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Roger LeRoy Miller Economics Today

Roger LeRoy Miller Economics Today. Chapter 4 Extensions of Demand and Supply Analysis. Young athletes and computer science students are leaving college before graduation to take very high-paying jobs. Are they grabbing near-term gains at the expense of lower future earnings?. Introduction.

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Roger LeRoy Miller Economics Today

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  1. Roger LeRoy Miller Economics Today Chapter 4 Extensions of Demandand Supply Analysis

  2. Young athletes and computer science students are leaving college before graduation to take very high-paying jobs. Are they grabbing near-term gains at the expense of lower future earnings? Introduction

  3. Learning Objectives • Discuss the essential features of the price system • Evaluate the effects on the market price and equilibrium quantity of changes in demand and supply • Understand the rationing function of prices

  4. Learning Objectives • Explain the effects of price ceilings • Explain the effects of price floors • Describe various types of government-imposed quantity restrictions on markets

  5. Chapter Outline • The Price System • Exchange and Markets • Changes in Demand and Supply • Price Flexibility and Adjustment Speed • The Rationing Function of Prices

  6. Chapter Outline • The Policy of Government-Imposed Price Controls • The Policy of Controlling Rents • Price Floors in Agriculture • Price Floors in the Labor Market • Quantity Restrictions

  7. Did You Know That... • According to the U.S. Customs Service, the second most serious smuggling problem along the Mexican border involves the refrigerant freon? • When an older U.S. air conditioner needs fixing, it is often cheaper to pay a relatively high price for illegally smuggled freon than to modify the unit?

  8. The Price System • Price System (market system) • An economic system that allocates resources based on relative prices determined by supply and demand • Prices signal what is relatively scarce and relatively abundant

  9. Exchange and Markets • Markets • Emphasize voluntary exchange • Determine the terms of exchange • Facilitate exchange

  10. Exchange and Markets • Voluntary Exchange • Acts of trading between individuals that make both parties to the trade subjectively better off • Terms of Exchange • The prices we pay for the desired items

  11. Exchange and Markets • Transaction Cost • The costs associated with exchange • Examples • Price shopping • Determining quality • Determining reliability • Service availability • Cost of contracting

  12. Exchange and Markets • The role of middlemen • Middlemen (intermediaries) or brokers reduce transaction cost by providing information to buyers and sellers. • Examples • Real estate brokers • Stock brokers • Consignment shops • Car dealerships

  13. Exchange and Markets • Observation • Middle men flourish on the Internet • Question • Since anyone connected to the Internet can find the same information as an Internet middleman, or a shopbot, why would someone pay for the services of an Internet middleman?

  14. Changes in Demand and Supply • Changes in supply and demand create a disequilibrium • The market price and quantity adjusts to a new equilibrium

  15. The Upside of the Yo-Yo Cycle • Observations • Yo-yo’s are very popular again. • Yo-yo manufacturers cannot keep up with the demand at current prices. • There is a shortage of yo-yo’s. • Question • What is likely to happen to yo-yo prices?

  16. Responses to a Shift in Yo-Yo Demand Figure 4-2

  17. S E1 P1 D1 Q1 Shifts in Demand and Supply: Determinate Results Increase Demand with Supply Constant

  18. At price P1 quantity demanded exceeds quantity supplied— a shortage exists D2 Q3 Shifts in Demand and Supply: Determinate Results Increase Demand with Supply Constant S E1 P1 D1 Q1

  19. E2 P2 Q2 Shifts in Demand and Supply: Determinate Results Increase Demand with Supply Constant S Equilibrium price and quantity increase to P2and Q2 E1 P1 D1 D2 Q1

  20. S E1 At price P1 quantity supplied exceeds quantity demanded— a surplus exists. P1 D1 D2 Q2 Q1 Shifts in Demand and Supply: Determinate Results Decrease Demand with Supply Constant

  21. E3 P3 Q3 Shifts in Demand and Supply: Determinate Results Decrease Demand with Supply Constant S E1 Equilibrium price and quantity decrease to P3and Q3 P1 D1 D2 Q1

  22. S1 E1 P1 D Q1 Shifts in Demand and Supply: Determinate Results Increase Supply with Demand Constant

  23. At price P1 quantity supplied exceeds quantity demanded— a surplus exists Shifts in Demand and Supply: Determinate Results Increase Supply with Demand Constant S1 S2 E1 P1 D Q1 Q3

  24. E2 P2 Q2 Shifts in Demand and Supply: Determinate Results Increase Supply with Demand Constant Equilibrium price decreases and quantity increases to P2and Q2 S1 S2 E1 P1 D Q1

  25. S3 At price P1 quantity demanded exceeds quantity supplied— a shortage exists S1 E1 P1 D Q1 Q2 Shifts in Demand and Supply: Determinate Results Decrease Supply with Demand Constant

  26. E3 P3 Q3 Shifts in Demand and Supply: Determinate Results Decrease Supply with Demand Constant S3 Equilibrium price decreases and quantity increases to P3and Q3 S1 E1 P1 D Q1

  27. Changes in Demand and Supply • Summary • Increases in demand increase equilibrium price and quantity. • Decreases in demand decrease equilibrium price and quantity.

  28. Changes in Demand and Supply • Summary • Increases in supply decrease equilibrium price and increase equilibrium quantity. • Decreases in supply increase equilibrium price and decrease equilibrium quantity.

  29. Changes in Demand and Supply • When both demand and supply shift • Simultaneous changes in demand and supply put conflicting pressure on price or quantity • The resulting effect depends upon how much each shift • Either equilibrium price or quantity will be indeterminate

  30. S1 S2 E1 P1 D2 D1 Q1 Shifts in Demand and Supply: Shortage Increase Demand > Increase Supply

  31. At price P1 quantity demanded exceeds quantity supplied— a shortage exists Shifts in Demand and Supply: Shortage Increase Demand > Increase Supply S1 S2 E1 P1 D2 D1 Q1 Qs Qd

  32. E2 P2 Q2 Shifts in Demand and Supply: Shortage Increase Demand > Increase Supply S1 S2 Equilibrium price increases and quantity decreases to P2and Q2 E1 P1 D2 D1 Q1

  33. S1 S2 At price P1 quantity demanded exceeds quantity supplied— a shortage exists E1 P1 D2 D1 Qs Qd Q1 Shifts in Demand and Supply: Shortage Decrease Demand < Decrease Supply

  34. E2 P2 Q2 Shifts in Demand and Supply: Shortage Decrease Demand < Decrease Supply S1 S2 Equilibrium price increases and quantity decreases to P2and Q2 E1 P1 D2 D1 Q1

  35. S1 S2 E1 P1 D2 D1 Q1 Shifts in Demand and Supply: Shortage Increase Demand > Decrease Supply

  36. Shifts in Demand and Supply: Shortage Increase in Demand > Decrease in Supply S1 S2 At price P1 quantity demanded exceeds quantity supplied— a shortage exists E1 P1 D1 D2 Qs Q1 Qd

  37. E2 P2 Q2 Shifts in Demand and Supply: Shortage Increase Demand > Decrease in Supply S1 S2 Equilibrium price increases and quantity decreases to P2and Q2 E1 P1 D1 D2 Q1

  38. S2 S1 E1 P1 D1 D2 Q1 Shifts in Demand and Supply: Shortage Increase Demand < Decrease in Supply

  39. Shifts in Demand and Supply: Shortage Increase Demand < Decrease in Supply S2 S1 At price P1 quantity demanded exceeds quantity supplied— a shortage exists E1 P1 D1 D2 Qs Q1 Qd

  40. E2 P2 Q2 Shifts in Demand and Supply: Shortage Increase Demand < Decrease in Supply S2 S1 Equilibrium price increases and quantity decreases to P2and Q2 E1 P1 D1 D2 Q1

  41. S1 S2 E1 P1 D1 D2 Q1 Shifts in Demand and Supply: Surplus Increase Supply > Increase in Demand

  42. Shifts in Demand and Supply: Surplus Increase Supply > Increase in Demand S1 S2 E1 At price P1 quantity supplied exceeds quantity demanded— a surplus exists P1 D1 D2 Qd Qs Q1

  43. E2 P2 Q2 Shifts in Demand and Supply: Surplus Increase Supply > Increase in Demand S1 S2 E1 P1 Equilibrium price decreases and quantity increases to P2and Q2 D1 D2 Q1

  44. S2 S1 E1 P1 D1 D2 Q1 Shifts in Demand and Supply: Surplus Decrease Demand > Decrease in Supply

  45. Shifts in Demand and Supply: Surplus Decrease Demand > Decrease in Supply S2 S1 At price P1 quantity supplied exceeds quantity demanded— a surplus exists E1 P1 D1 D2 Q1 Qd Qs

  46. E2 P2 Qd Shifts in Demand and Supply: Surplus Decrease Demand > Decrease in Supply S2 S1 Equilibrium price decreases and quantity decreases to P2and Q2 E1 P1 D1 D2 Q1

  47. S1 S2 E1 P1 D1 D2 Q1 Shifts in Demand and Supply: Surplus Increase Supply > Decrease in Demand

  48. Shifts in Demand and Supply: Surplus Increase Supply > Decrease in Demand S1 S2 E1 P1 At price P1 quantity supplied exceeds quantity demanded— a surplus exists D1 D2 Q1 Qd Qs

  49. E2 P2 Q2 Shifts in Demand and Supply: Surplus Increase Supply > Decrease in Demand S1 S2 E1 P1 Equilibrium price decreases and quantity decreases to P2and Q2 D1 D2 Q1

  50. S1 S2 E1 P1 D2 D1 Q1 Shifts in Demand and Supply: Surplus Increase Supply < Decrease in Demand

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