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Relative Scarcity How scarce is one good or service compared to all other goods and services? How scarce is one good or service compared to all other goods and services? Relative scarcity is the relationship between supply and demand. Relative scarcity is the relationship between supply and demand. Price is the measurement of relative scarcity. Price is the measurement of relative scarcity. What determines the price of a work of art, an antique, an old stamp or coin? What determines the price of a work of art, an antique, an old stamp or coin?

What is an equilibrium price? The measure of relative scarcity. The measure of relative scarcity. Relative scarcity is the relation between supply and demand. Relative scarcity is the relation between supply and demand. How scarce is one product compared to all others? How scarce is one product compared to all others? The unit of measurement is the price in the domestic currency. (e.g. $43.37) The unit of measurement is the price in the domestic currency. (e.g. $43.37)

Relative prices: why? Diamond $50,000 Insulin $5

Price: indicator of relative scarcity (Units on the Scarcometer)

Order these products in terms of relative scarcity yacht yacht candy bar candy bar nice dinner for two in San Francisco nice dinner for two in San Francisco mini truck mini truck laptop computer laptop computer

Order these products in terms of relative scarcity 1 yacht 5 candy bar 4 nice dinner for two in San Francisco 2 mini truck 3 laptop computer

Equilibrium Price The measure of Relative Scarcity Feet and inches measure distance. Feet and inches measure distance. Pounds and ounces measure weight. Pounds and ounces measure weight. Degrees Fahrenheit measure heat. Degrees Fahrenheit measure heat. Cups and pints and quarts measure volume. Cups and pints and quarts measure volume. Dollars and cents measure relative scarcity in the U.S. Dollars and cents measure relative scarcity in the U.S.

Relative Scarcity Not the same as rare Not the same as rare Rare tropical disease is not scarce (no demand). Rare tropical disease is not scarce (no demand). Gold is more scarce than water even though water is essential for life. (Supply of water is greater than the supply of gold.) Gold is more scarce than water even though water is essential for life. (Supply of water is greater than the supply of gold.) Some collectors items are more scarce than others depending upon supply and demand. Their prices go up or down depending upon changes in supply and demand. Some collectors items are more scarce than others depending upon supply and demand. Their prices go up or down depending upon changes in supply and demand.

Relative Scarcity Relative scarcity is not a subjective evaluation of worth or value or social contribution even though some of those considerations are included in the demand function. Relative scarcity is not a subjective evaluation of worth or value or social contribution even though some of those considerations are included in the demand function. To the extent that some can manipulate supply or demand, they may influence relative scarcity and price but price remains the measurement of relative scarcity. To the extent that some can manipulate supply or demand, they may influence relative scarcity and price but price remains the measurement of relative scarcity. OPEC OPEC Advertising Advertising In a market with CIIP, price is the accurate measure of the relative scarcity of a good or service. In a market with CIIP, price is the accurate measure of the relative scarcity of a good or service.

Relative Scarcity The relationship between supply and demand. Measured by the equilibrium price Not the same as rare Not a matter of supply alone Not fair or unfair

The Law of Supply Once all other factors (WAGTIPS) have been considered, the quantity supplied of a good or service varies directly with the price of the good or service; price goes up, quantity supplied goes up. Once all other factors (WAGTIPS) have been considered, the quantity supplied of a good or service varies directly with the price of the good or service; price goes up, quantity supplied goes up. The influence of price on quantity supplied is a short run phenomenon and assumes no change in WAGTIPS. The influence of price on quantity supplied is a short run phenomenon and assumes no change in WAGTIPS. The Principle of Exchange – if the price received by the supplier is greater than all production costs, the supplier will supply the product. The Principle of Exchange – if the price received by the supplier is greater than all production costs, the supplier will supply the product. Price is an incentive to suppliers Price is an incentive to suppliers

Diminishing Marginal Returns Given some fixed inputs, additions of the variable inputs will yield lower additional products. Given some fixed inputs, additions of the variable inputs will yield lower additional products. Since each of the variable inputs are paid the same, marginal costs increase as production increases. Since each of the variable inputs are paid the same, marginal costs increase as production increases. Marginal resource costs rise as production increases. Marginal resource costs rise as production increases. Therefore, suppliers must receive a higher price to supply a greater quantity, assuming no change in WAGTIPS. Therefore, suppliers must receive a higher price to supply a greater quantity, assuming no change in WAGTIPS.

Price Elasticity of Supply Measures the strength of sellers reactions to a price change. Measures the strength of sellers reactions to a price change. How much will quantity supplied change as a result of a price change? How much will quantity supplied change as a result of a price change? Depends upon suppliers ability to increase or decrease production in the short run. Depends upon suppliers ability to increase or decrease production in the short run. How flexible are resources used in production? How flexible are resources used in production?

The Law of Demand Once all other factors have been considered, the quantity demanded of a good or service varies inversely with the price of the good or service. Once all other factors have been considered, the quantity demanded of a good or service varies inversely with the price of the good or service. Price rises, quantity demanded falls; price falls, quantity demanded rises. Price rises, quantity demanded falls; price falls, quantity demanded rises. The Principle of Exchange – if the price asked is greater than the expected benefit, the demander will not buy the product; if the price asked is less than the expected benefit, the demander will buy the product. Price is a disincentive to buyers. The Principle of Exchange – if the price asked is greater than the expected benefit, the demander will not buy the product; if the price asked is less than the expected benefit, the demander will buy the product. Price is a disincentive to buyers. Higher prices send buyers in search of substitutes. Higher prices send buyers in search of substitutes.

Diminishing Marginal Utility and Demand Utility is the benefit that consumers get from consuming goods and services Utility is the benefit that consumers get from consuming goods and services As consumers consume more of a product, the additional utility from additional units of the product decreases – the law of diminishing marginal utility As consumers consume more of a product, the additional utility from additional units of the product decreases – the law of diminishing marginal utility To entice buyers to buy more as their marginal utility falls, price must also fall, making the price lower than the expected benefit. (The principle of exchange) To entice buyers to buy more as their marginal utility falls, price must also fall, making the price lower than the expected benefit. (The principle of exchange)

Price Elasticity of Demand Measures the strength of buyers reactions to a price change. Measures the strength of buyers reactions to a price change. How much will quantity demanded change as a result of a price change? How much will quantity demanded change as a result of a price change? Depends upon Depends upon availability of substitutes availability of substitutes Percentage of total expenditures Percentage of total expenditures time time

Allocative Efficiency At the equilibrium price, the marginal utility of consuming the product is equal to the marginal resource cost of producing the product. At the equilibrium price, the marginal utility of consuming the product is equal to the marginal resource cost of producing the product. From societys perspective, this is the optimal resource allocation to this particular activity From societys perspective, this is the optimal resource allocation to this particular activity Attempts to change the price of a product through regulation will distort incentives and cause resource misallocation. Attempts to change the price of a product through regulation will distort incentives and cause resource misallocation.

A Price Above Equilibrium If a price is above equilibrium, a surplus exists. (The quantity supplied is greater than the quantity demanded at the higher price.) If a price is above equilibrium, a surplus exists. (The quantity supplied is greater than the quantity demanded at the higher price.) With no barriers, price will begin to fall towards equilibrium With no barriers, price will begin to fall towards equilibrium As price falls, quantity supplied will decrease and quantity demanded will increase. As price falls, quantity supplied will decrease and quantity demanded will increase. Eventually, price will fall to the equilibrium where quantity supplied is equal to quantity demanded, which is the quantity exchanged. Eventually, price will fall to the equilibrium where quantity supplied is equal to quantity demanded, which is the quantity exchanged.

A Price Below Equilibrium If a price is below equilibrium, a shortage exists. (The quantity demanded is greater than the quantity supplied at the lower price.) If a price is below equilibrium, a shortage exists. (The quantity demanded is greater than the quantity supplied at the lower price.) With no barriers, price will begin to rise towards equilibrium With no barriers, price will begin to rise towards equilibrium As price rises, quantity demanded will decrease and quantity supplied will increase. As price rises, quantity demanded will decrease and quantity supplied will increase. Eventually, price will rise to the equilibrium where quantity demanded is equal to quantity supplied, which is the quantity exchanged. Eventually, price will rise to the equilibrium where quantity demanded is equal to quantity supplied, which is the quantity exchanged.

Surplus and Shortage Surplus: at a price above equilibrium, quantity supplied is greater than quantity demanded. Surplus: at a price above equilibrium, quantity supplied is greater than quantity demanded. Shortage: at a price below equilibrium, quantity demanded is greater than quantity supplied. Shortage: at a price below equilibrium, quantity demanded is greater than quantity supplied. Surpluses and shortages are always in reference to specific non-equilibrium prices. Surpluses and shortages are always in reference to specific non-equilibrium prices. They will be automatically eliminated by price changes if there are no barriers to price movements. They will be automatically eliminated by price changes if there are no barriers to price movements.

Price Floors and Ceilings A legislated price A legislated price A price floor is a minimum price. Prices can be higher, but not lower than a floor. (Minimum wage) If the floor is above the equilibrium, a surplus is created. A price floor is a minimum price. Prices can be higher, but not lower than a floor. (Minimum wage) If the floor is above the equilibrium, a surplus is created. A price ceiling is a maximum price. Prices can be lower, but not higher than a ceiling. (Rent controls) If the ceiling is below the equilibrium, a shortage is created. A price ceiling is a maximum price. Prices can be lower, but not higher than a ceiling. (Rent controls) If the ceiling is below the equilibrium, a shortage is created.

Price Floors and Price Ceilings Price cannot rise above a ceiling Price cannot fall below a floor

A Price Ceiling - shortage Who gains? Who gains? Politicians Politicians Those who get the goods and services Those who get the goods and services Those who police the ceiling Those who police the ceiling Who loses? Who loses? Those who supply the good or service Those who supply the good or service Those who cant get the good or service Those who cant get the good or service Taxpayers Taxpayers

A Price Floor - surplus Who gains? Who gains? Politicians Politicians Those who supply the goods and services Those who supply the goods and services Those who police the floor Those who police the floor Those who store the surplus Those who store the surplus Who loses? Who loses? Those who demand the good or service Those who demand the good or service Taxpayers Taxpayers

Price Controls - The Message Price controls distort market incentives Price controls distort market incentives They can not change the relative scarcity of the product They can not change the relative scarcity of the product They cause over allocation or under allocation of resources They cause over allocation or under allocation of resources They cause arbitrary distributive effects They cause arbitrary distributive effects But they are great politics! But they are great politics!

Markets during Disasters What happens to markets for wood, tools, and even water during a disaster? What happens to markets for wood, tools, and even water during a disaster? Cant get products in; supply decreases. Cant get products in; supply decreases. More people want these products. Demand increases. More people want these products. Demand increases. Product is relatively more scarce. Product is relatively more scarce.

Markets during Disasters What happens to markets for wood, tools, and even water during a disaster? What happens to markets for wood, tools, and even water during a disaster? What incentive would cause suppliers to supply more of the product? What incentive would cause suppliers to supply more of the product? A price ceiling prevents the price from rising. A price ceiling prevents the price from rising. The shortage worsens. The shortage worsens.

Disasters usually cause shortages Price ceilings make the shortages worse. Government price controls cant change relative scarcity, but they do distort incentives

The Market in Disasters Considering the market, what happens to products like wood, tools, and even water during a disaster? Considering the market, what happens to products like wood, tools, and even water during a disaster? Trucks cant bring products in, therefore supply is decreased Trucks cant bring products in, therefore supply is decreased More people need these products than normal- Demand increases. More people need these products than normal- Demand increases. So why do people cry price gouging? So why do people cry price gouging?

Price Gouging??? If the government felt sorry for these people and imposed a price floor on certain products, we, as economists, know that there will be a shortage. If the government felt sorry for these people and imposed a price floor on certain products, we, as economists, know that there will be a shortage. Other people feel that the prices are made high to take advantage of the affected people- simply not true. Other people feel that the prices are made high to take advantage of the affected people- simply not true.

PRICE CONTROLS DISTORT MARKET INCENTIVES and CAUSE RESOURCE MISALLOCATION

Main Points Relative scarcity for a particular product is the relationship between supply and demand. Relative scarcity for a particular product is the relationship between supply and demand. With CIIP, supply and demand determines the relative scarcity of a product, which is accurately measured by the price of the product. With CIIP, supply and demand determines the relative scarcity of a product, which is accurately measured by the price of the product. The Law of Supply states that price and quantity move in the same direction. This assumes no change in WAGTIPS. The Law of Supply states that price and quantity move in the same direction. This assumes no change in WAGTIPS. Price elasticity of supply measures the strength of suppliers response to price changes. Price elasticity of supply measures the strength of suppliers response to price changes.

Main Points The Law of Demand states the price and quantity demanded move in the opposite direction. This assumes no change in TIPSE. The Law of Demand states the price and quantity demanded move in the opposite direction. This assumes no change in TIPSE. Price elasticity of demand measures the strength of buyers reactions to price changes. Price elasticity of demand measures the strength of buyers reactions to price changes.

Main Points Supply represents the marginal opportunity cost of producing different quantities of a product. Supply represents the marginal opportunity cost of producing different quantities of a product. Demand represents the marginal utility of consuming different quantities of a product. Demand represents the marginal utility of consuming different quantities of a product. Allocative efficiency occurs at the equilibrium where the marginal opportunity cost of producing a quantity is just equal to the marginal utility of consuming that quantity. Allocative efficiency occurs at the equilibrium where the marginal opportunity cost of producing a quantity is just equal to the marginal utility of consuming that quantity.

Main Points A surplus exists at a price above the equilibrium where the quantity supplied is greater than the quantity demanded. A surplus exists at a price above the equilibrium where the quantity supplied is greater than the quantity demanded. A shortage occurs at a price below the equilibrium where the quantity demanded is greater than the quantity supplied. A shortage occurs at a price below the equilibrium where the quantity demanded is greater than the quantity supplied. With no price floor, a surplus will correct itself as the price falls. With no price floor, a surplus will correct itself as the price falls. With no price ceiling, a shortage will correct itself as the price rises. With no price ceiling, a shortage will correct itself as the price rises.