Download presentation
Presentation is loading. Please wait.
1
Unit 2 The Product Market 20 to 30%
2
Supply & Demand
3
LAW OF DEMAND An inverse relationship exists between price and quantity demanded As Price Falls… …Quantity Demanded Rises As Price Rises… …Quantity Demanded Falls
4
DOWNWARD SLOPE Diminishing Marginal Utility Income Effect
Substitution Effect
5
GRAPHING DEMAND Increase in Quantity Demanded P QD $5 4 3 2 1 10 20 35
Price of Corn P Increase in Quantity Demanded $5 4 3 2 1 CORN P QD $5 4 3 2 1 10 20 35 55 80 30 40 60 80 + Increase in Demand D2 D1 o Q Quantity of Corn
6
DETERMINANTS OF DEMAND
Tastes (Preferences) Prices of Related Goods Substitutes & Complements Unrelated Goods Income Normal (Superior) & Inferior Goods Number of Buyers Expectations
7
LAW OF SUPPLY A direct relationship exists between price and quantity supplied As Price Rises… …Quantity Supplied Rises As Price Falls… …Quantity Supplied Falls
8
GRAPHING SUPPLY Increase in Supply P QS $5 4 3 2 1 60 50 35 20 5 80 70
Price of Corn P Increase in Supply S2 S1 $5 4 3 2 1 CORN P QS $5 4 3 2 1 60 50 35 20 5 80 70 60 45 30 Increase in Quantity Supplied o Q Quantity of Corn
9
DETERMINANTS OF SUPPLY
Resource Prices Prices of Other Goods Technology Taxes & Subsidies Price Expectations Number of Sellers
10
DETERMINANTS OF SUPPLY
Resource Prices Technology Taxes & Subsidies Prices of Other Goods Price Expectations Number of Sellers Combining with Demand
11
MARKET DEMAND & SUPPLY Surplus Shortage P QD P QS $5 4 3 2 1 2,000
Price of Corn P CORN MARKET CORN MARKET Surplus S $5 4 3 2 1 P QD P QS $5 4 3 2 1 2,000 4,000 7,000 11,000 16,000 $5 4 3 2 1 12,000 10,000 7,000 4,000 1,000 Shortage D 7 11 o Q Quantity of Corn
12
Consumer and Producer Surplus in the Market Equilibrium
Price A C B D E Consumer surplus Demand Supply Equilibrium price quantity Producer surplus Quantity
13
% Q % P Commonly Expressed as… PRICE ELASTICITY OF DEMAND P D Q
The percentage change in quantity The percentage change in price % Q d % P P2 P1 Elasticity is .5 D Q2 Q1 Q
14
Price Elasticity is... Inelastic 0 < X < 1
PRICE ELASTICITY OF DEMAND Price Elasticity is... Inelastic 0 < X < 1 Typical of necessities one must have Elastic from 1 < X < Typical of luxuries one wants Unit elastic when exactly = 1 Quantity change offsets Price change
15
Extreme Cases PRICE ELASTICITY OF DEMAND Perfectly Inelastic Demand
Ed = 0 Q Perfectly Elastic Demand P D2 Ed = Q
16
Ed = More Accurate Calculation – The Midpoint Formula
PRICE ELASTICITY OF DEMAND More Accurate Calculation – The Midpoint Formula Ed = ΔQ AVG Q ΔP AVG P
17
TOTAL REVENUE TEST Another way to determine elasticity P x Q = TR
P and Q move opposite each other So how do we know what happens to TR? If P and TR move together demand is inelastic If Q and TR move together demand is elastic If TR doesn’t move demand is unit elastic
18
CONTROLS ON PRICES Price Ceiling Price Floor
A legal maximum on the price at which a good can be sold. Price Floor A legal minimum on the price at which a good can be sold. 4 4
19
A Market with a Price Ceiling
(b) A Price Ceiling That Is Binding Price of Ice-Cream Cone Supply Demand Equilibrium price $3 2 Price ceiling 75 125 Shortage Quantity of Ice-Cream Quantity supplied Quantity demanded Cones
20
A Market with a Price Floor
(b) A Price Floor That Is Binding Price of Ice-Cream Supply Cone Demand Surplus $4 Price floor 80 120 3 Equilibrium price Quantity of Ice-Cream Quantity demanded Quantity supplied Cones
21
How a Tax Affects Market Participants
Tax Revenue T = the size of the tax Q = the quantity of the good sold T Q = Tax Revenue
22
Tax Revenue Price Demand Supply Quantity with tax Price buyers pay
Price sellers receive Tax revenue (T × Q) Size of tax (T) Quantity without tax Quantity sold (Q) Quantity
23
How a Tax Affects Welfare
Price Demand Supply = PB Q2 PS Price buyers pay sellers receive A F B D C E = P1 Q1 Price without tax Quantity
24
DETERMINANTS OF DEADWEIGHT LOSS
What determines whether the deadweight loss from a tax is large or small? Elasticities of Demand & Supply More elastic curves bring more loss
25
Tax Incidence Who pays for the tax? The more inelastic curve pays more
26
the last dollar spent on
UTILITY MAXIMIZING COMBINATION Product A: Price = $1 Product B: Price = $2 $ 10 income Marginal utility per dollar (MU/price) Marginal utility per dollar (MU/price) Marginal utility, utils Marginal utility, utils Unit of product First Second Third Fourth Fifth Sixth Seventh Income is gone... the last dollar spent on each good gave the same utility (8) per dollar
27
Algebraic Restatement of the Utility Maximization Rule
Consumption Bundles Algebraic Restatement of the Utility Maximization Rule MU of A Price of A MU of B Price of B = 8 Utils $1 16 Utils $2 =
Similar presentations
© 2024 SlidePlayer.com. Inc.
All rights reserved.