OK, I was wrong. It is a matter of supply and demand, and now I think you da man. and. Demand

Transcription

1 P D1 D3 D2 S3 S1 S2 Q OK, I was wrong. It is a matter of supply and demand, and now I think you da man. and Demand

2 Consumers and Producers Feel Differently About High and Low prices Producers supply more at the higher price because the opportunity cost increases if they don t. Consumers consume less at the higher price because they now have less money to spend. Producers supply less at the lower prices because the opportunity cost decreases if they don t. Consumers consume more at the lower price because they now have more money to spend. I was going to buy a Honda but this car is $4,000 cheaper. I m m saving money at the lower price. I normally eat one, but at this low price, I m having two.

3 P2 Direct Supply (& Demand) Bread & Butter of Economics [ perfectly competitive markets ] Direct price and QS move move in the same direction. (increase together or decrease together) S The Law of Supply says QS varies directly with price. P1 The Law Of Demand says QD varies inversely with price. QS1 QS2

4 Supply (and Demand) Bread & Butter of Economics [ perfectly competitive markets ] The law of supply and demand is learned in infancy. Infants demand clean diapers and are willing to supply peace and quiet in exchange. Mothers demand peace and quiet and are willing to supply clean diapers in exchange. The terms of trade are arranged.. One scream equals one diaper. The price of one diaper is one scream. Supply producers willingness to sell. Or, the amount of products offered at each price during a specific time period.

5 Bread Supply (and( Demand) Bread & Butter of Economics [ perfectly competitive markets ] Butter Law of Supply QS QS varies directly with price. Suppliers offer more for sale at higher prices than at lower prices. The consumers, being on the paying end, tend to buy a small amount of the product, but will buy more if the price is lowered. The supplier, on the receiving end, considers price as an incentive to sell a product. The higher the price, the more incentive he has.

6 SUPPLY DEFINED SUPPLY SCHEDULE Various Amounts CORN P QS $ And why is talk so cheap? Supply is excessive. Cut Supply & you will increase demand

7 Let s make more. LAW OF SUPPLY - As price increases Q S also increases -As price decreases QS also decreases Take it. We are losing money. P2 P1 P1 P2 QS1 QS2 S QS2 S QS1 Direct relationship between P & QS

8 I only have 200 acres Change in Supply [Curve] 1. Non-price change [RATNEST] 2. Whole supply curve shifts [There was a QS change but it was not caused by a change in price] P2 P1 Broccoli QS1 QS2 S Don t t confuse these two with Chg in QS. P S2 Supply Shifters [RATNEST] Corn S1 S3 Alternative Output Price Change [INVERSE] S1 S2 Substitutes in production 1. Resource Cost [wages /raw materials ] [INVERSE] Suppliers produce smaller/ larger quantities at each price. P S1 S2 2. Alternative Output Prices [INVERSE] 3. Technology [DIRECT]. 4. Number of Suppliers [DIRECT] [new football league- bigger S of games] 5. Expectations [about future price] [INVERSE] 6. Subsidies [DIRECT] 7. Taxes [INVERSE] QS3 QS1 QS2

9 Supply Shifters [ RATNEST[ RATNEST ] ResourceCost[wages & raw materials] [inverse] Alternative Output price changes [inverse] Technology [direct] Decr in S of broccoli Number of Suppliers [direct direct] Expectation(Suppliers) about future price [inverse] Take this money. Subsidies [direct direct] Bigger supply of games Taxes [inverse] Up down

10 DETERMINANTS [Shifters] OF SUPPLY P [RATNEST non PL] AS3 AS1 AS2 1. ResourceCost [wages & raw materials] [inverse] 58. Increase in wages (increases/decreases) supply. Ex: A decrease in the price of computer chips (increases/decreases) the supply of computers. 2. Alternative Output price changes [inverse] 57. If the price of corn decreases, the supply of broccoli (increases/decreases). P S1 S2 Supply

11 3. Technological Improvement Can t t wait till milking time. This lowers production costs & increases S. Ex: Suppose a new milking machine called The Invisible Hand has a very soothing effect on cows; cows find the new machine so udderly delightful that they produce 30% more milk. This technological advance will cause a shift to the right. 54

12 4. Number of producers [direct] AS3 AS1 AS2 56. If more firms enter an industry, the supply curve will shift to the (left/right). When the American Basketball League began play in 1968, there was a (bigger/smaller) supply of basketball games each week. 60. A new professional football league will (increase/decrease) the supply of football games.

13 5. Producer Expectations about Future Price [Inverse] AS3 AS1 AS2 59. If oil producers expect future oil prices to decline, they will (increase/decrease) current production. P Oil Prices Expected to decrease Supply

14 6. Subsidies free money from G Free money from the government (subsidies) induces suppliers to supply more. 7. Taxes take away business profits and decrease supply. 55. Businesses have their taxes increased which moves the supply curve to the (left/right).

15 Shortage of Face Masks for SARSS Young Hong Kong ballet dancers wear masks to protect themselves from SARS. 770 people died from this disease.

16 So What to use if there is a shortage?

17 Effects of an Increase in Demand on Equilibrium P $1200 $900 D 1 D 2 S $600 QS=8 Shortage QD=16 $ Q

18 Effects of a Decrease in Demand on Equilibrium P $40 D 2 D 1 S $30 QD=10 Surplus QS=30 $20 $ Q

19 Effects of an Increase in Supply on Equilibrium P D S 1 $4 S 2 $3 QD=40 Surplus QS=80 $2 $ Q

20 Effects of an Decrease in in Supply on Equilibrium P $800 D S 2 S $600 1 $400 QS=2 Shortage QD=6 $ Q

21 Decrease in Supply D S2 S1 P2 P1 Shortage Q2 Q1

22 Increase in Supply D S1 $ S2 P1 Surplus P2 Q2 Q2

23 Juicy Orange Prices Decide if the price of oranges is going to rise, fall, or stay the same. 1. R All of the growers meet & agree to grow fewer oranges next year. 2. F Growers plant more acres of orange trees. 3. R Orange growers run an advertising campaign promoting oranges as a symbol of good health. 4. S One grower [out of thousands] retires and stops growing oranges. 5. R Growers develop a bigger and better tasting orange. 6. R Orange growers are struck by the disease-causing Mediterranean fruit fly. Quantity of Oranges

24 Increase in D Decrease in D Increase in S S S D S1 P2 P1 D1 D2 P1 P2 D2 D1 P1 P2 S2 Decrease in S D S2 P2 P1 S1 QD1 QD2 (A) TIMER QD2 QD1 (B) QD1 QD2 (C) RATNEST QD2 QD1 (D) 1. A Decrease in income on market for used cars. 2. B Decrease in income on market for new cars. 3. B Consumer expectations about a price decrease. 4. C Producer expectations about a price decrease. 5. C Increase in # of producers on the market for computers. 6. A Increase in # of consumers on the market for used cars. 7. A Increase in # of consumers on the market for new cars. 8. A Decrease in the price of movies upon the market for popcorn. 9. C Decrease in business taxes on the market for computers. 10. A Consumer expectations of a shortage of apples. 11. C Decrease in resource cost on market for computers. 12. D Increase in price of wheat upon market for corn. 13. A Consumer expectations of a shortage of cell phones. 14. D Producers expectations about a price increase. 15. A Increase in income on the market for ipod nanos.

25 MARKET DEMAND & SUPPLY Price of Corn CORN MARKET $5 S CORN MARKET P Q D $5 2,000 $4 4,000 $3 7,000 $211,000 $116,000 4 $3 2 1 Market Clearing Equilibrium P Q S $512,000 $410,000 $3 7,000 $2 4,000 $1 1,000 D o Quantity of Corn Q

26 Banana Supply & Demand Crop Freezing Damage Price (per pound) P P 2 P 1 D 1 S 2 S 1 o Q 2 Q 1 Quantity Q

27 Price Floor minimum price [creates surpluses] Such as: Minimum Wage Agricultural Price Supports P $2.50 The price has to be IN the house. It can t be below the floor Price per gallon Some call agricultural price supports udder insanity. D Surplus S Price Floor-minimum price QS exceeds QD Equilibrium price for milk Millions of gallons per month Q

28 Price Ceiling - maximum price Such as: Rent controls in NYC Wartime price controls Rock concert prices Super Bowl tickets P The price has to be in the house. It can t be above the ceiling. $2,000 Reliant Stadium 1,200 Super Bowl TicketT Prices E-Bay $ $500 $2-6,000 o D NYC Rent Controls price [creates shortages] Shortage NFL could raise the price & make another $150 M but the average man couldn t attend S Price Ceiling-maximum price QD exceeds QS Millions of Dwellings Rented

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