Transcript P 1

Factor Markets
Businesses
Households
Product Markets
Selling
Price
$5
$4
$3
$2
$1
Quantity
Demanded
10
15
25
40
60
Graphing:
-Plot the points
-Connect the dots
Price
$6
$5
Downsloping
to right
$4
$3
left
Demand
$2
$1
0
10
20
30
40
50
60
Quantity
Selling
Price
Quantity
Supplied
$5
$4
$3
$2
$1
60
40
25
15
10
Graphing:
-Plot the points
-Connect the dots
Price
$6
$5
$4
Upsloping
right
to left
$3
Supply
$2
$1
0
10
20
30
40
50
60
Quantity
Selling
Price
$5
$4
$3
$2
$1
Quantity
Demanded Supplied
60
10
40
15
25
25
15
40
10
60
Graphing:
-Plot Demand
-Plot Supply
Price
$6
D
S
$5
$4
$3
$2
$1
0
D
S
10
20
30
40
50
60
Quantity
Movement OF the curve
Caused by a Change in a Determinant
Selling
Price
$6
$5
$4
$3
$2
$1
$0
Quantity
Old
New
0
1
2
3
4
5
6
Inc
1
2
3
4
5
6
7
Dec
0
1
2
3
4
5
Increase in Demand shifts
Price
out or to the right
$6
$5
$4
$3
$2
$1
Old
0
1
2
3
4
5
6
Decrease in Demand shifts in or
Quantity
Why the curve shifts
1 Consumer Tastes
2 Price of Other Goods
3 Consumer Incomes
4 Number of Consumers
5 Consumer Expectations
Or why the curve shifts
1 Consumer Tastes
-beanie hats make a
comeback
Demand increases
-Hula Hoops go out
of style
Demand decreases
2 Price of Other Goods
If airlines cut ticket
prices
More demand for
Luggage
Less demand for train
tickets
Tickets and Luggage are compliments
Compliments are consumed or used together
(inverse relationship)
If ticket prices decrease, demand for
Luggage increases
If ticket prices increase, demand for
Luggage decreases
Airlines and Trains are Substitutes
Substitutes replace each other
(direct relationship)
If air tickets decrease, demand for Train
tickets also decreases
If air tickets increase, demand for Train
tickets also increases
3
Consumer Incomes
+tax cuts increase net incomes
Consumers have more money to
spend, demand increases
-the $ depreciates against the
Euro
Imported goods from Europe cost more
dollars,
demand decreases
For Normal Goods!!!
For Inferior Goods
+tax cuts increase net incomes
Consumers switch to better goods,
demand for Hot Dogs decreases
-the $ depreciates against
the Euro
Domestic travel looks better, demand
increases
4 Number of Consumers
(also Demographics)
-Hurricanes arrive on Labor
Day weekend
Fewer tourists touring,
demand decreases
+NAFTA
North American Free Trade Agreement
Canada sells to 290 million US consumers,
demand for their goods increases
5 Consumer Expectations
-dealers
reduce car
prices in August
Car buyers wait, demand decreases
-heavy
rains have damaged
coffee crop
Consumers expect shortages and higher
prices so they buy more now, demand
increases
Shifting the Demand Curve
Caused by a change in a Determinant of Demand
Price
$6
$5
P Q
P2$4
P1
decrease
Current
Equilibrium
$3
P3
$2
increase
P Q
$1
0
Supply
1
Q3 2
Q1 3
Q2
Demand
4
5
6 Quantity
Why the curve shifts
1 Consumer Tastes
2 Price of Other Goods
3 Consumer Incomes
4 Number of Consumers
5 Consumer Expectations
Movement OF the curve
Caused by a Change in a Determinant
Selling
Price
$6
$5
$4
$3
$2
$1
Quantity Supplied
Old
New
6
5
4
3
2
1
Inc
7
6
5
4
3
2
Dec
5
4
3
2
1
0
Price
Increase in Supply shifts out
or to the right
$6
$5
$4
Old
$3
$2
Decrease in Supply
$1
0
shifts in or to the left
1
2
3
4
5
6
Quantity
Why the curve shifts
1 Resource Prices
2 Changes in Technology
3 Prices of other goods
4 Taxes and Subsidies
5 Number of Producers
Or why the curve shifts
1 Resource Prices
-gas is discovered under
CVCC
Supply increases
-Minimum wage goes
up
Supply decreases
2 Changes in Technology
+ If a more powerful
computer is developed
Makes production easier
(and cheaper)
- If stronger pollution
controls are required
Makes production harder
(and costly)
3
Elements of Nature/Prices
of other goods
Shift resources away from high
production cost goods.
Caused by natural disasters or
market price of other goods
4
Taxes and Subsidies
- taxes discourage production
+ subsidies
encourage
production
5
Number of Producers
+more firms
increase supply
-fewer firms
decrease supply
6 Producer Expectations
about prices and resource
availability
-if
prices are expected to
increase, more production
-if
prices are expected to
decrease, less production
Why the curve shifts
1 Resource Prices
2 Changes in Technology
3 Prices of other goods
4 Taxes and Subsidies
5 Number of Producers
6 Producer Expectations
Movement ALONG the curve
Consumers responding to a Change in the Price of
the good
Caused by factors related to production of the
Price
good
The Supply Schedule!!
$6
Harder or costlier to produce, pri
goes up
Supply
decrease
$5
P
$4 2
P Q
P
Current
Price
$3 1
P
$2 3
$1
0
increase
P Q
Easier or less expensive to produce,
price goes down
1
Q2 2
Q1 3
Q3
4
5
Curve
What makes the
Supply Curve
Shift??
Demand
6 Quantity
Shifting the Supply Curve
Caused by a change in a Determinant of Supply
Price
$6
$5
decrease
P
$4 2
P Q
P
increase
Current
Equilibrium
$3 1
P
$2 3
P Q
$1
0
Supply
Demand
1
Q2 2
Q1 3
Q3
4
5
6 Quantity
Movement ALONG the curve
Response to a Change in the Price of the good
Caused by factors related to consumers
Price
$6
$5
P2$4
P1
Current
Price
$3
P3
$2
Supply
$1
0
1
Q2 2
Q1 3
Q3
4
5
6 Quantity
Economic Examples
Resource Prices, and Product Markets
• A reduction in the supply of unskilled labor …
pushes the wage rates of fast-food workers upward.
• Higher wages cause a reduction in supply.
This leads to higher hamburger prices.
S2
Price
(wage)
Resources
Market
Price
S2
S1
Product
Market
S1
$2.25
$7.50
$2.00
$6.25
DR
Employment
E2 E1
DP
Q2 Q1
Quantity
2. Increase in the Demand
for LoanableInterest
Funds
• At the interest rate r the
quantity of loanable funds
demanded by borrowers
into equals quantity
supplied by lenders.
• An increase in demand
will move D1 to D2
the interest rises to r2
and increasing borrowing
to Q2
• Higher interest rates
encourage additional savings,
making it possible to fund
more borrowing.
Lending
rate
S
r2
r1
Borrowing
D1
Q1 Q2
D2
Quantity of
loanable funds
3. Increase in the Demand
for Foreign Exchange U.S. sales to
• Begin in equilibrium, where
the dollar price of the
quetzal is $.10
(10 cents = 1quetzal).
• An increase in American
demand for Guatemalan
coffee will also increase the
demand for quetzals (with
which American importers
pay Guatemalan coffee
growers).
Exchange rate
• Equilibrium occurs where
the new demand D2 just
equals the supply S
0.10
•– at $.20 per quetzal with
Q2 > Q1 quetzals clearing the
market.
Guatemala
($ per quetzal)
S
0.20
D2
U.S. purchases
from Guatemala
D1
Q1
Q2
Quantity of
quetzal exchange
Price
Controls
1. Price Ceilings
• Price ceiling is a legally established
maximum price that sellers may charge.
• It stops the price from rising to the
equilibrium level.
– Example: rent control
• The direct effect of a price ceiling is a
shortage: quantity demanded exceeds
quantity supplied.
The Impact of a Price Ceiling
Price
(rent)
• In the rental housing
market the price (rent) P0
would bring the quantity of
rental units demanded into
balance with the
quantity supplied.
• A price ceiling like P1sets a
price below equilibrium …
quantity demanded QD …
exceeds quantity supplied QS
…
resulting in a shortage.
S
Rental housing
market
P0
Price
ceiling
P1
Shortage
D
QS
QD
Quantity of
housing units
2. Price Floors
• Price floor is a legally established
minimum price that buyers must pay.
• It stops the price from dropping down to
equilibrium level.
– Example: minimum wage
• The direct effect of a price floor
above the equilibrium price is a surplus:
quantity supplied exceeds quantity
demanded.
The Impact of a Price Floor
Price
• A price floor like P1
imposes a price above market
equilibrium …
causing quantity supplied QD …
P1
to exceed quantity demanded
QS … results in a surplus.
P0
S
Surplus
Price
floor
• Because prices are not
allowed to direct the market
to equilibrium, non-price
elements of exchange will
become more important in
determining where scarce
goods go.
D
QD
QS
Quantity
Employment and the Minimum Wage
Price
(wage)
Excess
supply
• Consider where a price (wage)
of $4.00 could bring the
$ 5.15
quantity of labor demanded into
balance with the quantity
supplied.
• A minimum wage (price floor)
of $5.15 would increase the
earnings of those who were able
to maintain employment (E1),
but would reduce the
employment of others.
• Those who lose their job (E0 to
E1) would be pushed into either
the unemployment rolls or some
other less preferred form of
employment.
S
Minimum
wage level
$ 4.00
D
E1
E0
Quantity
(employment)
Elastic and Inelastic
Demand Curves
• Elastic demand
– quantity demanded is sensitive to
small changes in price.
– Easy to substitute away from good.
• Inelastic demand
– quantity demanded is not sensitive
to changes in price.
– Difficult to substitute away from good.
Measuring Elasticity
Percent change in Quantity demanded
Percent change in Price
> 1 : Elastic sensitive to Price changes
Price Quantity (by more %) TR
Price  Quantity  (by more %) TR 
< 1 : Inelastic not sensitive to Price changes
Price Quantity (by less %) TR 
Price  Quantity  (by less %) TR
What affects Elasticity???
1. Available Substitutes
2. Necessity vs Luxury
3. Proportion of Income
4. Time to shop around
And the Drug Problem
Inelastic Demand - necessity
Price
Supply
P1
Demand
Q1
Quantity
Change supply:
or
Price
P2
eradication
Q then P
Q
then P
Supply
decrease
increase
P1
legalization
P3
Inelastic Demand
Q2Q1Q3
Quantity
Elastic and Inelastic
Supply Curves
Price
Price
Quantity
Quantity
• Elastic supply
– quantity supplied is sensitive to
changes in price.
Inelastic demand
– quantity supplied is not sensitive to
changes in price.
What affects Elasticity of
Supply???
1. Time
a. Market Period
b. Short Run
c. Long Run