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Chapter 4: Extensions of Demand and Supply Analysis ECON 152 – PRINCIPLES OF MICROECONOMICS...
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Chapter 4: Extensions of Demand and Supply Analysis ECON 152 – PRINCIPLES OF MICROECONOMICS Materials include content from Pearson Addison-Wesley which has been modified by the instructor and displayed with permission of the publisher. All rights reserved.
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Transcript of Chapter 4: Extensions of Demand and Supply Analysis ECON 152 – PRINCIPLES OF MICROECONOMICS...
Chapter 4:Extensions of Demand and Supply Analysis
ECON 152 – PRINCIPLES OF MICROECONOMICS
Materials include content from Pearson Addison-Wesley which has been modified by the instructor and displayed with permission of the publisher. All rights reserved.
2
The Price System Price System or Market System
An economic system in which relative prices are constantly changing to reflect changes in supply and demand
Prices signal what is relatively scarce and relatively abundant.
Prices provide information to individuals and businesses.
3
Exchange and Markets
MarketsEmphasize voluntary exchangeDetermine the terms of exchangeFacilitate exchange
4
Exchange and Markets
Voluntary ExchangeActs of trading between individuals
that make both parties to the trade subjectively better off
Terms of ExchangeThe prices we pay for the desired items
5
Exchange and Markets
Transaction CostThe costs associated with exchangeExamples
Price shopping Determining quality Determining reliability Service availability Cost of contracting
6
Exchange and Markets
The role of middlemenMiddlemen (intermediaries) or brokers reduce
transaction cost by providing information to buyers and sellers.
Examples Real estate brokers Stock brokers Consignment shops Car dealerships
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Changes in Demand and Supply Changes in supply and demand
create a disequilibrium The market price and quantity
adjust to a new equilibrium
8
Shifts in Demand and Supply: Determine Results
Increase Demand with Supply Constant
D1
S
P1
Q1
E1
Figure 4-1
9
At price P1 quantitydemanded exceedsquantity supplied—a shortage exists
Shifts in Demand and Supply: Determine Results
Increase Demand with Supply Constant
D1
S
P1
Q1
E1
Q2
D2
Figure 4-1
10
Shifts in Demand and Supply: Determine Results
Increase Demand with Supply Constant
P1
Q1
S
E1
D2
Equilibrium price and quantity increase to P2 and Q2
E2
Q2
P2
D1
Figure 4-1
11
At price P1 quantitysupplied exceedsquantity demanded—a surplus exists.
Q2
D2
S
Shifts in Demand and Supply: Determinate Results
Decrease Demand with Supply Constant
D1
E1
Q1
P1
Figure 4-1
12
Shifts in Demand and Supply: Determinate Results
Decrease Demand with Supply Constant
P1
Q1
SE1
D3
Equilibrium priceand quantity decrease to P3 and Q3
D1
Q3
E3
P3
Figure 4-1
13
S1
Shifts in Demand and Supply: Determinate Results
Increase Supply with Demand Constant
D
P1
Q1
E1
Figure 4-1
14
At price P1 quantitysupplied exceedsquantity demanded—a surplus exists
Shifts in Demand and Supply: Determinate Results
Increase Supply with Demand Constant
P1
Q1
E1
D
Q3
S2
S1
Figure 4-1
15
Shifts in Demand and Supply: Determinate Results
Increase Supply with Demand Constant
P1
Q1
E1
D
Q2
P2
E2
S2
S1Equilibrium price decreases and quantity
increases to P2 and Q2
Figure 4-1
16
At price P1 quantitydemanded exceedsquantity supplied—a shortage exists
Shifts in Demand and Supply: Determinate Results
Decrease Supply with Demand Constant
D
S1
E1
Q1
P1
Q2
S3
Figure 4-1
17
Shifts in Demand and Supply: Determinate Results
Decrease Supply with Demand Constant
P1
Q1
E1
D
S3
S1
Equilibrium price decreases and quantity
increases to P3 and Q3
Q3
P3
E3
Figure 4-1
18
Changes in Demand and Supply Summary
Increases in demand increase equilibrium price and quantity.
Decreases in demand decrease equilibrium price and quantity.
19
Changes in Demand and Supply Summary
Increases in supply decrease equilibrium price and increase equilibrium quantity.
Decreases in supply increase equilibrium price and decrease equilibrium quantity.
20
Changes in Demand and Supply When both demand and supply shift
Simultaneous changes in demand and supply put conflicting pressure on price or quantity
The resulting effect depends upon how much each curve shifts
Either equilibrium price or quantity will be indeterminate
21
Changes in Demand and Supply
When both demand and supply increase Change in price is indeterminate Quantity will increase
When both demand and supply decrease Change in price is indeterminate Quantity will decrease
22
Changes in Demand and Supply
When supply decreases and demand increases Price will increase Change in quantity is indeterminate
When supply increases and demand decreases Price will decrease Change in quantity is indeterminate
23
Demand Supply Price Quantity
Increase Increase Increase
Decrease Decrease Decrease
Increase Decrease Increase
Decrease Increase Decrease
Demand Supply Price Quantity
Increase Increase Unknown Increase
Increase Decrease Increase Unknown
Decrease Increase Decrease Unknown
Decrease Decrease Unknown Decrease
Change in demand or supply
Change in both demand and supply
24
Price Flexibility and Adjustment Speed
Prices quite flexible in unfettered markets can be less flexible in other market scenarios.
May experience indirect adjustments such as hidden payments, quality changes
May not reach equilibrium right away
25
Adjustment speed
Market characteristics influence adjustment speed.
Markets may overshoot in the adjustment process.
Markets are subject to energy shocks, labor strikes, severe weather.
26
The Rationing Function of Prices
When surpluses and shortages exist, the price adjusts to clear the market.
Synchronization of decisions of buyers and sellers will lead to equilibrium.
This adjustment is the rationing function of price.
27
The Rationing Function of Prices
When prices cannot adjust non-price rationing occursRationing by queuesRationing by lotteriesRationing by coupons
28
The Rationing Function of Prices
The essential role of rationingWith scarcity rationing must occurWe must choose the rationing mechanism:
price or non-pricePrice rationing is the most efficient
Further trades could not occur without making somebody worse-off
29
The Policy of Government-Imposed Price Controls Price Controls
Government-mandated minimum or maximum prices
Price Ceiling A legal maximum price
Price Floor A legal minimum price
30
The Policy of Government-Imposed Price Controls Non-Price Rationing Devices
All methods used to ration scarce goods that are price-controlled
Black MarketA market in which price-controlled goods are
sold at an illegally high price
Black Markets
32
The functions of rental pricesPromote the efficient maintenance
and construction of housingAllocate existing housingRation the use of housing
The Policy of Controlling Rents
33
Effects on the existing supply of housingProperty owners cannot recover costs
The Policy of Controlling Rents
Rationing the current use of housingReduces mobility
New York’s “housing gridlock”
34
Who gains and who loses from rent controls?Losers
Property owners Low-income individuals
Benefits Upper-income professionals
The Policy of Controlling Rents
35
Price Floors in Agriculture
Support Price the governmentally established minimum
price farmers are to receive for a particular agricultural product.
36
Agricultural Price Supports
37
Price Floors in the Labor Market
Minimum WageLowest hourly wage rate that firms
may legally pay their workers
38
The Effect of Minimum Wages
39
Quantity Restrictions
Prohibitions on the ownership or trading of a goodHuman organsDrugsHospital beds
40
Quantity Restrictions
Government Prohibitions or Licensing Requirements Some commodities cannot be purchased at all legally;
others require a license. Import Quota
Supply restriction that prohibits the importation of more than a specified quantity of a particular good in a one-year period
Chapter 4:Extensions of Demand and Supply Analysis
ECON 152 – PRINCIPLES OF MICROECONOMICS
Materials include content from Pearson Addison-Wesley which has been modified by the instructor and displayed with permission of the publisher. All rights reserved.
