Transcript Ch3

Frank & Bernanke
4th edition, 2009
Ch. 3: Supply and Demand: An
Introduction
http://prezi.com/2mvbtqd9ushg/market-system/?auth_key=37842a81dd359b3c60b23d5a0915542d4e954c91
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The Answer: Supply and
Demand
Why did gasoline prices almost doubled
between November 1999 and May 2000
but fell by half by November 2001?
 Why could you buy the same computer
at half price in 2006 than in 2003?
 Why are prices at the College
Bookstore higher than the discount
markets?

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Markets



When in elementary school you traded your
baloney sandwich for your best friend’s peanut
butter sandwich, you were involved in an
exchange. Trade theory discussed in the
previous chapter told us that both of you were
better off with this exchange.
If you offered your baloney sandwich to whoever
wanted it for a “fair trade” there formed a market
for a single baloney sandwich.
For a market to exist, there should be more than
one buyer or more than one seller.


One seller and many buyers is called monopoly.
One buyer and many sellers is called monopsony.
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Market Types
Many buyers and many sellers with identical
products operate in competitive markets.
 Many buyers and many sellers with
differentiated (brand name) products
operate in monopolistically competitive
markets.
 Many buyers and a few sellers constitute an
oligopoly.
 Many buyers and a single seller constitute a
monopoly.

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Demand and Supply
The behavior of buyers is captured with
the demand curve.
 The behavior of the sellers is captured
with the supply curve.
 Each individual decision (both by
consumers and firms) is ruled by the
marginal benefit vs. marginal cost
calculation.
 Opportunity cost determines if one is a
buyer or seller (ex: airplane tickets).

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Determinants of Demand

Price of the product.
P

Income of the consumers.
Y

up => Q down.
up => Q up.
Change in price of substitutes.
 Ps

Change in price of complements.
 Pc

up => Q down.
Change in tastes and preferences.
T

up => Q up.
favor the product more => Q up.
Expected price in the future.
 Pe
up => Q up.
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Drawing the Demand Curve
In a two-dimensional space (the page in
your notebook, the chalkboard) we can
only measure two variables.
 We will pick “price” and “quantity
demanded” as our two variables.
 As we change the price of the product
and look at the change in quantity
demanded, we will assume that all the
other variables are kept constant.

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An Example of Demand
Ticket Price for Cleveland Orchestra Number of Concerts Attended
100
0
50
1
30
3
20
6
10
12
Ticket Price
Demand for Cleveland Orchestra
150
100
50
0
0
5
10
Concerts
Attended
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Income Increase
Ticket Price for Cleveland Orchestra Number of Concerts Attended
100
0
50
1
30
3
20
6
10
12
2Y
1
2
6
12
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PricePrice
of
Ticket
Tickets
Demand
Demand
for Cleveland
with Higher
Orchestra
Income
150
150
100
100
5050
0 0
0 0
10 15
5 5
10
Concerts
Attended
Number
of Concerts
15
20
25
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Exercises

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Show what happens to the demand for Coke
when Pepsi price rises.
Show what happens to demand for computers
when monitor prices increase.
Show what happens to demand for Firestone tires
after the Federal government accused them of
faulty product.
Show what happens to teenage demand for
cigarettes if originally price is $2 and consumption
is 1 million and price goes up to $2.20.
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Teenage Smoking
$2.20
$2.00
880,000 1 million
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Determinants of Supply

Price of the product
P

Input prices
W

up => Q up
up => Q down
Technology
 New

technology => Q up
Expected price
 Pe
up => Q down
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An Example of Supply
Price of Chairs Quantity Supplied
0
0
25
100
50
200
75
300
100
400
Price
Supply of Chairs
120
100
80
60
40
20
0
0
100
200
300
Quantity
400
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Input Price Increase
Price of Chairs Quantity Supplied Supply w/ higher wages
0
0
0
25
100
75
50
200
150
75
300
225
100
400
300
Price
Price
Rise
in Input
Prices
Supply
of Chairs
150
120
100
100
80
60
50
40
0
20
0 0
0
100
100
200
300
Quantity
200
Quantity 300
400
400
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Exercises
Show what happens when new technology
is employed.
 Show what happens when cost of capital
increases.
 Show what happens when new firms enter
into the market.
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Equilibrium
Equilibrium takes place when the quantity
supplied into the market exactly matches
quantity demanded.
 If quantity supplied exceeds quantity
demanded, there will be unsold
quantities.

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Sellers will lower price to get rid of excess
inventory.
If quantity demanded exceeds quantity
supplied, price will inch up to bring the
market into equilibrium.
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How Does This Fit S&D?
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Price Controls, Price Supports
Show the effect of rent control, gas
price controls, wage controls.
 Show the effect of agricultural price
supports, export supports.
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Disequilibrium and
Social Welfare

Why does the society (sellers and buyers)
are better off when they move toward
equilibrium?
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Disequilibrium and Social
Welfare
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Exercises
Show what will happen to quantity and
price when income rises and technology
improves.
 Show what will happen to quantity and
price when the state increases the sales
tax.
 Show what will happen to quantity and
price when wages increase and tastes
favor the product.
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What Is Happening to Farmland
Around Hiram?
Farmland is being transformed into
residential developments.
 Are we going to be without food?
 How does the price system allocate the
land between residential development and
farmland?
 Why don’t economists worry about the
shortage of food?
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Social vs. Private Costs

Why an action might be smart for one but
dumb for all?


Subprime debacle
How does the market reach optimal
welfare when social costs are different
than private costs?
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