Transcript Slide 1

Basic Assumption
Ceteris Paribus
– other things being equal
- only consider price changes
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 Incomes
2 Consumer Tastes
3 Number of Consumers
4 Price of Other Goods
5 Consumer Expectations
Or why the curve shifts
1 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
2 Consumer Tastes
-beanie hats make a
comeback
Demand increases
-Hula Hoops go out
of style
Demand decreases
3
Number of Consumers
(also Demographics)
-Hurricanes around
Labor Day
Fewer tourists touring Florida and
the Gulf Coast, demand decreases
More tourists touring, NC and
SC, demand increases
4 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 increase, demand for Train
tickets also 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
Why the curve shifts
1 Consumer Incomes
2 Consumer Tastes
3 Number of Consumers
4 Price of Other Goods
5 Consumer 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, price
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
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
1
2
3
4
5
6
Why the curve shifts
Changes in Natural Conditions
Resource Prices
Changes in Technology
Taxes and Subsidies
Number of Producers
Producer Expectations
Or why the curve shifts
1 Changes is Natural Conditions
Shift resources away from high
production cost goods.
Caused by natural disasters or
market price of other goods
2 Resource Prices
-gas is discovered under
CVCC
Supply increases
-Minimum wage goes
up
Supply decreases
3 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)
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
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
1
2
3
4
5
6
Why the curve shifts
Changes in Natural Conditions
Resource Prices
Changes in Technology
Taxes and Subsidies
Number of Producers
Producer Expectations
Why the curve shifts
1 Consumer Incomes
2 Consumer Tastes
3 Number of Consumers
4 Price of Other Goods
5 Consumer Expectations
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
1
2
3
4
5
6
Why the curve shifts
Changes in Natural Conditions
Resource Prices
Changes in Technology
Taxes and Subsidies
Number of Producers
Producer Expectations
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
Government Intervention
in the Market:
Price Controls
1. 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
• A price floor like P1 sets a Price
price above market equilibrium
P1
causing quantity supplied QD …
S
Surplus
Price
floor
to exceed quantity demanded QS
P0
…
resulting in a surplus.
•Non-price factors will become
more important than prices in
determining where scarce
goods go.
D
QD
QS
Quantity
Minimum Wage Effects
• Direct effect:
– Reduces employment of low-skilled
labor.
• Indirect effects:
• Reduction in non-wage component of
compensation.
• Less on-the-job training.
• May encourage students to drop out of
school
• A higher minimum wage does little to help
the poor.
http://www.thedailyshow.com/watch/tue-january-28-2014/wage-against-the-machine
Employment and the Minimum Wage
• If a price (wage) of $4.00
could bring equilibrium.
Price
(wage)
Excess
supply
• A minimum wage (price floor) $ 5.15
of $5.15 would increase the
earnings of those who stayed
employed (E1), but would reduce
the employment of others.
$ 4.00
S
Minimum
wage level
• Those who lose their job (E0
to E1) would be pushed into
either unemployment or some
other less preferred form of
employment.
D
E1
E0
Quantity
(employment)
2. 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)
S
Rental housing
market
• In the rental housing
market the price (rent) P0
would bring the quantity
of rental units demanded
into balance with the
P0
quantity supplied.
• A price ceiling like P1sets a
price below equilibrium …
P1
quantity demanded QD …
exceeds quantity supplied QS
…
resulting in a shortage.
Price
ceiling
Shortage
D
QS
QD
Quantity of
housing units
Effects of Rent Control
• The future supply of housing will decline.
• The quality of housing will deteriorate.
• Non-price methods of rationing will
increase in importance.
• Long-term renters will benefit at the
expense of newcomers.