11
Frank & BernankeFrank & Bernanke4th edition, 20094th edition, 2009
Ch. 3: Supply and Demand: An Ch. 3: Supply and Demand: An IntroductionIntroduction
http://prezi.com/2mvbtqd9ushg/market-system/?auth_key=37842a81dd359b3c60b23d5a0915542d4e954c91
22
33
44
The Answer: Supply and The Answer: Supply and DemandDemand
Why did gasoline prices almost doubled Why did gasoline prices almost doubled between November 1999 and May 2000 between November 1999 and May 2000 but fell by half by November 2001?but fell by half by November 2001?
Why could you buy the same computer Why could you buy the same computer at half price in 2006 than in 2003?at half price in 2006 than in 2003?
Why are prices at the College Why are prices at the College Bookstore higher than the discount Bookstore higher than the discount markets?markets?
55
MarketsMarkets When in elementary school you traded your When in elementary school you traded your
baloney sandwich for your best friend’s peanut baloney sandwich for your best friend’s peanut butter sandwich, you were involved in an butter sandwich, you were involved in an exchange. Trade theory discussed in the exchange. Trade theory discussed in the previous chapter told us that both of you were previous chapter told us that both of you were better off with this exchange.better off with this exchange.
If you offered your baloney sandwich to whoever If you offered your baloney sandwich to whoever wanted it for a “fair trade” there formed a market wanted it for a “fair trade” there formed a market for a single baloney sandwich.for a single baloney sandwich.
For a market to exist, there should be more than For a market to exist, there should be more than one buyer or more than one seller.one buyer or more than one seller. One seller and many buyers is called monopoly.One seller and many buyers is called monopoly. One buyer and many sellers is called monopsony.One buyer and many sellers is called monopsony.
66
Market TypesMarket Types
Many buyers and many sellers with identical Many buyers and many sellers with identical products operate in products operate in competitivecompetitive markets.markets.
Many buyers and many sellers with Many buyers and many sellers with differentiated (brand name) products operate differentiated (brand name) products operate in in monopolistically competitivemonopolistically competitive markets. markets.
Many buyers and a few sellers constitute an Many buyers and a few sellers constitute an oligopolyoligopoly..
Many buyers and a single seller constitute a Many buyers and a single seller constitute a monopolymonopoly..
77
Demand and SupplyDemand and Supply The behavior of buyers is captured with the The behavior of buyers is captured with the
demand curve.demand curve. The behavior of the sellers is captured with The behavior of the sellers is captured with
the supply curve.the supply curve. Each individual decision (both by Each individual decision (both by
consumers and firms) is ruled by the consumers and firms) is ruled by the marginal benefit vs. marginal cost marginal benefit vs. marginal cost calculation.calculation.
Opportunity cost determines if one is a Opportunity cost determines if one is a buyer or seller (ex: airplane tickets).buyer or seller (ex: airplane tickets).
88
Determinants of DemandDeterminants of Demand Price of the product.Price of the product.
P up => Q down.P up => Q down. Income of the consumers.Income of the consumers.
Y up => Q up.Y up => Q up. Change in price of substitutes.Change in price of substitutes.
Ps up => Q upPs up => Q up.. Change in price of complements.Change in price of complements.
Pc up => Q downPc up => Q down.. Change in tastes and preferences.Change in tastes and preferences.
T favor the product more => Q upT favor the product more => Q up.. Expected price in the future.Expected price in the future.
Pe up => Q upPe up => Q up..
99
Drawing the Demand CurveDrawing the Demand Curve
In a two-dimensional space (the page in In a two-dimensional space (the page in your notebook, the chalkboard) we can your notebook, the chalkboard) we can only measure two variables.only measure two variables.
We will pick “price” and “quantity We will pick “price” and “quantity demanded” as our two variables.demanded” as our two variables.
As we change the price of the product As we change the price of the product and look at the change in quantity and look at the change in quantity demanded, we will assume that all the demanded, we will assume that all the other variables are kept constant.other variables are kept constant.
1010
An Example of DemandAn Example of Demand
Ticket Price for Cleveland Orchestra Number of Concerts Attended
100 050 130 320 610 12
Demand for Cleveland Orchestra
0
50
100
150
0 5 10 15Concerts Attended
Tic
ke
t P
ric
e
1111
Income IncreaseIncome IncreaseTicket Price for Cleveland Orchestra Number of Concerts Attended 2Y
100 0 150 1 230 3 620 6 1210 12 24
Demand for Cleveland Orchestra
0
50
100
150
0 5 10 15Concerts Attended
Tic
ke
t P
ric
e Demand with Higher Income
0
50
100
150
0 5 10 15 20 25Number of Concerts
Pri
ce
of
Tic
ke
ts
1212
ExercisesExercises Show what happens to the demand for Coke Show what happens to the demand for Coke
when Pepsi price rises.when Pepsi price rises. Show what happens to demand for computers Show what happens to demand for computers
when monitor prices increase.when monitor prices increase. Show what happens to demand for Firestone tires Show what happens to demand for Firestone tires
after the Federal government accused them of after the Federal government accused them of faulty product.faulty product.
Show what happens to teenage demand for Show what happens to teenage demand for cigarettes if originally price is $2 and consumption cigarettes if originally price is $2 and consumption is 1 million and price goes up to $2.20.is 1 million and price goes up to $2.20.
1313
Teenage SmokingTeenage Smoking
$2.20$2.00
1 million880,000
1414
Determinants of SupplyDeterminants of SupplyPrice of the productPrice of the product
P up => Q upP up => Q up Input pricesInput prices
W up => Q downW up => Q downTechnologyTechnology
New technology => Q upNew technology => Q upExpected priceExpected price
Pe up => Q downPe up => Q down
1515
An Example of SupplyAn Example of SupplyPrice of Chairs Quantity Supplied
0 025 10050 20075 300100 400
Supply of Chairs
020406080
100120
0 100 200 300 400Quantity
Pri
ce
1616
Input Price IncreaseInput Price IncreasePrice of Chairs Quantity Supplied Supply w/ higher wages
0 0 025 100 7550 200 15075 300 225100 400 300
Supply of Chairs
0
50
100
150
0 100 200 300 400Quantity
Pri
ce
Rise in Input Prices
020406080
100120
0 100 200 300 400Quantity
Pri
ce
1717
ExercisesExercises
Show what happens when new technology Show what happens when new technology is employed.is employed.
Show what happens when cost of capital Show what happens when cost of capital increases.increases.
Show what happens when new firms enter Show what happens when new firms enter into the market.into the market.
1818
EquilibriumEquilibrium Equilibrium takes place when the quantity Equilibrium takes place when the quantity
supplied into the market exactly matches supplied into the market exactly matches quantity demanded.quantity demanded.
If quantity supplied exceeds quantity If quantity supplied exceeds quantity demanded, there will be unsold quantities.demanded, there will be unsold quantities.Sellers will lower price to get rid of excess Sellers will lower price to get rid of excess
inventory.inventory. If quantity demanded exceeds quantity If quantity demanded exceeds quantity
supplied, price will inch up to bring the supplied, price will inch up to bring the market into equilibrium.market into equilibrium.
1919
How Does This Fit S&D?How Does This Fit S&D?
2020
Price Controls, Price SupportsPrice Controls, Price SupportsShow the effect of rent control, gas Show the effect of rent control, gas
price controls, wage controls.price controls, wage controls.Show the effect of agricultural price Show the effect of agricultural price
supports, export supports.supports, export supports.
2121
Disequilibrium and Disequilibrium and Social WelfareSocial Welfare
Why does the society (sellers and buyers) Why does the society (sellers and buyers) are better off when they move toward are better off when they move toward equilibrium?equilibrium?
2222
Disequilibrium and Social Disequilibrium and Social WelfareWelfare
2323
ExercisesExercises
Show what will happen to quantity and Show what will happen to quantity and price when income rises and technology price when income rises and technology improves.improves.
Show what will happen to quantity and Show what will happen to quantity and price when the state increases the sales price when the state increases the sales tax.tax.
Show what will happen to quantity and Show what will happen to quantity and price when wages increase and tastes price when wages increase and tastes favor the product.favor the product.
2424
What Is Happening to Farmland What Is Happening to Farmland Around Hiram?Around Hiram?
Farmland is being transformed into Farmland is being transformed into residential developments.residential developments.
Are we going to be without food?Are we going to be without food?How does the price system allocate the How does the price system allocate the
land between residential development and land between residential development and farmland?farmland?
Why don’t economists worry about the Why don’t economists worry about the shortage of food?shortage of food?
2525
Social vs. Private CostsSocial vs. Private Costs
Why an action might be smart for one but Why an action might be smart for one but dumb for all?dumb for all?Subprime debacleSubprime debacle
How does the market reach optimal How does the market reach optimal welfare when social costs are different welfare when social costs are different than private costs?than private costs?
