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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- move from one point on the curve to another
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Demand Basics Changes in Demand –C–Consumer Income Normal v. Inferior Goods –P–Population –P–Preference/Taste –P–Price of Other Goods Compliments Substitutes –E–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 Substitutes of Production Compliments of Production Taxes and Subsidies Other Regulations
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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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Equilibrium Price = Market Clearing Price
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Let’s Review Shifts Double Shifts Ceilings and Floors Shortage and Surplus ------------------------------------------ Quantifying Shortage and Surplus Other Effects of Ceilings and Floors
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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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S & D for Non-Smart Phones (inferior good) Decrease in unemployment Increase in the price of Smart Phones
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S & D for Non-Smart Phones (inferior good) Decrease in unemployment Increase in the price of Smart Phones * If the income effect is greater than the substitute effect*
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Agenda HW and Field Trip Beyond Surpluses and Shortages Binding v. Non-Binding Price Controls A Closer Look at the Downward Slope Marginal Utility Activity (HW if incomplete)
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Price Controls Effects beyond Surpluses and Shortages
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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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How to stop Canal Street Sales?
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Price Ceilings Non-Binding Set above equilibrium Market prices will remain below the ceiling
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Price Floors Non-Binding Set below equilibrium Market prices will remain above the floor
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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 Prices below equilibrium –Prices account for the relatively low number of consumers willing to break the law
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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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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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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? 1 st pizza for full price ($10.00), get a 2 nd 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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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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Optimal Purchase Rule?
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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 $1 (MU/$) MU x /P x = MU y /P y
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Did you make any consumer equilibrium decisions this weekend?
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Tax Incidence
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Nominal (Statutory) versus Economic Incidence If “law” doesn’t matter, what does?
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PED
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Relationship between % change in price and % change in quantity
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PED Perfectly Inelastic = 0 Unit Elastic = 1 Perfectly Elastic =
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PED 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 –Decrease price to Increase TR Unit Elastic Demand Inelastic Demand –Increase Price to Increase TR
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TIP of the DAY Remember 2 not 6
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Apples The price has increased The quantity has decreased What likely happened?
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Reminder and Update and Reminder PHILLY TRIP!!!!!!!!!!!! FRQs- moved to Tuesday Graphs Due Tomorrow
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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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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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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 –Inferior
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Income Elasticity of Demand % Q / %Income –Necessity –Luxury (________)
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Cross Price Elasticity % Q x / % P y Substitutes = Complements = Neither =
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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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