Transcript Ch3 - YSU

Chapter 3: Supply and Demand
With limited resources and various needs of human being,
– Every year, how many acres of wheat should be planted ? How many cars
should be made? And how many houses should be built?
– Who should decide what and how much to produce? Government or the
free ‘market’?
• Government controlled distribution of scarce resources
– Rationing coupons (stamps) of almost everything in P.R.China before 1980
– Rationing of gasoline in 1973 oil crisis in Netherlands
– Rent control in New York City and Los Angeles
• Market force driven allocation of scarce resources
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What is A Market?
• A market is a structure where buyers meet sellers
to exchange any type of goods, services, and
information.
– Buyers create demand for a good;
– Sellers create supply of a good;
– How the price of a good is determined?
• Cost
• Value
• Interaction between supply and demand
2
The Demand Curve
• A demand curve shows the
quantity demanded for a
good at a certain level of
price.
• A demand curve is
downward sloping.
Demand for Pizzas
P
$4
$2
D
8
16
(1000s of slices/day)
Q
– Substitution effect
– Income effect
– Marginal buyer’s reservation
price
3
The Supply Curve
• A supply curve shows the
quantity supplied of a
good at a certain level of
price.
• A supply curve is upward
sloping
Supply of Pizzas
P
S
$4
$2
8
16
(1000s of slices/day)
Q
- As the output of a good
increases, the opportunity
cost of producing the good
increases. Therefore, the
price to be charged will also
increase.
- Marginal seller’s reservation
price
4
Market Equilibrium
Market for Pizzas
P
Surplus
S
$4
$3
Equilibrium
$2
Deficit
8 12 16
(1000s of slices/day)
D
Q
• A market is in equilibrium
when a price equates
quantity demanded and
quantity supplied (market
clearing price).
• At a free market, any
deviation from equilibrium
tends to automatically
revert back to equilibrium.
- Excess supply
- Excess demand
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An Example: Rent Control
Market for NYC Apartments
P
S
• A price ceiling is a maximum
price specified by law.
• If the price ceiling is under
the equilibrium price, a
shortage of apartments
results.
$1,600
$800
D
1
2
3
Q
(millions of apartments/day)
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Movements of Demand Curve
• When the price of a good
changes, its quantity
demanded changes, which
happens along the demand
curve – changes in quantity
demanded.
• When any factor other than
the price of a good changes,
the change shifts the whole
demand curve – a change in
demand.
Demand for Canned Tuna
P
$2
D
8
10
D'
Q
(1000s of cans/day)
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Shifts in Demand
What could shift a demand curve?
–
–
–
–
–
–
Price of complementary goods;
Price of substitute goods;
Income: normal or inferior goods;
Preference;
Population of potential buyers;
Expectations on future price changes.
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Movements of Supply Curve
• Movements along the
supply curve;
• Shifts of supply curve
-
Price of an input;
Technological changes;
Weather;
Number of potential sellers;
Expectations on future price
changes
Convenient Apartments
P
S
S’
P
P’
D
Q Q’
(units/month)
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Changes in Supply and Demand
• Demand changes while supply remains the same
Demand
Equilibrium Price
Equilibrium Quantity
Increase
Increase
Increase
Decrease
Decrease
Decrease
• Supply changes while demand remains the same
Supply
Equilibrium Price
Equilibrium Quantity
Increase
Decrease
Increase
Decrease
Increase
Decrease
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Changes in Supply and Demand
Supply
Demand
Increases
Decreases
Increases
P
Q
Depends
Increases
P
Q
Increases
Depends
Decreases
P
Q
Decreases
Depends
P
Q
Depends
Decreases
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Efficiency and Equilibrium
• Does the fact that a market automatically reach its
equilibrium also guarantee the achievement of
economic efficiency – all goods at their socially
optimal levels?
– Only if the benefits to buyers and/or the costs to sellers
are not shared by others. (Efficiency Principle)
– Buyers and sellers are only concerned about their own
marginal benefit and marginal cost.
– If the production of a good creates benefits or costs to
other groups, the market equilibrium would not achieve
economic efficiency.
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Efficiency and Equilibrium
• Producers sometimes shift costs to others
– Pollution is like getting free waste disposal services
– Total marginal cost = seller's marginal cost plus
marginal cost of pollution
– When costs are shifted, supply is greater than socially
optimal
• Buyers may create benefits for others
– Marginal benefit is less than the full social benefit
– Vaccinations, my neighbor's landscaping
– The demand for these goods is less than socially
optimal
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