Question from last year’s final … Smith and Jones comprise a two-person economy. Their hourly rates of production are shown below. The opportunity cost of an extra calculator for Smith is __________ and for Jones it is __________. A) .10 computers; .05 computers B) 10 computers; 6 computers C) 1 computer; .5 computers D) .6 computers; 1.2 computers E) .05 computers; .10 computers

Who has the comparative advantage? Given two producers with PPC’s of different slopes, the producer with the FLATTER curve has the comparative advantage in the good measured along the HORIZONTAL.

Fuel Efficiency Standards Should they be legislated? Winners? Losers? Any alternative?

2. In the long- run if the production of all goods increases for a society (there is a economic growth), it will cause the production possibility curve to A) shift inward B) shift outward C) first shift inward and then shift outward D) stay the same E) none of the above

Supply, Demand and Market Equilibrium

Competitive Market Lots of buyers and sellers dealing in identical goods, and enjoying well-defined property rights.

Law of Demand: P↓→QD↑

Market Demand as the Sum of Individual Demands

Shifts in the Demand Curve

Shift Factors for Demand Income. Number of buyers. Prices of related goods (substitutes and complements). Expectations. Demographic changes. Tastes/Preferences.

Shifts in the Demand Curve versus Movements along the Demand Curve

Figure 3 How the Price Affects Consumer Surplus (a) Consumer Surplus at Price P Price A Demand Consumer surplus P1 Q1 B C Quantity Copyright©2003 Southwestern/Thomson Learning

Figure 3 How the Price Affects Consumer Surplus (b) Consumer Surplus at Price P Price A B C Demand Initial consumer surplus Consumer surplus to new consumers P1 Q1 D E F P2 Q2 Additional consumer surplus to initial consumers Quantity Copyright©2003 Southwestern/Thomson Learning

3. Which of the following will NOT cause a shift in the demand curve for Athlon processors (Pentium III processors are substitutes for Athlon processors, processors are a major part of a computer)? A) An increase in the price of memory. B) A decrease in the price of Pentium III processors. C) A decrease in the price of motherboards. D) A decrease in the price of Athlon processors. E) An increase in consumers' incomes.

Elastic and Inelastic Demand Curves Price Gasoline market When the market price for gasoline rises from $1.25 to $2.00 a gallon, the quantity demanded in the market falls insignificantly from 8 to 7 million units per week. $2.00 $1.25 $1.00 In contrast, when the market price for tacos rises from $1.25 to $2.00, quantity demanded in the market falls significantly from 8 to 4 million units per week. D Quantity (gasoline) 1 2 3 4 5 6 7 8 9 Price Taco market $2.00 $1.25 D $1.00 Quantity (tacos) 1 2 3 4 5 6 7 8 9

Market Supply as the Sum of Individual Supplies

Market Supply as the Sum of Individual Supplies

Shifts in the Supply Curve

Shift Factors for Supply Input prices. Technology. Weather, natural disasters & political disruptions. Taxes. Number of sellers. Expectations.

Figure 6 How the Price Affects Producer Surplus (a) Producer Surplus at Price P Price Supply B A C Q1 P1 Producer surplus Quantity Copyright©2003 Southwestern/Thomson Learning

Figure 6 How the Price Affects Producer Surplus (b) Producer Surplus at Price P Price Additional producer surplus to initial producers Supply D E F P2 Q2 Producer surplus to new producers B P1 C Initial producer surplus A Q1 Quantity Copyright©2003 Southwestern/Thomson Learning

Elastic and Inelastic Supply Curves Price Soft drink market When the market price for soft drinks increases from $1.00 to $1.50 a six-pack, the quantity supplied to the market rises from 100 to 200 million units per week. $2.00 S $1.50 $1.00 When the market price for physician services rises from $100 to $150 an office visit, the quantity supplied rises from 10 to 12 million visits per week. Quantity (million 6-packs) 50 100 150 200 S Price Physician Services market $200 $150 $100 Quantity (million visits) 2 4 6 8 10 12 14 16 18 20

The Equilibrium of Supply and Demand

Markets Not in Equilibrium

A Three-Step Program for Analyzing Changes in Equilibrium Decide whether the event shifts the supply or demand curve (or perhaps both). Decide in which direction the curve shifts. Use the supply-and-demand to see how the shift changes the equilibrium price and quantity.

How an Increase in Demand Affects the Equilibrium

How a Decrease in Supply Affects the Equilibrium

A Shift in Both Supply and Demand

Figure 7 Consumer and Producer Surplus in the Market Equilibrium Price A C B D E Demand Consumer surplus Supply Equilibrium price quantity Producer surplus Quantity Copyright©2003 Southwestern/Thomson Learning

The Invisible Hand “ Every individual is continually exerting himself to find out the most advantageous employment for whatever capital [income] he can command. It is his own advantage, indeed, and not that of the society which he has in view. But the study of his own advantage naturally, or rather necessarily, leads him to prefer that employment which is most advantageous to society. ...He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was not part of his intention.” – Adam Smith, The Wealth of Nations (1776)