Transcript Markets & Prices - University of Wisconsin

Markets & Prices
What If The Price Is Too High
sellers have incentive to produce a lot
 buyers have incentive to consume a little
 excess supply (surplus)
 competition among sellers:
P ↓
 weeds out extra sellers, attracts additional buyers

Excess Supply
Price of
Ice-Cream
Cone
Supply
Surplus
$2.50
2.00
Demand
4
Quantity
demanded
7
10
Quantity
supplied
Quantity of
Ice-Cream
Cones
Markets & Prices
What If The Price Is Too Low
buyers have incentive to consume a lot
 sellers have incentive to produce a little
 excess demand (shortage)

competition among buyers: P ↑
 weeds out extra buyers, attracts additional sellers

Excess Demand
Price of
Ice-Cream
Cone
Supply
$2.00
1.50
Shortage
Demand
4
Quantity
supplied
7
10
Quantity
demanded
Quantity of
Ice-Cream
Cones
Gains From Trade
Opportunity For Improvement
should a particular unit of a good be produced
and consumed?
 only if market participants can benefit from
exchange
 as long as someone is willing to pay more than it
would cost a firm to produce the unit, then there
are incentives to enter into the transaction

Gains From trade
Price
Supply
Value
to
buyers
Cost
to
sellers
Cost
to
sellers
Value
to
buyers
Equilibrium
quantity
Value to buyers is greater
than cost to sellers.
Value to buyers is less
than cost to sellers.
Demand
Quantity
Markets & Competition
Competition Regulates Markets
buyers and sellers both gain from exchange
 prices adjust to encourage trade
 competition directs goods & services (resources)
to their most highly-valued uses

FTE
Shocks
What If Market Conditions Change

suppose something other than the price of a good changes
– price of inputs, technology
– income, price of other goods, tastes & preferences
a change in market conditions will create a disequilibrium
 the price adjusts to bring the quantity supplied and the
quantity demanded into balance

Shocks
Three Steps
does the event shift the supply curve or demand curve
 to the left or to the right


use the S & D diagram to see how the shift affects the
equilibrium price and quantity
Increase In Demand
Price of
Ice-Cream
Cone
1. Hot weather increases
the demand for ice cream . . .
Supply
New equilibrium
$2.50
2.00
2. . . . resulting
in a higher
price . . .
Initial
equilibrium
D
D
7
3. . . . and a higher
quantity sold.
10
Quantity of
Ice-Cream Cones
Increase In Demand
Hot Weather
increased tastes & preferences
 demand curve shifts to the right
 shortage at initial equilibrium price
 P ↑ to restore equilibrium
 new equilibrium:
higher P
higher Q

Factors That Shift Demand
Factors That Shift Demand
Recall…..

if more people want a particular product
D ↑ leads to
P↑
sends signal to producers that more is desired
 sellers respond to incentive of higher prices

ethanol and corn
 bellbottoms are all the rage this year
 cowbells?

Decrease In Supply
Price of
Ice-Cream
Cone
S2
1. An increase in the
price of sugar reduces
the supply of ice cream. . .
S1
New
equilibrium
$2.50
Initial equilibrium
2.00
2. . . . resulting
in a higher
price of ice
cream . . .
Demand
4
7
3. . . . and a lower
quantity sold.
Quantity of
Ice-Cream Cones
Decrease In Supply
Price Of Sugar Rises
increased price of input
 supply curve shifts to the left
 shortage at initial equilibrium price
 P ↑ to restore equilibrium
 new equilibrium:
higher P
lower Q

Factors That Shift Supply
Shocks
What Happens to Price and Quantity
When Supply or Demand Shifts?
Efficiency
The Invisible Hand
guides decision-making
 rewards efficient producers and consumers
 goods society wants
 prices society is willing and able to pay

Equilibrium
Price of
Ice-Cream
Cone
Supply
Equilibrium
Equilibrium price
$2.00
Equilibrium
quantity
1
2
3
4
5
6
7
8
Demand
9 10 11 12 13
Quantity of Ice-Cream Cones
University
Wisconsin-Eau
Claire 1
Markets
inofAction:
Application
Two Sources Of Seasonal Variation
beachfront cottages
 apples

identify period of highest consumption
 will price be high or low?

University
Wisconsin-Eau
Claire 1
Markets
inofAction:
Application
Two Sources of Seasonal Variation
University
Wisconsin-Eau
Claire 2
Markets
inofAction:
Application
Corn and Beef
D for corn (ethanol) has led to P
 corn is main feed for cattle (used to produce beef)
 What happens in the market for beef?


Atkin’s Diet has people wanting more beef…..

Mad Cow scare in Nebraska meat plant…..
University
Wisconsin-Eau
Claire
Markets
inofAction:
Application
3
Nursing Shortage
nursing is traditionally a women’s occupation
 new higher paying job opportunities for women
 What happens in the market for nurses?


an aging population has led to
D for medical services…

apply similar analysis to teachers, truck drivers…
University
Wisconsin-Eau
Claire
Markets
inofAction:
Application
4
Taxes, Markets & Government Revenue

$1 tax on each unit sold in the marketplace

How successful will this be in gasoline market?

How successful will this be in the cigarette market?

now consider the market for footwear…
– black Converse Chuck Taylor high-tops…
University
of Wisconsin-Eau
Claire
Markets
in Action:
Other Questions

Why do houses ↑ in price after purchase, while
automobiles ↓ in price after purchase?

How do consumers respond to price changes?
– salt, public transportation, gasoline (what’s up with gas prices)

If there are more cranberries, how come the price is
higher?

Why is there currently a shortage of nurses and truck
drivers