Chapter3SupplyandDemandTUWtC009ThtMrdftmQiillC^npantcJiAU豪睜KonrolLearningObjectives:Understandhow1.Demandcurvesshowbuyers'marketbehaviors?Supplycurvesshowsellers*marketbehaviors.Supplyanddemanddetermineequilibriumpriceandquantity.Shiftsinsupplyanddemandchangeequilibriumoutcomes.5.TheEfficiencyPrinciplesaysgrowthmakesitpossibleforeachpersontohavemore.6.TheEquilibriumPrinciplesaysmarketequilibriumleavesnounexploitedopportunitiesforindividuals.CentralPlann

What,How,andForWhom?■EverysocietyanswersthreebasicquestionsWHAT■Whichgoodswillbeproduced?■Howmuchofeach?HOW■Whichtechnology?■Whichresourcesareused?FOR■Howareoutputsdistribu怕d?WHOM?Need?Income?LO>AltTheMarket■BuyersandsellCentralPlanningv.MarketLO3-.VI3UMixedeconomiesuseboththemarketandcentralplanningLO3-.VI3UBuyersandSellersintheMarket■BuyersandsellershavedifferentmotivationsBuyerswanttobenefitfromthegoodSellerswanttomakeaprofit■Market:peoplewhobuyandsellthegoodBuyersandsellersjointlydetermineoutcomeMarketpricebalancestwoforces?ValuebuyersderivefromthegoodCosttoproduceonemoreunitofthegoodDemandThequantitybuyerswouldpurchaseateachpossiblepriceDemandcurve■Negativeslope■Consumersbuylessathigherprices■ConsumersbuymoreatlowerpricesLO3-13-6DemandSlopesDownward■BuyersvaluegoodsdifferentlyReservationprice:thehighestpriceanindividualiswillingtopayforagood■Demandreflectstheentiremarket,notoneconsumerLowerpricesbringmorebuyersintothemarketLowerpricescauseexistingbuyerstobuymoreLO3-1>7IncomeandSubstitutionEffectsBuyersbuymoreatlowerpricesandbuylessathigherprices■Whathappenswhenpricegoesup?■Thesubstitutioneffect:BuyersswitchtosubstituteswhenpricegoesupTheincomeeffect:Buyers*overallpurchasingpowergoesdownLO3-13-SInterpretingtheDemandCurveHorizontalinterpretationofdemand■Givenprice,howmuchwillbuyersbuy?InterpretingtheDemandCurveLO3-13-9Verticalinterpretationofdemand■Giventhequantitytobebought,whatwillthepricebe?LO3-1LO3-23-12TheSupplyCurve■ThequantityofagoodthatsellersofferateachpriceIfthepriceislessthanopportunitycost,offermore■Opportunitycostdiffersamongsellersdueto■Technology■Differentcostssuchasrent■Skills■Expectations■Higherprices,largerquantities■Low-HangingFruitPrincipleLO3-2>11InterpretingtheSupplyCurve■Horizontalinterpretationofsupply■Givenprice,howmuchwillLO3-24-12suppliersoffer?InterpretingtheSupplyCurveSupplyofPizzas

VerticalinterpretationofsupplyGiventhequantitytobesold,whatwillthepricebe?LO3-2MarketEquilibrium■QuantitysuppliedequalsquantitydemandedAND■Priceisonsupplyanddemandcurves■NotendencytochangePorQ■BuyersareontheirdemandcurveSellersareontheirsupplycurveLO3?3ExcessSupplyandExcessDemandExcessSupplyExcessDemand■At$4.16.000slicessupplied■At$2,8,000slicessuppliedand8.000slicesdemanded16,000slicesdemandedIncentivePrinciple:ExcessSupplyat$4■EachsupplierhasanincentivetodecreasethepriceinordertosellmoreLowerpricesdecreasethesurplus■Aspricedecreases:

Markelforvdib(300sofslices/day)LO3-35-16thequantityofferedforsaledecreasesalongthesupplycurvethequantitydemandedincreasesalongthedemandcurveLO3-36-16IncentivePrinciple:ExcessDemandat$2■Eachsupplierhasanincentivetoincreasethepriceinordertosellmore■Higherpricesdecreasetheshortage■Aspriceincreases■thequantityofferedforsaleincreasesalongthesupplycurve■Aspriceincreases,thequantitydemandeddecreasesalongthedemandcurve?J-17LO3-3LO3-35-ISRentcontrolssetamaximumpricethatcanbechargedforagivenapartmentIfthecontrolledpriceisbelowequilibrium,then■Quantitydemandedincreasesand■QuantitysupplieddecreasesAshortageresultsRentControlsArePriceCeilingsMa$1,600S800(mLO3-35-ISMovementalongtheDemandPDemandforCannedTunaCurve■Whenpricegoesup,quantitydemandedgoesdown■Whenpricegoesdown,buyersmovetoanew,higherquantitydemanded■Achangeinquantitydemandedresultsfromachangeinthepriceofagood.LO3-3ShiftinDemand■Ifbuyersarewillingtobuymoreateachprice,thendemandhasincreased■Movetheentiredemandcurvetotheright■Increaseindemand■Ifbuyersarewillingtobuylessateachprice,thendemandhasdecreased810(OOOsofLO3-43-20ChangesinQuantitySupplied■Whenthepriceofagoodchanges,movetoanewquantitysupplied■AssumeseverythingexceptpriceisheldconstantLO3-43-2JChangesinSupplySupplyincreaseswhensellersarewillingtooffermoreforsaleateachpossiblepriceMovestheentiresupplycurvetotheright■Supplydecreaseswhensellers

arewillingtoofferlessforsaleateachpossibleprice■MovestheentiresupplycurvetotheleftLO3-43-22■Ifrentfor怕nniscourtdecreases,demandfor怕nnisballsincreases■TenniscourtsandtennisballsarecomplementsCausesofShiftsinDemand■PriceofcomplementarygoodsTenniscourtsandtennisballs■PriceofsubstitutegoodsInternetandovernightdelivery■Income:normalorinferiorgoods?■Preferences?DinosaurtoysafterJurassicParkmovie■Numberofbuyersinthemarket■ExpectationsaboutthefuturePricechangesnevercauseashiftindemandLO3-4ApartmentsNearDCMetroIfgovernmentwagesrise,demandtorapartmentsnearMetrostationsincreasesDemandincreases■■Priceincreases?QuantityincreasesDemandforanormalgoodincreaseswhenincomeincreases■DemandforaninferiorgoodQincreaseswhenincomedecreasesLO3-ICausesofShiftsinSupply■AchangeinthepriceofaninputFiberglassforskateboards,constructionwages■AchangeintechnologyDesktoppublishingandtermpapersInternetdistributionofproducts(e-commerce)■Weather(agriculturalcommoditiesandoutdoorentertainment)■Numberofsellersinthemarket■ExpectationoffuturepricechangesPricechangesnevercauseashiftinsupplyLO3-4ShiftsinSupply:Skateboards■CostsofprodShiftinSupply:HomeConstruction?Costoflaborusedtoproducehousesdecreases■SupplyincreasesTheMarketforNewHousesDemandisconstantThepriceofhousesdecreasesto$90,000perhouseQuantityincreasesto504050(houses/month)LO3-13-2SSupplyandDemandShifts:FourRulesAnincreaseindemandwillleadtoanincreaseinbothequilibriumpriceandquantityLO3-I5-29SupplyandDemandShifts:FourRulesAndecreaseindemandwillleadtoadecreaseinbothequilibriumpriceandquantityQ*QLO3-I3-30SupplyandDemandShifts:FourRulesAnincreaseinsupplywillleadtoadecreaseintheequilibriumpriceandanincreaseintheequilibriumquantity.LO3-I^31SupplyandDemandShifts:FourRulesAndecreaseinsupplywillleadtoanincreaseintheequilibriumpriceandadecreaseintheequilibriumquantity.LO3-IJ-32SupplyandDemandShifts:FourRulesLO3-IJ-32SupplyandDemandBothChange:TortillaChips■OilsusedforfryingareharmfulANDthepriceofharvest!ngequipmentdecreasesp6eq/$)eo=dDMi川LO3-4onsofJ-33ChangesinSupplyandDemandSupplyDemIncreasesDecreasesandIncreasesPDependsPIncreasesQIncreasesQDependsPDecreasesPDependsDecreasesLO3-4SupplyandDemandBothChange:TortillaChipsQDependsQDecreasesLO3-4EfficiencyandEquilibrium■Marketscommunicateinformationeffectively■Valuebuyersplaceontheproduct?Opportunitycostofproducingtheproduct■Marketsmaximizethediffereneebetweenbenefitsandcosts?Marketoutcomesarethebestprovidedthat■ThemarketisinequilibriumAND■NocostsorbenefitsaresharedwiththepublictO3<53-35CashontheTable■Buyer'ssurplus:buyer'sreservationpriceminusthemarketprice■Seller'ssurplus:marketpriceminustheseller'sreservationprice?Totalsurplus=buyer'ssurplus+seller'ssurplus?Totalsurplusisbuyer'sreservationprice一sellersreservationprice■Nocashonthetablewhensurplusismaximized■NoopportunitytogainfromadditionalsalesorpurchasesLO3?53-36EfficiencyPrinciple■Sociallyoptimalquantitymaximizesthetotalsurplusfortheeconomyfromproducingandsellingagood?Economicefficiency??allgoodsattheirsociallyoptimallevel?EfficiencyPrinciple:equilibriumpriceandquantityareefficientifSellerspayallthecostsofproductionBuyersreceiveallthebenefitsoftheirpurchase■Efficiency:marginalcostequalsmarginalbenefitProduct!onisefficientiftotalsurplusismaximizedLO3-5M7SmartforOne,DumbforAll■ProducerssometimesshiftcoststoothersPollutionislikegettingfreewastedisposalservices■Totalmarginalcost=seller'smarginalcostplusmarginalcostofpollution■Whencostsareshifted,supplyisgreaterthansociallyoptimalBuyersmaycreatebenefitsforothersMarginalbenefitislessthanthefullsocialbenefitVaccinations,myneighbor'sIandscaping■ThedemandforthesegoodsislessthansociallyoptimalLO3?5EquilibriumPrincipleEquilibriumPrinciple:nounexploitedopportunitiesforindividualsBUTitmaynotexploita