Chapter 3 Principles of Microeconomics, 4 th Edition Instructor’s Manual
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Transcript of Chapter 3 Principles of Microeconomics, 4 th Edition Instructor’s Manual
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Chapter 3
Principles of
Microeconomics, 4th Edition
Instructor’s Manual
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Prices Communicate (a)
• Prices are how the economy communicates.
• Prices provide information and incentives.
• Price measures scarcity.
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Prices Communicate (b)
• When the price of a good is high, consumers and businesses will buy less and substitute other goods.
• They economize on the use of scarce goods or resources.
• Therefore, scarce goods are used most efficiently.
• No announcement on radio or TV has to be made.
• Individuals find out about the relative scarcity of a good through its price.
• Individuals and firms then decide what to do; decision making is decentralized.
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The Role of Supply and Demand (a)
• Price changes can be puzzling.
• Water is almost free but is a necessity of life.
• Diamonds are very expensive but are a luxury.
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The Role of Supply and Demand (b)
• Price movements are in the news and are important topics of national debate.
• The price of housing in San Francisco increases.
• The effective, or quality-adjusted, price of computers falls.
• Average real wages of workers in the United States remain roughly constant.
• The inflation adjusted price of gasoline in the U.S. has remained approximately constant since the mid-1980s.
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U.S. Gasoline Prices
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Demand and Demand Curves (a)
• Demand is the quantity of a good or service purchased at a given price.
• The demand curve shows the quantity of the good demanded at each price.
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Demand and Demand Curves (b)
• The individual demand curve shows the quantity demanded at each price by one consumer.
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Demand and Demand Curves (c)
• Demand curves are downward sloping.
• As price falls, consumers buy more of the good.
• The position of an individual’s demand curve (but not its slope) also depends on:
• Income
• Social trends
• The price of related goods
• Expectations about the future
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Demand and Demand Curves (d)
• The market demand curve is the horizontal sum of the demand curves of all individuals.
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Shifts in a Demand Curve versus Movements along a Demand Curve
• A change in price is represented by a movement along the demand curve.
• All other changes that affect demand will shift the demand curve.
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Sources of Shifts in the Demand Curves (a)
• Tastes
• Prices of related goods
• Income
• Demographics
• Information
• Availability of credit
• Changes in expectations
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Sources of Shifts in Demand Curves (b)
• Tastes: If one day everyone in the United States woke up and liked Britney Spears CDs, the demand curve for Britney Spears CDs would shift to the right.
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Sources of Shifts in Demand Curves (c)
• Prices of related goods
• Complementary goods: Peanut butter and jelly
• When the price of peanut butter rises, there is movement along the demand curve for peanut butter.
• When the demand for jelly falls, the demand curve for jelly shifts to the left.
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Sources of Shifts in Demand Curves (d)
• Price of related goods
• Substitute goods
• When the price of coffee rises, there is movement along the demand curve for coffee.
• When the demand for tea increases, the demand curve for tea shifts to the right.
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Sources of Shifts in Demand Curves (e)
• An increase in income increases the demand for most goods.
• The demand curve shifts to the right.
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Sources of Shift in Demand Curves (f)
• Availability of credit
• If banks reduce the number of automobile loans they approve, the demand for cars decreases and the demand curve shifts to the left.
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Sources of Shift in Demand Curves (f) (cont.)
• A change in expectations
• If consumers believe the price will increase in the future, demand increases today (when the good is cheaper); this shifts the demand curve to the right.
• A change in expectations about the future affects current variables.
• A change in expectations may be self-fulfilling.
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Supply and Supply Curves
• Supply is the quantity of goods and services offered in the market at a given price.
• The supply curve shows the quantity of the good offered for sale at each price.
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The Slope of the Supply Curve
• The supply curve is upward sloping.
• When the price of a good or service rises, the quantity supplied to the market rises.
• Suppliers find it more profitable to produce more goods or services when prices are higher.
• A higher price allows firms to cover the higher costs of producing more goods.
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Market Supply
• The market supply curve is the horizontal sum of the supply curves of all the suppliers.
• Just as individual supply curves have a positive slope, so do market supply curves.
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Shifts in a Supply Curve versus Movements along a Supply Curve
• A change in price is represented by a movement along the supply curve.
• All other changes that affect supply shift the supply curve.
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Sources of Shifts in Supply Curves (a)
• A change in the price of inputs
• A change in technology
• A change in the natural environment
• A change in the availability of credit
• A change in expectations
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Sources of Shifts in Supply Curves (b)
• A rise in the price of coffee increases the costs of making espresso.
• The supply of coffee decreases and the supply curve for coffee shifts left or up.
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Sources of Shifts in Supply Curves (c)
• If a new technology improves coffee bean harvesting, the costs of producing coffee fall.
• This increases the suppliers’ desire to sell at each price.
• The supply increases and the supply curve shifts right.
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Law of Supply and Demand (a)
• In equilibrium, there are no forces or reasons for change.
• A marble in a bowl is in stable equilibrium.
• It remains at the bottom if there are no external changes to the system.
• In a market in equilibrium, neither demanders nor suppliers have an incentive to change their actions.
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Law of Supply and Demand (b)
• The equilibrium price is the market clearing price that equates quantity demanded with quantity supplied.
• Equilibrium occurs where the demand curve intersects the supply curve—Qd = Qs.
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Excess Supply• The law of supply and demand predicts that prices will move to equilibrium values.
• Excess supply causes prices to fall.
• Suppliers cannot sell all they wish, so they the cut price.
• Quantity demanded increases along the demand curve to point E0.
• Quantity supplied decreases along the supply curve to point E0.
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Excess Demand
• Excess demand causes prices to rise.
• Consumers cannot buy as much of the item as they want.
• They bid up the price.
• As the price rises, the quantity supplied increases along the supply curve.
• As the price rises, the quantity demanded decreases along the demand curve.
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Using Demand and Supply Curves (a)
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Using Demand and Supply Curves (b)
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Marginal Value
• Price is related to marginal value not to total value.
• The price of water can be very low, even though its initial value is immense.
• The marginal value is why the price of water is relatively low in Alaska and relatively high in New Mexico.
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What Determines Price?
• Price does not reflect importance.
• Price only reflects supply and demand.
• Water and diamond paradox
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Price and Cost (a)
• Price is not identical to cost but they are related. Price is what an item sells for.
• Cost is the expense of making an item.
• When the cost of producing an item increases, the equilibrium price will rise.
• Why?
• When cost rises, suppliers will supply less at any price; the supply curve will shift to the left or up.
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Price and Cost (b)
• In the basic competitive model, the price equals the marginal cost.
• An example of the difference between price and marginal cost is land.
• The supply of land is fixed (ignore reclamation from the sea).
• So marginal cost is infinite or at least very high.
• But the price of land is finite.
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This concludes the Instructor’s Manual Slide Set for Chapter 3
Principles of
Microeconomics, 4th Editionby
Joseph E. StiglitzCarl E. Walsh
W. W. Norton & CompanyIndependent and Employee-Owned