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MICROECONOMICS BU 224 Seminar Three Agenda Course Issues and Questions Chapters Three and Four: Questions and Problems from the text. Review of Market Allocation Mechanisms Homework Review Demand Schedule or curve Amount consumers are willing and able to purchase at a given price Other things equal Individual demand Market demand The Demand Curve P P Qd $5 10 4 20 3 35 2 55 Price (per bushel) 6 5 4 3 2 1 1 80 0 LO1 D Q 10 20 30 40 50 60 Quantity 70 80 Demanded (bushels per week) 3-4 Determinants of Demand • • • • • • • • • Tastes Number of Buyers Income - Normal Goods - Inferior Goods Price of Related Goods - Substitute Good - Complementary Good Consumer Expectations Determinants of Supply • Resource Prices • Technology • Taxes and Subsidies • Prices of Other Goods • Producer Expectations • Number of Sellers Chapter 3 Questions 1. What are some examples of inferior products? 2. Who does the demanding and the supplying in the labor market? The loanable funds market? 3. Is the price system a "just" or "fair" way to allocate products? What about medical services? 4. What can we say about the demand and supply curves for products which are "free", like matches, toothpicks, and kittens? 5. Why do you think "rock" stars charge concert ticket prices below what they could charge and still sell out their performances? Chapter 3 Questions 1. A survey indicated that chocolate ice cream is America’s favorite ice-cream flavor. For each of the following, indicate the possible effects on demand and/or supply and equilibrium price and quantity of chocolate ice cream. a. A severe drought in the Midwest causes dairy farmers to reduce the number of milk-producing cattle in their herds by a third. These dairy farmers supply cream that is used to manufacture chocolate ice cream. b. A new report by the American Medical Association reveals that chocolate does, in fact, have significant health benefits. c. The discovery of cheaper synthetic vanilla flavoring lowers the price of vanilla ice cream. d. New technology for mixing and freezing ice cream lowers manufacturers’ costs of producing chocolate ice cream. Market Allocation Mechanisms Inputs or factors of production need to be used to produce goods and services. The ways such inputs can be utilized to serve the needs of consumers are called the allocation mechanisms. Market Allocation Mechanisms Four Market Allocation Mechanisms: 1. The market (price), 2. Government, 3. Random choice, and 4. First-come, first-served Market Allocation Mechanisms Efficiency: If an allocation mechanism is efficient, it means that it best satisfies the needs and wants of a society compared to the other allocation mechanisms. A system of markets and prices is generally the most efficient way of allocating scarce resources. As a result, it is predominantly used in most industrial countries today. Consumer Surplus Difference between what a consumer is willing to pay for a good and what the consumer actually pays Extra benefit from paying less than the maximum price 5-14 Consumer Surplus Consumer Surplus (2) Maximum Price Willing to Pay (3) Actual Price (Equilibrium Price) Bob $13 $8 $5 (=$13-$8) Barb 12 8 4 (=$12-$8) Bill 11 8 3 (=$11-$8) Bart 10 8 2 (=$10-$8) Brent 9 8 1 (= $9-$8) Betty 8 8 0 (= $8-$8) (1) Person LO2 (4) Consumer Surplus 5-15 Price (per bag) Consumer Surplus Consume r Surplus Equilibriu m Price P1 D Q 1 Quantity (bags) LO2 5-16 Producer Surplus Difference between the actual price a producer receives and the minimum price they would accept Extra benefit from receiving a higher price LO2 5-17 Producer Surplus Producer Surplus (2) Minimum Acceptable Price (3) Actual Price (Equilibrium Price) Carlos $3 $8 $5 (=$8-$3) Courtney 4 8 4 (=$8-$4) Chuck 5 8 3 (=$8-$5) Cindy 6 8 2 (=$8-$6) Craig 7 8 1 (=$8-$7) Chad 8 8 0 (=$8-$8) (1) Person LO2 (4) Producer Surplus 5-18 Price (per bag) Producer Surplus Producer surplus P1 S Equilibriu m price Q 1 Quantity (bags) LO2 5-19 Price (per bag) Efficiency Revisited Consumer surplus S P1 Producer surplus D Q 1 Quantity (bags) LO2 5-20 Microeconomics Questions?