econ 160 week 4
DESCRIPTION
ECON 160 Week 4. The functioning of Markets: The interaction of buyers and sellers. (Chapter 4). Review. Economic competition : We compete for goods by offering to trade $ dollars. Circular flow diagram : Shows the interaction of households and firms in two kinds of markets. - PowerPoint PPT PresentationTRANSCRIPT
ECON 160Week 4
• The functioning of Markets: The interaction of buyers and sellers. (Chapter 4)
ReviewReview
• Economic competitionEconomic competition: We compete for goods by offering to trade $ dollars.
• Circular flow diagramCircular flow diagram: Shows the interaction of households and firms in two kinds of markets.
Product Markets
FIRMSHOUSEHOLDS
ResourceMarkets
$'s $'s Revenue
$'s Income $'s
Goods & Services
Goods &Services
Resources Inputs
Circular Flow Diagram of the Exchange Economy
NEW: Study of MarketsNEW: Study of Markets
• MarketsMarkets are the interaction of buyers and sellers.• Some markets are local, some worldwide.
• Focus on buyers and sellers separately: Separate graphs for each group.
• Ceteris paribus: look at one thing at a time; All other things held equal.
Marginal Value Marginal Value
• Focusing on a buyer, we measure the personal marginal value of a good as the most $’s you are willing to give up to acquire an additional unit. (How much you are willing to trade)
• Graph the marginal value as a height above each additional unit per time period.
Marginal Value Declines
• Plot the marginal value as a height above additional units.
• As you have more of any good, the marginal value declines.
Marginal Value = The Most you are willing to pay for each additional unit
0
10
20
30
40
50
60
70
80
1 2 3 4
Marginal Value
MVx
Qtyx/T
$ 10 $ 9 $ 8 $ 7 $ 6 $ 5 $ 4 $ 3 $ 2 $ 1
1 2 3 4 5 6 7 8 9 10
Marginal ValueThe height above each additional unit = the most you are willing to pay
Marginal Value
How much are you willing to Buy?
• By comparing the marginal value with the $ Price at which the good is available, we can read the quantity you are willing to buy at each $ price. (horizontal distance)
• DemandDemand: A schedule of the alternative quantities that an individual is willing and able to buy at alternative $ prices.
$Price x
Qtyx/T
$ 10 $ 9 $ 8 $ 7 $ 6 $ 5 $ 4 $ 3 $ 2 $ 1
1 2 3 4 5 6 7 8 9 10
MVx = Demand X
Demand Curve
$ P x
$ 10 $ 9 $ 8 $ 7 $ 6 $ 5 $ 4 $ 3 $ 2 $ 1
1 2 3 4 5 6 7 8 9 10
Demand x
Demand shows the amounts purchased at alternative prices (horizontal distances at each price)
Qtyx /T
Dx
Dx
Demand for X Demand for X
First Law of Demand First Law of Demand
• The higher the price of a good, the smaller the quantity demanded; the lower the price of a good, the greater the quantity demanded.
• Demand is downward sloping.• A change in price leads to a change in
quantity demanded = a movement along the function
Change in Price Vrs. Change in Demand
• A change in price is a move on the demand schedule.
• A change in demand is a shift of the function due to something else changing.
$ P x
$ 10 $ 9 $ 8 $ 7 $ 6 $ 5 $ 4 $ 3 $ 2 $ 1
1 2 3 4 5 6 7 8 9 10 11 12 Qtyx /T
Dx
Dx
Dx’
Dx’
Increase in Demand
Increase in demand is a rightward shift (greater quantity demanded at each price.)
Determinants of Demand
• What factors determine the position of demand ?
• What changes in other factors will cause demand to increase (shift right) or decrease (shift left)?
Determinants of Demand: (Shift Factors)• Taste & preference: how much you like
the good. If T&P increase, demand increases. (Rightward shift).
• Income: a change in income affects demand.– Normal good: increase in income increases
demand. (Right Shift)– Inferior good: increase in income decreases
demand. (Left Shift)
Determinants of Demand, Continued• Price of other goods:
– Substitutes: most other goods are substitutes; An increase in the price of a substitute increases demand (rightward shift).
– Complements: Goods used together; an increase in the price of complements decreases demand (leftward shift).
Determinants of Demand, Continued• Future Price Expectations: an increase in
the expected future price will increase demand today.
Market Demand
• The market demand is the sum of the individual demands of the buyers.
• An increase in the number of buyers will increase market demand.
Market Supply
• Supply is a schedule of the alternative quantities which sellers are willing and able to sell at alternative prices.
Market Supply
• Supply is a schedule of the alternative quantities which sellers are willing and able to sell at alternative prices.
• Supply is generally a positive relationship: at higher prices the quantity supplied is larger.
Supply Curve$Price
$10
8
6
4
2
2 4 6 8 10 12 14 16 Qty x/ T
The Height of the Supply Curve is based on Marginal Cost of Production
$Price
$10
8
6
4
2
2 4 6 8 10 12 14 16 Qty x/ T
Change in Quantity Vrs Shift in Supply
• If sellers can get a higher price, the increase in quantity supplied is a movement on the supply curve.
• If some other factor changes, the supply curve will shift.
• An increase in supply is a rightward shift.
• A decrease in supply is a leftward shift.
Determinants of Supply: (Shift Factors)• 1. Price of inputs: an increase in price of inputs
will decrease supply (leftward shift).• 2. Value of Alternative Outputs: As the value of
alternative outputs increases, supply decreases.• 3. Change in technology: an increase in
technology will increase supply (rightward shift).• 4. Number of sellers: as more sellers enter a
market the supply shifts rightward.
$Price
$ 4
3
2.50
2.00
1.50
1.00
.50
.25
100 200 300 400 500 600 700 800 900 1000 1100 Q x/ T
Demand
Supply
Surplus at this $ PriceSurplus at this $ Price
The Market
$Price
$ 4
3
2.50
2.00
1.50
1.00
.50
.25
100 200 300 400 500 600 700 800 900 1000 1100 Q x/ T
Demand
Supply
Shortage at this $ Price
The Market
$Price
4
3
2.50
2.00
1.50
PePe 1.00
.50
.25
100 200 300 400 500 600 700 800 900 1000 1100 Q x/ T QeQe
Demand
Supply
Market EquilibriumMarket Equilibrium
DDxx = S = Sxx at P at Pee
$ P x
$ 10 $ 9 $ 8 $ 7 $ 6 $ 5 $ 4 $ 3 $ 2 $ 1
1 2 3 4 5 6 7 8 9 10 11 12 Qtyx /T
SupplyDemand
DxSx
Market: Demand & Supply
At the equilibrium Price, theDx = Sx
Pe
Qe
$ P x
$ 10 $ 9 $ 8 $ 7 $ 6 $ 5 $ 4 $ 3 $ 2 $ 1
1 2 3 4 5 6 7 8 9 10 11 12 Qtyx /T
SupplyDo
Do
Sx
Effects of Increase in Demand on Price and Quantity
Increases Price and Quantity
Pe
Qe
D1
D1
$ P x
$ 10 $ 9 $ 8 $ 7 $ 6 $ 5 $ 4 $ 3 $ 2 $ 1
1 2 3 4 5 6 7 8 9 10 11 12 Qtyx /T
Supply: Response
D1
D1
Sx
Demand Determines Price
Demand pulls forth output
D2
D2
D3
D3
$ P x
$ 10 $ 9 $ 8 $ 7 $ 6 $ 5 $ 4 $ 3 $ 2 $ 1
1 2 3 4 5 6 7 8 9 10 11 12 Qtyx /T
Demand
DxS0
Effects of an Increase in Supply on Price and Quantity
Price decreases and Quantity increases
Pe
Qe
S0
S1
S1