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Economic Problem
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What, how, and for whom to produce?
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Prices
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Free Market Economies rely upon ________ to signal the "best" use of resources.
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Market
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A group of buyers and sellers of a particular good or service.
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Market
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Requires well defined good/service and defined time period.
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Supply and Demand
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The terms _____________________ refer to the behavior of people as they interact with one another in markets
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Demand
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Buyers determine.
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Supply
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Sellers determine.
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Competitive Market
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Market in which there are many buyers and sellers so that each has a negligible impact on the market price.
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Market Determined
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Price is.
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Supply and Demand
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Market has to be competitive in order for _____________________ model to work.
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Quantity Demanded
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The amount of a good that buyers are willing and able to purchase.
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Law of Demand
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States that, other things equal and in a given time period, the quantity demanded of a good falls when the price of the good rises.
Price and Qd are inversely related.
Price and Qd are inversely related.
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Three ways to represent the demand or the supply relationship:
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1. Schedules- tables of numbers
2. Curves- graphically
3. Functions- equations
2. Curves- graphically
3. Functions- equations
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Demand Schedule
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A table that shows the relationship between the price of the good and the quantity demanded, in a given time period, ceteris paribus.
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Demand: The relationship between Price and Quantity Demanded
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Two Interpretations:
1. Given P, what is Qd?
2. Given Qd, what is the max P that will be paid?
1. Given P, what is Qd?
2. Given Qd, what is the max P that will be paid?
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Demand Curve
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A graph of the relationship between the price of a good and the quantity demanded, in a given time period, ceteris paribus.
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General Demand Function Form
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Qd = f(P)
Normally not graphed.
Normally not graphed.
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General Form Inverse Demand Function
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P = f(Qd)
Normally what we graph or call the demand curve, with P on the vertical axis, Q on the horizontal axis.
Normally what we graph or call the demand curve, with P on the vertical axis, Q on the horizontal axis.
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Market Demand
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Refers to the sum of all individual demands for a particular good or service at each different price.
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Market Demand Curve
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The amount of a good that will be purchased at alternative prices, holding other factors constant.
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Law of Demand
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The market demand curve is downward sloping if individual demand curves are downward sloping.
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Multivariate Demand Function
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A mathematical representation describing how many units will be purchased at different prices for X, the price of a related good Y, income and other factors that affect the demand for good X.
Functions allow for more than one independent variable which is not possible with graphs or tables.
Functions allow for more than one independent variable which is not possible with graphs or tables.
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The General Form Market Demand Function
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Qx^d = f (Fx, Py, M, H)
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The General Form Multivariate Linear Demand Function
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Qx^d = a0 + axPx + ayPy + amM+ ahH
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ax < 0
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By the law of demand ax _____ 0.
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ay > 0
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If good Y is a substitute for good X then ay ______ 0.
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am < 0
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If good X is an inferior good then am ______ 0.
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Sizes of Coefficients
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Reflect how much Qd changes due to a one unit change in each variable.
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Change in Quantity Demanded
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Caused by a change in the price of the product.
Represented by a movement along the same demand curve.
Represented by a movement along the same demand curve.
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Change in Demand
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Represented by a shift in the demand curve, either to the left or right. Really a whole new Demand Curve, Demand Schedule, and Demand Equation.
Caused by any change that alters the quantity demanded at every price.
Caused by any change that alters the quantity demanded at every price.
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Demand Shifters
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Income
-Normal good
-Inferior good
Prices of Related Goods
-Prices of substitutes
-Prices of complements
Advertising and Consumer Tastes
Number of Consumers
Consumer expectations about future prices or income.
-Normal good
-Inferior good
Prices of Related Goods
-Prices of substitutes
-Prices of complements
Advertising and Consumer Tastes
Number of Consumers
Consumer expectations about future prices or income.
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Substitutes in Consumption
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When a fall in the price of one good reduces the demand for another good, the two are called ___________________.
Fulfill similar consumption needs.
Fulfill similar consumption needs.
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Complements in Consumption
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When a fall in the price of one good increases the demand for another good, the two goods are called ____________________.
Typically consumed together.
Typically consumed together.
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Increase in current demand
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Expect prices to rise in the future ______________.
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Decrease in current demand
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Expect prices to fall in the future ______________.
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Demand for all normal goods increases.
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If income is expected to increase then what will happen to the demand for normal goods?
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Price
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Movement along the demand curve.
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Income
$ of Related Goods
Tastes
Expectations
Number of Buyers
$ of Related Goods
Tastes
Expectations
Number of Buyers
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5 Shifters of the demand curve.
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???? Movement along the demand curve.
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What happens to Demand for a good when its price increases?
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Consumer Surplus
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The difference between what consumers would have been willing to pay for a certain quantity of a good and the amount they actually have to pay for it.
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Consumer Surplus
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Will prove useful in making marketing and other business decisions such as pricing strategies as well as be useful in analyzing the impacts of various government policies.
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Quantity supplied
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Amount of a good that sellers are willing and able to sell.
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Law of Supply
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States that, other things equal and in a given time period, the quantity supplied of a good rises when the price of the good rises.
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Supply Schedule
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A table that shows the relationship between the price of the good and the quantity supplied in a given time period, ceteris paribus.
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Supply: The relationship between Price and Quantity Supplied
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1. Given P, what is Qs?
2. Given Qs, what is the P that will be needed to induce suppliers to supply that amount?
2. Given Qs, what is the P that will be needed to induce suppliers to supply that amount?
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Supply Curve
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The graph of the relationship between the price of a good and the quantity supplied in a given time period, ceteris paribus.
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General Form Supply Equation
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Qs = f(P)
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Market Supply
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The sum of all individual supplies for all sellers of a particular good or service.
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Market Supply Curve
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Shows the amount of a good that will be produced at alternative prices.
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Law of Supply
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The market supply curve is upward sloping because individual firms' supply curves are upward sloping.
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Multivariate Supply Function
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A mathematical representation describing how many units will be produced at different prices for X, prices of inputs W, prices of technologically related goods, and other factors that affect the supply for good X.
Allows for more than one independent variable.
Allows for more than one independent variable.
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The General Form Multivariate Supply Function
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Qx^s = f (Px, Pr, W, H)
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The General Form Linear Supply Function
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Qx^s = B0 + BxPx + BwW + BrPr + BhH
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Bx > 0
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By the law of supply Bx _______ 0.
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Bw < 0
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Increasing input price leads to Bw _______ 0.
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Br > 0
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Technology lowers the cost of producing good X so Br _______ 0.
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Change in Quantity Supplied
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Represented by a movement along the supply curve caused by a change in P.
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Change in Supply
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A shift in the supply curve, either to the left or right, caused by a change in some supply determinant other than price.
Must draw a whole new curve, formulate a whole new equation, and derive a whole new schedule.
Must draw a whole new curve, formulate a whole new equation, and derive a whole new schedule.
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Costs of Production
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Anything that increases _________________ leads to a decrease in supply, while reductions in cost lead to increases in supply of a good.
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Supply Shifters
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Input Prices
Technology or Government Regulations
Taxes
-Excise taxes: Specific and Ad valorem taxes
Prices of Substitutes vs. Complements in Production
Producer expectations concerning future prices: expect prices to go up leads to decrease in current supply
Number of firms
-Entry and Exit
Technology or Government Regulations
Taxes
-Excise taxes: Specific and Ad valorem taxes
Prices of Substitutes vs. Complements in Production
Producer expectations concerning future prices: expect prices to go up leads to decrease in current supply
Number of firms
-Entry and Exit
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Price
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Represents a movement along the supply curve.
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Input Prices
Technology
Expectations
Number of Sellers
Technology
Expectations
Number of Sellers
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4 Shifters of the supply curve.
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Equilibrium
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A situation towards which a system is always moving, and if reached, there are no motivations for the situation to change.
Ex: Ball in a bowl.
Ex: Ball in a bowl.
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Competitive Market Equilibrium
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Determined by the interactions of the market demand and market supply for the good.
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Competitive Market Equilibrium
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A price and quantity such that there is no shortage of surplus in the market.
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Competitive Market Equilibrium
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Forces that drive market demand and market supply are balanced, and there is no pressure on prices or quantities to change.
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Market Equilibrium
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The price (P) that equates quantity demanded with quantity supplied.
Qx^s = Qx^d
Steady-state: no motivations to change, but will change if "other relevant factors" change.
Qx^s = Qx^d
Steady-state: no motivations to change, but will change if "other relevant factors" change.
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3 Ways to Find Equilibrium Price
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Using S & D curves
Using S & D schedules
Using S & D functions
Using S & D schedules
Using S & D functions
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Equilibrium Price
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The price that equates quantity supplied and quantity demanded.
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Equilibrium Price
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On a graph, it is the price at which the supply and demand curves intersect.
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Equilibrium Quantity
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The quantity supplied and the quantity demanded at the equilibrium price.
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Equilibrium Quantity
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On a graph, it is the quantity at which the supply and demand curves intersect.
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Shortage
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When price < equilibrium price, the quantity demanded > the quantity supplied.
Suppliers will raise the price due to too many buyers chasing too few goods, thereby moving toward equilibrium.
Suppliers will raise the price due to too many buyers chasing too few goods, thereby moving toward equilibrium.
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Surplus
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When price > equilibrium price, then quantity supplied > quantity demanded.
Suppliers will lower the price to increase sales, thereby moving toward equilibrium.
Suppliers will lower the price to increase sales, thereby moving toward equilibrium.
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Equilibrium
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Price of any good tends to adjust to bring the quantity supplied and the quantity demanded for that good more into balance.
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Supply and Demand Applications
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1. Government price controls or restrictions.
2. Comparative statics.
2. Comparative statics.
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Government Price Controls
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Price Ceilings and Price Floor
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Comparative Statics
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Changes in supply and demand and their effects upon equilibrium price and quantity.
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Price Ceiling
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A maximum legal price that can be charged.
Motivation: Protect Consumers
Motivation: Protect Consumers
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Price Floor
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A minimum legal price that can be charged.
Motivation: Help Suppliers. Minimum Wage. Ag Price Supports.
Motivation: Help Suppliers. Minimum Wage. Ag Price Supports.
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Price Ceiling
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1. The ________________ is not binding if set above the equilibrium price.
2. The _________________ is binding if set below the equilibrium price, leading to a shortage.
2. The _________________ is binding if set below the equilibrium price, leading to a shortage.
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Possible Implications of Shortage
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Non money costs of purchases
Illegal transactions
Non-price discrimination
Government rationing
Decrease in supply in the future
Illegal transactions
Non-price discrimination
Government rationing
Decrease in supply in the future
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Price Floor
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1. The ______________ is not binding if set below the equilibrium price.
2. The _______________ is binding if set above the equilibrium price, leading to a surplus.
2. The _______________ is binding if set above the equilibrium price, leading to a surplus.
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Price Floor
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A ____________ prevents supply and demand from moving toward the equilibrium price and quantity.
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Market Price
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When the _______________ hits the floor, it can fall no further, and the market price equals the floor price.
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Binding Price Floor
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Causes a surplus because Qs > Qd.
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5 Steps to Analyzing Changes in Equilibrium
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1. Draw and mark original S, D, and equilibrium on graph.
2. Decide whether the event changes supply or demand (or both).
3. Determine if it is an increase or a decrease.
4. Shift the correct curve(s) to the right (increase) or to the left (decrease).
5. Use the supply and demand diagram to compare new equilibrium with original equilibrium price and quantity.
2. Decide whether the event changes supply or demand (or both).
3. Determine if it is an increase or a decrease.
4. Shift the correct curve(s) to the right (increase) or to the left (decrease).
5. Use the supply and demand diagram to compare new equilibrium with original equilibrium price and quantity.
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Change in Supply
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A shift in the supply curve is called a ________________.
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Change in Quantity Supplied
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A movement along a fixed supply curve is called a _________________.
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Change in Demand
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A shift in the demand curve is called a _________________.
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Change in Quantity Demanded
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A movement along a fixed demand curve is called a __________________.
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