Microeconomics: Markets, Prices, and Business Competition Unit 3 Microeconomics: Markets, Prices, and Business Competition

Demand Demand: The amount of a good or service that consumers are able and willing to buy at various possible prices during a specified time period. Supply: The amount of a good or service that producers are able and willing to sell at various prices during a specified time period

The Marketplace Market: The process of freely exchanging goods and services between buyers and sellers Voluntary Exchange: A transaction in which a buyer and seller work out their own terms of exchange

The Law of Demand Economic rule stating that quantity demanded and price move in opposite directions Quantity Demanded: The amount of a good or service that a consumer is willing and able to purchase at a specific price

Let’s look at an example How many of you would be willing and able to buy a brand new computer for $1.00? How many of you would be willing and able to buy a brand new computer for $50? $100? $200? $500? $1000?

The Law of Demand This line is known as the demand curve Real Income Effect: Economic rule stating that individuals cannot keep buying the same quantity of a product if its price rises while their income stays the same Substitution Effect: Economic rule stating that if two items satisfy the same need an the price of one rises, people will buy the other

Diminishing Marginal Utility Utility: The ability of any good or service to satisfy consumer wants Marginal Utility: an additional amount of satisfaction Law of Diminishing Marginal Utility: Rule stating that the additional satisfaction a consumer gets from purchasing one more unit of a product will lessen with each additional unit purchased

Let’s look an example… You have been at a summer music festival all day and your favorite band has not played yet. You are not allowed to leave and reenter the concert and you cannot bring food in. You have been there for six hours in scorching heat and a single bottle of water costs $8 Would you be willing to pay for a bottle of water? How about two? Three?

Diminishing Marginal Utility People will continue buying an item to the point at which the satisfaction from the last unit bought is equal to the price.

The Demand Curve and Elasticity of Demand Price is not the only factor to have an effect on demand. Other determinants of demand are… Changes in population Changes in income Changes in Tastes and Preferences Substitutes Complementary Goods A product often used with another product

Examples Draw a demand curve in your notes Title the graph “Demand Curve for Chicken Fingers in Hampshire” Label the Y-axis “Price” Label the X-axis “Quantity”

Examples Let’s say that the interchange at route 47 is FINALLY finished and the population of Hampshire greatly increases. What would this do to the demand curve?

Redraw your original demand curve below the last one The stock market crashes! (again) People get laid off at their jobs or take pay cuts What does this do to the demand curve?

Redraw your original demand curve below the last one People start buying chickens as pets and decide that eating them is to cruel What will this do to the demand curve?

Redraw your original demand curve below the last one Mr. Hollister decides to open a turkey testicle stand and it’s a huge success! How will this affect the demand curve?

Redraw your original demand curve below the last one There is a shortage of everyone’s favorite dipping sauce because the workers who produce it have gone on strike! What will this do to the demand curve?

The Price Elasticity of Demand Elasticity: Economic concept dealing with consumers’ responsiveness to an increase or decrease in the price of a product Price Elasticity of Demand: Economic concept that deals with how much demand varies according to changes in price. Elastic Demand: Situation in which a given rise or fall in a product’s price greatly affects the amount that people are willing to buy. Example? Inelastic Demand: Situation in which a product’s price change has little impact on the quantity demanded by consumers.

What does elastic/inelastic demand look like?

What Determines Elasticity? The existence of substitutes If the price for Pepsi rises people will just switch to coke The percentage of a person’s total budget devoted to the purchase of that good The demand for housing is elastic because it is such a large portion of a family’s budget The time consumers are given to adjust to a change in price If the price of a good drastically rises overnight, you will have trouble adjusting

Supply The law of demand focuses on the consumer, the law of supply focuses on the producer. Law of Supply: Economic rule stating that price and quantity supplied move in the same direction Quantity Supplied: The amount of a good or service that a producer is willing and able to supply at a specific price

Let’s look at an example… When you get your first job, you will be providing or selling your labor. Would you be willing to work for $1/hr? $5/hr? $10/hr? $15/hr? $20/hr? $25/hr? $50/hr? $100/hr?

Let’s make a table to show our results… Supply Schedule: Table showing quantities supplied at different possible prices The two columns should be titled “Wages” and “Laborers”

Graph It!

The Supply Curve The higher the price of a good, the greater the incentive is for a producer to produce more. There is a direct relationship between quantity supplied and price. Supply Curve: Upward sloping line that shows in graph form the quantities supplied at each possible price.

Determinants of Supply Price of Inputs Number of Firms in the Industry Taxes Technology

Examples Draw a supply curve in your notes. Label the Y-axis “price” and label the X-axis “quantity” Title your graph “Supply of Wild Wacky Action Bikes”

Price of Inputs Let’s say the price of plastic has risen. How would this affect the supply curve? What would happen if you fire all your workers and outsource your production to a sweatshop in southeast Asia where you only have to pay your workers 50 cents a day!

Number of Firms in the Industry Redraw your original graph. Let’s say that after the initial success of the Wild Wacky Action Bike, other companies decide to start selling them. How would this affect the Supply curve?

Taxes Redraw your original graph. After several children are killed in Wild Wacky Action Bike explosions the government decides to try and discourage parents from buying the bikes by raising the sales tax. How would this affect the supply curve?

Technology Redraw your original graph. A brilliant researcher has just created a machine that can put together Wild Wacky Action Bikes all on its own. The owners of the company can now fire all of their sweatshop workers and use the machine to build bikes at a faster rate and cheaper cost. What will this do to the supply curve?

Law of Diminishing Returns Economic rule that says as more units of a factor of production are added to other factors of production, after some point total output continues to increase but at a decreasing rate. Workers at McDonalds Additional Output 11 100 burgers 12 90 burgers 13 80 burgers 14 70 burgers 15 60 burgers 16 50 burgers 17 40 burgers

A Quick Review! Demand Curve is a line graph that shows the amount of a product that will be purchased at each price; it shows an inverse relationship and is always downsloping D Qd

Remember: A change along the curve indicates a change in price and a change in quantity demanded A change of the curve (right or left) indicates an across the board change in demand

Supply Supply is a schedule which shows the amounts of a good or service a producer is willing and able to make available at each price during a specified time period Law of Supply states that the quantity of a commodity supplied varies directly with its price: the number of goods and services offered for sale increases as the price increases.

Supply Curve Supply Curve will always be upsloping. S

Equilibrium Equilibrium Price: The price at which the amount producers are willing to supply is equal to the amount consumers are willing to buy Shortage: Situation in which the quantity demanded is greater than the quantity supplied at the current price Surplus: Situation in which quantity supplied is greater than quantity demanded at the current price

Equilibrium Price S Surplus Equilibrium Price Shortage D

The Equilibrium Principle A market in equilibrium leaves no unexploited opportunities for individuals, but may not exploit all gains achievable through collective action.

14. Elasticity of Supply A. If a change in price produces only a small change in supply, it is said to be inelastic b. What goods are subject to supply elasticity? Manufactured goods are more subject to elasticity of supply than goods produced by nature Example: Skateboard manufacturers can get employees to produce more skateboards, but farmers can’t force cows to produce more milk or trees to grow faster

15. Market Disequilibrium Price Ceilings and Price Floors cause market disequilibrium because they disrupt the natural dynamics of the marketplace (supply and demand)

16. Price Floors: Price floor are prices below which it is illegal to buy or sell. Federal Min Wage = $7.25/hr Ill. State Min Wage= $8.25/hr Dilemma: Some argue that minimum wage laws disrupt the equilibrium in the market and actually increase unemployment Why? left to the forces of supply and demand more workers would be hired at LOWER wages, decreasing unemployment. McDonald’s Worker and other fast food workers generally earn minimum wage

17. Price Ceilings: Rent controlled apartment buildings in cities Prices above which it is illegal to buy or sell Examples: Rent controlled apartment buildings in cities Certain goods and services during emergencies. Dilemma: Since rents are frozen, many landlords cannot keep up with the rising costs of maintenance – which have not been frozen ! They stand in the way of market forces of supply and demand

Price Ceilings and Price Floors

Price Ceilings and Price floors According to the supply/demand model there should never be a shortage or surplus as long as consumers are flexible on the amount they are willing to pay. Example: If workers are willing to accept lower wages, there will be no need to lay any of them off Is this how the world REALLY is? …Not really Remember, no models are perfect, but some are useful.

Considering Price Floors/Ceilings Are the negative effects large enough to be worrisome? Does the social good achieved by the use of price ceiling/floor make them worthwhile in spite of possible negative side effects? Is the alternative price controls something other than the free market? Is there a monopoly (one seller, many buyers) Or a monopsony (many sellers, one buyer) In these situations there is no competition to drive prices down.

Example Suppose a developer wants to triple their rents. In an ideal free market world, people would be “flexible” enough to immediately move to a cheaper neighborhood in response to such price changes. In the real world where moving is costly (and difficult if the person is elderly) the result of relying on “flexibility” in the face of dramatic rent increase may lead to homelessness and deaths from pneumonia and exposure.

Having frozen dead old people all over the streets isn’t exactly good for a city’s tourism industry

When might a price ceiling/floor be useful? If supply or demand for a good is inelastic, a price floor/ceiling will not have a large impact on the quantity supplied. This is usually the case when it comes to renting. Why?

Let’s look at the minimum wage debate… People who are against minimum wage argue that the price floor for labor will lead to unemployment because business owners will not be willing to pay their workers more than their original amount. Those who support minimum wage argue that a small increase in wages will not severely impact the quantity of labor supplied. They believe that without a minimum wage, workers may not be able to support themselves and their families.