢
75¢
3
5
8
50¢
50¢
2
4
6
25¢
0
0
0
25¢
0
10
1
2
3
4
5
6
7
8
Donuts
9
As the Price of the Good Rises
More is supplied because
• Existing suppliers provide more
• New suppliers start producing and supplying the
good
This occurs with movement along a supply curve!
Shifts in Supply Curve
Change in Other Factors:
•
Changes in Input Prices (increases)
•
Changes in Technology
•
Change in Expectations
Shifts Supply
Inward
Outward
Assignment for Next Lecture
• Do Homework 3 on ‘Homework Assignment’
by Wednesday, September 6 at 5 pm
• ReRead Chapter 3
• Topics Next Time
– Markets and Competitive Equilibrium