MICROECONOMICSMICROECONOMICS BU 224 BU 224

Seminar Seminar Three Three

AgendaAgenda Course Issues and QuestionsCourse Issues and Questions Chapters Three and Four: Questions Chapters Three and Four: Questions

and Problems from the text.and Problems from the text. Review of Market Allocation Review of Market Allocation

MechanismsMechanisms Homework ReviewHomework Review

DemandDemand

Schedule or curveSchedule or curveAmount consumers are willing Amount consumers are willing

and able to purchase at a given and able to purchase at a given priceprice

Other things equalOther things equalIndividual demandIndividual demandMarket demandMarket demand

6

5

4

3

2

1

0 10 20 30 40 50 60 70 80 Quantity Demanded (bushels per week)

Pric

e (p

er b

ushe

l)

P Qd

$5

4

3

2

1

10

20

35

55

80

P

Q

D

The Demand Curve

LO1

The Demand Curve

3-4

• TastesTastes• Number of BuyersNumber of Buyers• IncomeIncome• - Normal Goods- Normal Goods• - Inferior Goods- Inferior Goods• Price of Related GoodsPrice of Related Goods• - Substitute Good- Substitute Good• - Complementary Good- Complementary Good• Consumer ExpectationsConsumer Expectations

Determinants of DemandDeterminants of Demand

• Resource PricesResource Prices• TechnologyTechnology• Taxes and SubsidiesTaxes and Subsidies• Prices of Other GoodsPrices of Other Goods• Producer ExpectationsProducer Expectations• Number of SellersNumber of Sellers

Determinants of SupplyDeterminants of Supply

Chapter 3 QuestionsChapter 3 Questions1.1. What are some examples of inferior products?What are some examples of inferior products?

2.2. Who does the demanding and the supplying in the Who does the demanding and the supplying in the labor market? The loanable funds market?labor market? The loanable funds market?

3.3. Is the price system a "just" or "fair" way to allocate Is the price system a "just" or "fair" way to allocate products? What about medical services?products? What about medical services?

4.4. What can we say about the demand and supply What can we say about the demand and supply curves for products which are "free", like matches, curves for products which are "free", like matches, toothpicks, and kittens?toothpicks, and kittens?

5.5. Why do you think "rock" stars charge concert ticket Why do you think "rock" stars charge concert ticket prices below what they could charge and still sell out prices below what they could charge and still sell out their performances?their performances?

Chapter 3 QuestionsChapter 3 Questions1. A survey indicated that chocolate ice cream is America’s 1. A survey indicated that chocolate ice cream is America’s favorite ice-cream flavor. For each of the following, indicate favorite ice-cream flavor. For each of the following, indicate the possible effects on demand and/or supply and equilibrium the possible effects on demand and/or supply and equilibrium price and quantity of chocolate ice cream.price and quantity of chocolate ice cream.

a. a. A severe drought in the Midwest causes dairy farmers to A severe drought in the Midwest causes dairy farmers to reduce the number of milk-producing cattle in their herds by reduce the number of milk-producing cattle in their herds by a third. These dairy farmers supply cream that is used to a third. These dairy farmers supply cream that is used to manufacture chocolate ice cream.manufacture chocolate ice cream.

b. A new report by the American Medical Association reveals b. A new report by the American Medical Association reveals that chocolate does, in fact, have significant health benefits.that chocolate does, in fact, have significant health benefits.

c. The discovery of cheaper synthetic vanilla flavoring lowers c. The discovery of cheaper synthetic vanilla flavoring lowers the price of vanilla ice cream.the price of vanilla ice cream.

d. New technology for mixing and freezing ice cream lowers d. New technology for mixing and freezing ice cream lowers manufacturers’ costs of producing chocolate ice cream.manufacturers’ costs of producing chocolate ice cream.

Market Allocation MechanismsMarket Allocation Mechanisms

Inputs or factors of production need Inputs or factors of production need to be used to produce goods and to be used to produce goods and services. The ways such inputs can services. The ways such inputs can be utilized to serve the needs of be utilized to serve the needs of consumers are called the allocation consumers are called the allocation mechanisms. mechanisms.

Market Allocation Mechanisms Market Allocation Mechanisms

Four Market Allocation MechanismsFour Market Allocation Mechanisms::

1. The market (price), 1. The market (price),

2. Government, 2. Government,

3. Random choice, and 3. Random choice, and

4. First-come, first-served4. First-come, first-served

Market Allocation Mechanisms Market Allocation Mechanisms EfficiencyEfficiency: If an allocation mechanism : If an allocation mechanism

is efficient, it means that it best is efficient, it means that it best satisfies the needs and wants of a satisfies the needs and wants of a society compared to the other society compared to the other allocation mechanisms. A system of allocation mechanisms. A system of markets and prices is generally the markets and prices is generally the most efficient way of allocating most efficient way of allocating scarce resources. As a result, it is scarce resources. As a result, it is predominantly used in most industrial predominantly used in most industrial countries today.countries today.

Consumer SurplusConsumer Surplus

Difference between what a Difference between what a consumer is willing to pay for a consumer is willing to pay for a good and what the consumer good and what the consumer actually paysactually pays

Extra benefit from paying less Extra benefit from paying less than the maximum pricethan the maximum price

5-14

Consumer SurplusConsumer Surplus

LO2

Consumer Surplus

(1)Person

(2)Maximum

Price Willing to Pay

(3)Actual Price (Equilibrium

Price)

(4)Consumer

SurplusBob $13 $8 $5 (=$13-$8)

Barb 12 8 4 (=$12-$8)

Bill 11 8 3 (=$11-$8)

Bart 10 8 2 (=$10-$8)

Brent 9 8 1 (= $9-$8)

Betty 8 8 0 (= $8-$8)

5-15

Consumer SurplusConsumer Surplus

LO2LO2

D

Q1

P1

Consumer Surplus

Equilibrium Price

5-16

Producer SurplusProducer Surplus

Difference between the actual Difference between the actual price a producer receives and price a producer receives and the minimum price they would the minimum price they would acceptaccept

Extra benefit from receiving a Extra benefit from receiving a higher pricehigher price

LO2 5-17

Producer SurplusProducer Surplus

LO2

Producer Surplus

(1)Person

(2)Minimum

Acceptable Price

(3)Actual Price (Equilibrium

Price)

(4)Producer Surplus

Carlos $3 $8 $5 (=$8-$3)

Courtney 4 8 4 (=$8-$4)

Chuck 5 8 3 (=$8-$5)

Cindy 6 8 2 (=$8-$6)

Craig 7 8 1 (=$8-$7)

Chad 8 8 0 (=$8-$8)

5-18

Producer SurplusProducer Surplus

LO2LO2

S

Q1

P1Equilibrium price

Producer surplus

5-19

Efficiency RevisitedEfficiency Revisited

LO2

S

Q1

P1

D

Consumer surplus

Producer surplus

5-20

MicroeconomicsMicroeconomics

Questions?Questions?