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Unit 2 Supply & Demand and the Nature and Function of Markets
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Demand Basics Demand Schedule and Demand Curve
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Demand Basics Demand versus Quantity Demanded
Demand- quantities consumers are willing and able to buy at various prices Quantity Demanded- quantity consumers are willing and able to buy at a given price
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Demand Basics Demand versus Quantity Demanded Demand- the whole curve
Quantity Demanded- a point on the curve
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Demand Basics Demand versus Quantity Demanded
Change in Demand- the whole curve shifts Change in Quantity Demanded- movement along the curve
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Demand Basics Changes in Demand Consumer Income Population
Normal v. Inferior Goods Population Preference/Taste Price of Other Goods Compliments Substitutes Expectation of Change in Price
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Supply Basics Supply Schedule and Supply Curve
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Supply Basics Supply versus Quantity Supplied
Supply - quantities producers are willing and able to sell at various prices Quantity Supplied- quantity producers are willing and able to sell at a given price
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Supply Basics Supply versus Quantity Supplied Supply - the whole curve
Quantity Supplied- a point on the curve
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Supply Basics Change in Supply - the whole curve shifts
Change in Quantity Supplied- move from one point on the curve to another
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Supply Basics- Changes
# of Producers Technology Price of Inputs Taxes and Subsidies Other Regulations Producer expectations
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Individual & Market Demand Curve
Horizontal sum of individual demand curves
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Individual & Market Supply Curve
Horizontal sum of individual supply curves
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What if they both shift? Equilibrium Price? Equilibrium Quantity?
One change is certain The other is ambiguous
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What if they both shift? Coffee New Rebecca Black Song New Fertilizer
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What if they both shift? Same Shift- know Q Opposite Shift- know P
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S & D for Non-Smart Phones (inferior good)
Decrease in unemployment Increase in the price of Smart Phones
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Equilibrium Price = Market Clearing Price
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What can you tell me? OPEC breaks up
EPA eliminates all regulation of oil industry
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Why Demand Slopes Downward and what’s up with the shape?
Income Effect Substitute Effect Diminishing Marginal Utility
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Conspicuous Goods
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Why Demand Slopes Downward and what’s up with the shape?
Income Effect Substitute Effect Diminishing Marginal Utility
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TVs Consumers EXPECT prices to increase significantly in the coming months Producers are plagued by a growing shortage of Europium
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Why Demand Slopes Downward?
Income Effect Higher price = Lower purchasing power Lower price = Higher purchasing power “ability to buy”
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Why Demand Slopes Downward?
Substitute Effect- think opportunity cost Higher price = Lower relative price of substitutes Lower price = Higher relative price of substitutes
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Why? 1st pizza for full price ($10.00), get a 2nd for $5?
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Why? Buy one pair at regular price and get the second pair half off?
BOGO Days!
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MU/$
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Why Demand Slopes Downward?
Diminishing Marginal Utility
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Why Demand Slopes Downward?
Diminishing Marginal Utility MU= satisfaction (quantified in dollars) of an additional unit of consumption Marginal Utility ALWAYS* decreases with additional consumption Total Utility increases at a decreasing rate
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Why Demand Slopes Downward?
Diminishing Marginal Utility/Benefit Cost-Benefit Analysis How many slices will you consume? OPTIMAL PURCHASE RULE MU=P
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Optimizing Purchase of 2 or More Goods
MU per $1
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Consumer Equilibrium Maximize Total Utility MU per $1 (MU/$) MUx/Px = MUy/Py
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New Housing Market- East Penn
Emmaus High named the 280th best high school in the country (best in area) A decrease in the price of lumber (input of housing construction)
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Races = $50 Musicals = $100 Budget = $300
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If the market price is above equilibrium price…
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If the market price is below equilibrium price…
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Price Ceilings Non-Binding
Set above equilibrium Market prices will remain below the ceiling **Graph shows BINDING
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Price Floors Non-Binding
Set below equilibrium Market prices will remain above the floor **Graph shows BINDING
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Is minimum wage a binding price ceiling?
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Now that you are thinking…
Is minimum wage a binding price floor?
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Price Controls Effects beyond Surpluses and Shortages
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Price Controls Effects beyond Surpluses and Shortages
BOTH reduce the quantity of a good bought and sold
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Price Ceilings Shortages Inefficiencies Black Markets
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Price Ceilings- Inefficiencies
Misallocation of Resources Need and willingness to pay Wasted Resources Time and money spent overcoming the shortage Inefficiently Low Quality
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Price Ceilings- Black Markets
Illegal Markets Prices ABOVE equilibrium Prices account for additional cost in the form of risk
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Price Floors Surpluses Inefficiencies Black Markets
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Price Floors- Inefficiencies
Misallocation of Resources Those willing to sell at the lowest price do not always succeed Wasted Resources Inefficiently High Quality
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Price Floors- Black Markets
Illegal Markets
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Price Elasticity of Demand (PED)
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PED Relationship between % change in price and % change in quantity
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PED (absolute value) Perfectly Inelastic = 0 Unit Elastic = 1
Perfectly Elastic =
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PED (expressed in absolute value)
PED (expressed in absolute value) *PED will always be negative unless perfectly inelastic Perfectly Inelastic = 0 Unit Elastic = 1 Perfectly Elastic = Inelastic <1 Unit Elastic = 1 Elastic > 1
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PED
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*Total Revenue Method*
Price Decrease – TR Increase Elastic Price Decrease – TR Constant Unit Elastic Price Decrease – TR Decrease Inelastic
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*Total Revenue Method*
Elastic Demand Price and Total Revenue Move in OPPOSITE directions Unit Elastic Demand- No Change in TR Inelastic Demand Price and TR move in the SAME direction
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TIP of the DAY Remember 2 not 6
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TIP of the DAY Remember 2 not 6
1. Inelastic PED- Increase in Price will Increase Total TR *Increase P will Increase TR 2. Perfectly Inelastic = 0
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PES- Only difference?
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Other Elasticities Price Elasticity- % Q/ % P PED versus PES
Income Elasticity of Demand Normal Inferior goods Cross Price Elasticity Complements and substitutes
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Income Elasticity of Demand
% Q / % Income Normal Inferior
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Income Elasticity of Demand
% Q / % Income Normal = positive Inferior = negative
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Income Elasticity of Demand
% Q / % Income Necessity 0-1 Luxury > 1
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Cross Price Elasticity
% Qx / % Py Substitutes = Complements = Neither = 0
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Cross Price Elasticity
% Qx / % Py Substitutes = positive Complements = negative Neither = 0
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Tip of the Day Study 2 days before the test as if it were the day before The review will expose your weaknesses
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Tax Incidence
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Tax Incidence Nominal (Statutory) versus Economic Incidence
If “law” doesn’t matter, what does?
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Draw TWO S & Ds Add a Binding Price Floor to one
Add a Binding Price Ceiling to the other Shade DWL
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Deadweight Loss Excess Burden Allocative Inefficiency
Do subsidies produce DWL?? If so, where does it appear?
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