# Mechanism through which buyers (demanders) and sellers (suppliers) communicate to trade goods and services.

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1 By the end of this learning plan, you will be able to: Use marginal (Cost-Benefit) analysis in decision-making Apply supply and demand analysis to price determination Assess the role price plays in a market economy Examine market failures within a capitalistic system Mechanism through which buyers (demanders) and sellers (suppliers) communicate to trade goods and services. 2 A schedule that shows various amounts of a good/service a buyer is WILLING AND ABLE to buy at each possible price during a specific period. 3 1

2 Variables that Affect Quantity Demanded Price Consumer Income Prices of related goods Tastes Expectations of future prices Number of Consumers Because we want to see the relationship between price and quantity demanded so we hold all other variables constant. 4 Individual demand: shows the amount one buyer would consume for a variety of prices. Market demand: shows the amount all buyers would consume for a variety of prices. 5 The Market Demand Curve for DVDs Fred s Demand Curve + Mary s Demand Curve = Market Demand Curve Price Price Price \$2 0 5 \$2 \$2 D 1 0 D D TOTAL Quantity ( per year) Quantity ( per year) Quantity (per year) 6 2

3 Price and quantity demanded are inversely or negatively related. Consumers are willing to buy more of something at a low price than at a high price 7 Change in quantity demand: a change in price, represented by movement along the curve. 8 Point Price Q D A \$ B \$ C \$ D \$ E \$ F \$ G \$

4 A shift in the demand curve caused by a demand shifter. Demand shifter: a variable that can cause a shift in the demand curve. 10 Variables that Affect Q D Consumer Income Prices of related goods Tastes Expectations buyers Number of Consumers A Change in this Variable Demand shifter Demand shifter Demand shifter Demand shifter Demand shifter 11 Consumer income: Normal goods demand increases as income increases Inferior goods demand decreases as income increases Prices of related goods: Substitute goods: goods that can be used instead of another. Complementary goods: goods that are used together 12 4

5 Increase in Demand Decrease In Demand 13 Important! CHANGE IN THE QUANTITY DEMANDED Versus CHANGE IN DEMAND 14 Increase in quantity demanded Decrease in quantity demanded Downward movement along the demand curve Upward movement along the demand curve Price decreases Price Increases 15 5

6 Decrease or increase in demand Leftward or rightward shift in the demand curve Change in a nonprice determinant 16 A schedule that shows various amounts of a good/service a firm or household is WILLING AND ABLE to sell at each possible price during a specific period. 17 Variables that Affect Quantity Supplied Price Resource Prices Technology Prices of Other Goods Expectations Taxes and Subsidies Number of Sellers 18 6

7 Individual supply: shows the amount one seller would produce for a variety of prices. Market supply: shows the amount all sellers would produce for a variety of prices. 19 The Market Supply Curve for DVDs Entertain City Supply Curve + High Vibes Supply = Curve Market Supply Curve Price \$ Quantity (thousands per year) S Price 1 S 2 Price S TOTAL \$2 5 \$ Quantity (thousands per year) Quantity (thousands per year) 20 Price and quantity supplied are positively or directly related. Sellers are willing and able to make available more of their product at a higher price than lower, all else constant 21 7

8 Change in quantity supplied: a change in price, represented by movement along the curve. 22 Point Price Q S H \$ I \$ J \$ K \$ L \$ M \$ N \$ A shift in the supply curve caused by a supply shifter. Supply shifter: a variable that can cause a shift in the supply curve. 24 8

9 Variables that Affect Q S Resource Prices Technology Prices of Other Goods Expectations Taxes and Subsidies Number of Sellers A Change in this Variable Shifts the supply curve Shifts the supply curve Shifts the supply curve Shifts the supply curve Shifts the supply curve Shifts the supply curve 25 Decrease In Supply Increase in Supply 26 Important! CHANGE IN THE QUANTITY SUPPLIED Versus CHANGE IN SUPPLY 27 9

10 Increase in quantity supplied Decrease in quantity supplied Upward movement along the supply curve Downward movement along the supply curve Increase in price Decrease in price 28 Decrease or increase in supply Leftward or rightward shift in the supply curve Change in nonprice determinant 29 We look at the demand and supply curves together to find out where we agree, the market equilibrium

11 Equilibrium is where Q D = Q S and Price D = Price S Point D Price D Q D Point S Price S Q S A \$ H \$ B \$ I \$ C \$ J \$ D \$ K \$ E \$ L \$ F \$ M \$ G \$ N \$ A price ceiling or price floor is implemented by the government to protect a particular set of buyers or sellers. Price Ceilings: maximum legal price a seller may charge for a product. Price Floor: set to prevent prices falling below legally mandated level. 32 Rent controls Set to protect lowincome households from an increase in rents caused by housing shortages (a.k.a. to make housing more affordable) 33 11

12 Future supply and quantity of apartments will decrease. Under the table markets may develop Discrimination occurs in rationing of apartments Rent ceiling benefits the wealthy 34 Agriculture Price Floor & Subsidy The government sets a minimum price and then agrees to buy any quantity the farmers can not sell at the legal price. Done to: Sustain the lifestyle of American farmers Provide economic stability for the farmers 35 When the market fails to use the resources efficiently. When this happens, the government steps in to help

13 Lack of competition Externalities Public Goods Economic Inequality 37 Anti-trust Laws Enforced by the Department of Justice and the Federal Trade Commission Sherman Act of 1890 Clayton Act of Costs or benefits imposed on people other than the producer or consumer of the product. Costs: noise, air, water pollution Benefits: vaccines, education 39 13

14 \$ Costs of pollution B A With spillover costs S 1 of pollution D Quantity of chemicals (lbs.) S Without spillover 0 costs of pollution Overproduction 40 Consumer & Producer Subsidies Make a law requiring the population to buy the product (e.g. vaccinations) 41 Government law or consumer subsidy \$ S A B D 1 2 D Packages of medicine 42 14

15 Public Goods: nonexcludable and nonrival goods E.g. police service, national defense, fire service, snow removal Private Goods: rival and excludable goods E.g. Big Mac, individual house security, car 43 Free-rider problem: people can consume a public good without paying for it. This implies a shortage of public goods cause an individual market couldn t make money from supplying a public good. So many markets are run and paid for by the government because of the free rider issue. 44 Even if the market is producing efficiently, it might not be distributing the good/service equitably. Transfer payments What are examples of transfer payments? 45 15

16 Measures how responsive or sensitive buyers are to a change in price. % change in Q d /% change in P d So quantity changes a percentage for each 1% change in the price of the good. E d = 0.5 means a 5% change in quantity is reflected when the price changes by 10% Availability of Substitutes Proportion of income Time 48 16

17 We can use elasticities to see how a price change will impact a firm s total revenue. TR = P x Q Total revenue refers to the dollars earned by sellers of a product. 49 Elasticity of Demand Tuition \$ Inelastic demand: rising total revenue 7,000 6,000 D 0 Tuition revenue = \$28 million Tuition \$ Elastic demand: falling total revenue 7,000 6,000 Tuition revenue = \$23 million D 1 5,000 B 5,000 D 4,000 Tuition revenue = \$24 million A 4,000 Tuition revenue = \$24 million C 3, Attendance 3, Attendance 50 17

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