1 / 57

Extra Slides for Review (Slides 1-30) 1. Demand

Extra Slides for Review (Slides 1-30) 1. Demand . Tony’s Demand Schedule & Curve. Price of Coffee. Quantity of Coffee. 0. Price. Tony’s Q d. Dani’s Q d. $0.00. 16. +. 8. =. 24. 1.00. 14. +. 7. =. 21. 2.00. 12. +. 6. =. 18. 3.00. 10. +. 5. =. 15. 4.00. 8. +. 4.

thora
Download Presentation

Extra Slides for Review (Slides 1-30) 1. Demand

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Extra Slides for Review (Slides 1-30)1. Demand

  2. Tony’s Demand Schedule & Curve Price of Coffee Quantity of Coffee 0

  3. Price Tony’s Qd Dani’s Qd $0.00 16 + 8 = 24 1.00 14 + 7 = 21 2.00 12 + 6 = 18 3.00 10 + 5 = 15 4.00 8 + 4 = 12 5.00 6 + 3 = 9 6.00 4 + 2 = 6 0 Market Demand versus Individual Demand • The quantity demanded in the market is the sum of the quantities demanded by all buyers at each price. • Suppose Tony and Dani are the only two buyers in the coffee market. (Qd = quantity demanded) Market Qd

  4. The Market Demand Curve for Coffee 0 P Q

  5. Willingness to Pay (WTP) A buyer’s willingness to pay for a good is the maximumamount the buyer will pay for that good. WTP measures how much the buyer values the good. Example: 4 buyers’ WTP for an iPod the Red Hot Chili Peppers

  6. WTP and the Demand Curve Q:If price of iPod is $200, who will buy an iPod, and what is quantity demanded? A: Flea & Anthonywill buy an iPod, Chad & John will not. Hence, Qd = __when P = $200.

  7. WTP and the Demand Curve P (price of iPod) who buys Qd Derive the demand schedule: $301 & up nobody 0 251 – 300 Flea 1 176 – 250 Anthony, Flea 2 126 – 175 Chad, Anthony, Flea 3 0 – 125 John, Chad, Anthony, Flea 4

  8. WTP and the Demand Curve P Qd=0 Qd=1 Qd=2 $175 Qd=3 $125 Qd=4 Q

  9. About the Staircase Shape… P This D curve looks like a staircase with 4 steps. If there were a huge # of buyers, as in a competitive market, there would be a huge # of very tiny steps, and it would look more like a smooth curve. Q

  10. Shifts of D Curve • Economic variables held constant when specifying demand include income, wealth, prices of related goods, preferences, price expectations, the number of buyers… • If one of the above variables change, the demand curve will shift.

  11. P Q 0 Suppose the number of buyers increases. Then, at each price, quantity demanded will increase (by 5 in this example). D curve shifts to the right.

  12. 2. Supply

  13. Starbucks’ Supply Schedule & Curve 0 P Q

  14. Price Starbucks Jitters $0.00 0 + 0 = 0 1.00 3 + 2 = 5 2.00 6 + 4 = 10 3.00 9 + 6 = 15 4.00 12 + 8 = 20 5.00 15 + 10 = 25 6.00 18 + 12 = 30 0 Market Supply versus Individual Supply • The quantity supplied in the market is the sum of the quantities supplied by all sellers at each price. • Suppose Starbucks and Jitters are the only two sellers in this market. (Qs = quantity supplied) Market Qs

  15. P Q The Market Supply Curve 0

  16. Cost and the Supply Curve • Cost is the value of everything a seller must give up to produce a good (i.e., opportunity cost). • Includes cost of all resources used to produce good, including value of the seller’s time. • Example: Costs of 3 sellers in the lawn-cutting business. A seller will only produce and sell the good if the price exceeds his/her cost. Hence, cost is a measure of willingness to sell.

  17. Cost and the Supply Curve P Qs Derive the supply schedule from the cost data: $0 – 9 0 10 – 19 1 20 – 34 2 35 & up 3

  18. P Q Cost and the Supply Curve $35

  19. Shifts of S Curve • Economic variables held constant when deriving a supply curveinclude production technology, input prices, taxes and subsidies, and price expectations

  20. Example: input prices 0 • Examples of inputs: for coffee: milk, sugar, coffee machines, buildings… • A fall in input prices makes production more profitable at each output price, so firms supply a larger quantity at each price, and the S curve shifts to the right.

  21. P Q Example: input prices 0 Suppose the price of milk falls. At each price, the quantity of coffee supplied will increase (by 5 in this example).

  22. 3. Welfare Measures

  23. (1) Consumer Surplus (CS) Consumer surplus is the amount a buyer is willing to pay minus the buyer actually pays. Suppose P = $260. Flea’s CS = $300 – 260 = $__. The others get no CS because they do not buy an iPod at this price. Total CS = $___.

  24. Flea’s WTP CS and the Demand Curve P P = $260 Flea’s CS = $300 – 260 = ___ Total CS = ___ Q

  25. Flea’s WTP Anthony’s WTP CS and the Demand Curve P Instead, suppose P = $220 Flea’s CS = $300 – 220 = ___ Anthony’s CS =$250 – 220 = ___ Total CS = ____ Q

  26. CS and the Demand Curve P The lesson: Total CS equals the area below the demand curve & above the price. Q

  27. Price per pair P h 1000s of pairs of shoes D Q CS with Lots of Buyers & a Smooth D Curve The Demand for Shoes Q: P = $30, CS=? A: CS is the area below the D curve and above the P. Recall: area of a triangle equals ½ x base x height So, CS=½ x 15 x $30 = _____ $

  28. (2) Producer Surplus P Producer surplus (PS): the amount a seller is paid for a good minus the seller’s cost. Q

  29. Kitty’s cost Hunter’s cost Angelo’s cost Producer Surplus and the S Curve P Suppose P = $25 Angelo’s PS = ___ Hunter’s PS = ___ Total PS = ____ $25 Total PS equals the area below the price and above the supply curve. Q

  30. Price per pair P S h 1000s of pairs of shoes Q PS with Lots of Sellers & a Smooth S Curve The supply of shoes Q: P=$40, PS=? A: PS is the area below the P and above the S curve. The height of this triangle is $40 – 15 = $25. So,PS= _____________ = $312.5 $15

  31. Modeling the Market Process: A Review of the Basics Chapter 2

  32. 1. Market Models: Fundamentals • Defining the Relevant Market • A market: the interaction between _________&___________to exchange a well-defined commodity • Defining the market context is one of critical steps in economic analysis • Specifying the Market Model • Qualitative and quantitative relationship

  33. 2. Supply and Demand: An Overview • Primary objective of the supply and demand model is to facilitate an analysis of market conditions and any observed change in price • Sellers’ decisions are modeled through a _______ function and buyers’ decisions are modeled through a _______ function

  34. Competitive Market for Private Goods • Private goods are commodities that have two characteristics: excludable and rival in consumption • A competitive market is characterized by: • A large number of buyers and sellers with no control over price • The product is homogenous or standardized • The absence of entry barriers • Perfect information

  35. Important Characteristics of Goods • A good is excludable if a person can be prevented from using it if he does not pay for it. • excludable: fish tacos • not excludable: national defense • A good is rival in consumption if one person’s use/consumption of it diminishes others’ use/consumption. • rival: fish tacos • not rival: national defense

  36. 3. Demand • Demand refers to the quantities of a good the consumer is willing and able to buy at a set of prices during some time period, ceteris paribus (c.p.) • The willingness to pay (WTP), or demand price, measures the marginal benefit (MB) from consuming another unit of the good • Law of Demand says there is an _________ relationship between price (P) and quantity demanded of a good (qd), c.p.

  37. Market demand captures the decisions of all consumers willing and able to purchase a good • For a private good, market demand is found by horizontally summing individual demands

  38. Market DemandBottled Water (P) Price $11.50 P = –0.01QD + 11.5 D 1,150 (QD) Quantity

  39. 4. Supply • Supply refers to the quantities of a good the producer is willing and able to bring to market at a given set of prices during some time period, c.p. • Law of Supply – there is a direct relationship between price (P) and quantity supplied (qs) of a good, c.p. • Rising marginal cost (MC) supports this positive relationship (willingness to sell should cover MC)

  40. Market Supply captures the combined decisions of all producers in a given industry • Derived by horizontally summing the individual supply functions

  41. Market SupplyBottled Water (P) Price S P = 0.0025QS + 0.25 0.25 (QS) Quantity

  42. 5. Market Equilibrium • Supply and demand together determine a unique equilibrium price (PE) and equilibrium quantity (QE), at which point there is no tendency for change • PE occurs where ____________ • Model for bottled water • D: P = –0.01QD + 11.5 • S: P = 0.0025QS + 0.25 • Equilibrium found where –0.01QD + 11.5 = 0.0025QS + 0.25, or where QE = 900 and PE = _________

  43. Price 11.50 S 2.50 0.25 D Quantity 900 Market EquilibriumBottled Water PE QE

  44. FYI Market Adjustment to Equilibrium • Disequilibrium occurs if the prevailing market price is at some level other than the equilibrium level • If actual price is below its equilibrium level, there will be a shortage • Shortage = excess demand = QD – QS • If actual price is above its equilibrium level, there will be a surplus • Surplus = excess supply = QS – QD • Price movements serve as a signal that a shortage or surplus exists, whereas price stability suggests equilibrium

  45. 6. Efficiency Criteria(1) Allocative Efficiency • At the market level, allocative efficiency requires that resources be appropriated such that additional benefits to society are equal to additional costs incurred, i.e., _____________ • The value society places on the good is equivalent to the value of the resources given up to produce it • At the firm level, this efficiency is achieved at a competitive market equilibrium, assuming firms are _________________________

  46. FYI Profit Maximization • Total Profit () = Total Revenue (TR) - Total Costs (TC) • TR = P x Q • TC is all economic costs, explicit and implicit • Profit is maximized where TR/Q = TC/Q, or where ________________ • MR = TR/Q, additional revenue from producing another unit of Q • MC = TC/Q, additional cost from producing another unit of Q

  47. FYI Profit Maximization • In competitive industries, firms face constant prices determined by the market, which means P = MR • Therefore the competitive market equilibrium achieves allocative efficiency because: •  maximization requires: MR = MC • Competitive markets imply: P = MR • So maximization in competition means: P = MC, which defines allocative efficiency

  48. $ MC P = MR 2.50 0.25 qE = 36 Quantity FYI Profit MaximizationBottled Water

  49. (2) Technical Efficiency • Technical Efficiency refers to production decisions that generate _____________________given some stock of resources • Market forces can achieve technical efficiency so long as competitive conditions prevail • Competitive firms must minimize costs to remain viable in the market because they cannot raise price to cover the added cost of inefficient production

More Related