© 2007 thomson south-western unit ii: the price discovery mechanism
TRANSCRIPT
© 2007 Thomson South-Western
Unit II: The Price Discovery Mechanism
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Consumer Activity
• This requires full class participation• All you need to do is raise your hand
• I will be polling the class on their willingness to pay for a certain good or service
• We all will copy the data down in our notes…
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• A market is a group of buyers and sellers of a particular good or service.
What Is a Market?
Apple Store: I-Phone 4 Launch
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Competitive Markets
• A market in which there are many buyers and sellers so that no individual has an impact on the market price.
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Market’s in 100% Perfect Competition• Products are the same
• Numerous buyers and sellers so that each has no influence over price
• Firms are price takers
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Demand and supply in a market
Buyers determine demand.
Sellers determine supply
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Demand!!!!
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Demand• Shows the amount people are
willing to buy at every price
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Quantity Demanded
• The amount of a good that buyers are able and willing to purchase at a specific price.
• You want the good, and you can afford it
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Would this factor into your quantity demanded?
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The Law of Demand
• When a good’s price is lower, consumers will buy more of it. When the price is higher, consumers will buy less of it.
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The Demand Curve: The Relationship between Price and Quantity Demanded
• Demand Schedule • The demand schedule is a table that
shows the relationship between the price of the good and the quantity demanded.
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Catherine’s Demand Schedule
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The Demand Curve: The Relationship between Price and Quantity Demanded
• Demand Curve • The demand curve is a graph of the
relationship between the price of a good and the quantity demanded.
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Catherine’s Demand Schedule
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Figure 1 Catherine’s Demand Schedule and Demand Curve
Price ofIce-Cream Cone
0
2.50
2.00
1.50
1.00
0.50
1 2 3 4 5 6 7 8 9 10 11 Quantity ofIce-Cream Cones
$3.00
12
1. A decrease in price ...
2. ... increases quantity of cones demanded.
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Market Demand versus Individual Demand• Market demand refers to the sum
of all individual demands for a particular good or service.
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Brain Busta! Can you draw the market demand curve for ice-cream cones?
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The Market Demand Curve
Price of Ice-Cream Cone
Price of Ice-Cream Cone
Price of Ice-Cream Cone
2.00 2.00 2.00
4 3 7
1.00 1.001.00
8 5 13
Quantity of Ice-Cream Cones Quantity of Ice-Cream Cones Quantity of Ice-Cream Cones
Catherine’s Demand Nicholas’s Demand Market Demand+ =
When the price is $2.00, Catherine will demand 4 ice-cream cones.
When the price is $2.00, Nicholas will demand 3 ice-cream cones.
The market demand at $2.00 will be 7 ice-cream cones.
When the price is $1.00, Catherine will demand 8 ice-cream cones.
When the price is $1.00, Nicholas will demand 5 ice-cream cones.
The market demand at $1.00, will be 13 ice-cream cones.
The market demand curve is the horizontal sum of the individual demand curves!
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Shifts in the Demand Curve
0
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First know this!!
• Quantity Demanded and Demand are two different things!
• Quantity Demanded is referring to the amount of demand at a give price
• Demand refers to the actual curve itself• Let’s take a look…
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0
D
Price of Ice-Cream Cones
Quantity of Ice-Cream Cones
A $1 tax on sellers of ice-cream cones raises the price of ice-cream
cones. What will happen to the quantity
demanded?
A
B
8
1.00
$2.00
4
Changes in Quantity Demanded
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Does a change in the price of goods shift the demand curve?
NO!!!
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Shifts in the Demand Curve• This is called a “change in Demand”
• A shift in the demand curve, either to the left or right.
• Caused by a change in a quantity at every price other than a change in the price of the good/service.
• “Only 2 people would buy a dog for $200. Now, because something changed other than price, 10 people would buy a dog for $200.”
Day 1 Day 2 Day 3
If a Jimmy John’s cookie was $1, 2
people would buy one.
A new study has proven eating Jimmy
John’s cookies makes you 20% more intelligent
After the study was released, now 20 people would buy the cookie for $1
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Figure 3 Shifts in the Demand Curve
Price ofIce-Cream
Cone
Quantity ofIce-Cream Cones
Increasein demand
Decreasein demand
Demand curve, D3
Demandcurve, D1
Demandcurve, D2
0
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What causes a shift in the Demand Curve
• Anything that changes Qd other than a price change of the good/service• Consumer income
• Prices of related goods
• Tastes & Advertisements
• Expectations
• Number of buyers
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Normal Goods vs Inferior Goods
Normal Goods
• a good that consumers demand more of when their income increases
Inferior Goods
• A good that consumers demand less of when their incomes increase
• Since you make more money, you can afford something better.
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Normal or Inferior Good?
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1,8001,500
1,200
900
600
300
21 3 4 5 6 7 8 9 10 1211
Price of Crappy Televisions
Quantity of Crappy
Televisions0
Decreasein demand
An increase in income...
D1D2
Consumer Income Inferior Good
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$3.002.50
2.001.501.00
0.50
21 3 4 5 6 7 8 9 10 1211
Price of Apples
Quantity of Apples
0
Increasein demand
An increase in income...
D1
D2
Consumer Income Normal Good
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1,8001,500
1,200
900
600
300
21 3 4 5 6 7 8 9 10 1211
Price of Crappy Car
Quantity of Crappy Car
0
Decreasein demand
An increase in income...
D1D2
Consumer Income Inferior Good
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Shifts in the Demand Curve
• Prices of Related Goods• When a fall in the price of one good
reduces the demand for another good, the two goods are called substitutes.
• When a fall in the price of one good increases the demand for another good, the two goods are called complements.
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Substitute Example
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If price goes up in…
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You may purchase the cheaper alternative…
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$3.002.50
2.001.501.00
0.50
21 3 4 5 6 7 8 9 10 1211
Price of Totino’s
Quantity of
Totino’s0
Increasein demand
D1
D2
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Complement Example
If price goes down ???
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$3.002.50
2.001.501.00
0.50
21 3 4 5 6 7 8 9 10 1211
Price of Mustard
Quantity of
Mustard0
Increasein demand
D1
D2
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Consumer Expectations
• Expectations about the future
• What if someone told you a bike would be on sale in a week, which way would the demand curve shift on that day you found out about the impending sale?
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Amount of Buyers
• An increase in population causes an increase in demand for most goods
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Consumer Tastes and Advertising
• Fads affect demand
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Advertisements
• Good advertisements can increase demand
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Table 1 Variables That Influence Buyers
52
SUPPLY
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Quantity Supplied• The amount of a good sellers are
willing and able to sell
Flu Shot
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Law of Supply
When Price
Increases
Quantity Supplied Increases
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Ben’s Supply Schedule
No-Friends Rabbit No-Friends Rabbit
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The Supply Curve: The Relationship between Price and Quantity Supplied
• Supply Curve• The supply curve is the graph of the relationship
between the price of a good and the quantity supplied.
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Figure 5 Ben’s Supply Schedule and Supply Curve
Price ofNo-Friends
Rabbit
0
2.50
2.00
1.50
1.00
1 2 3 4 5 6 7 8 9 10 11 Quantity ofNo-Friends Rabbit
$3.00
12
0.50
1. Anincrease in price ...
2. ... increases quantity of cones supplied.
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Market Supply versus Individual Supply
• Market supply refers to the sum of all individual supplies for all sellers of a particular good or service.
• Graphically, individual supply curves are summed horizontally to obtain the market supply curve.
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Figure 7 Shifts in the Supply Curve
Price ofIce-Cream
Cone
Quantity ofIce-Cream Cones
0
Supply curve, S3
curve, Supply
S1Supply
curve, S2
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First know this!!!
• Quantity Supplied and Supply are two different things!
• Quantity Supplied is referring to the amount of supply at a given price
• Supply refers to the actual curve itself• Let’s take a look…
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1 5
Price of Ice-Cream Cone
Quantity of Ice-Cream Cones0
S
1.00A
C$3.00 A rise in the price
of ice cream cones results in a movement along the supply curve.
Change in Quantity Supplied
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Shifts in the Supply Curve
• Change in Supply• A shift in the supply curve, either to the left or right.
• Caused by a change in a quantity at every price
other than a change in the price of the good/service.
January May June-July
At $3 each, I will put 5 mini
American flags on my store shelf
The 4th of July holiday is
approaching
At $3 each, I will put 100 mini
American flags on my store shelf
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Figure 7 Shifts in the Supply Curve
Price ofIce-Cream
Cone
Quantity ofIce-Cream Cones
0
Increasein supply
Decreasein supply
Supply curve, S3
curve, Supply
S1Supply
curve, S2
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Shifts in the Supply Curve
• Input prices
• Technology
• Expectations
• Number of sellers
• Government
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Input Costs
• Any change of an input cost (production costs) will affect supply
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Lets say you produce these…
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What would happen to supply if the price of steel went up?
Supply of buses
would decrease
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Technology Example
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Early 1900’s Assembly Line
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Today’s Assembly Line
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Technology and Supply
• If technology increases, supply increases (shift to the right)
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Government’s Influence on Supply
• Subsidy–Government payment that supports
a business market–Increases supply/shift to the right
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True Subsidy Story• Tax authorities in the Netherlands agreed
to provide an education subsidy to a Dutch woman who was studying and training to be a witch. The woman’s attendance at the 13-weekend witchery program, which cost $3,003, was ruled a legitimate tax-deductible schooling expense by government officials. Students in the program reportedly learned to cast spells, prepare herbs and potions, and to use crystal balls while generally using magic as “a force for good.”
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Other Examples
• Expectations– If you expect the price of an input cost to rise
in the future, than you current supply will increase and shift to the right
• Number of Sellers– If a new hospital in Plainfield opens, the
following supply will increase and shift to the right: doctors, hospital beds, MRI machines, vaccinations, etc…
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Table 2: Variables That Influence Sellers
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Market Equilibrium
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Market Equilibrium
• Market for a good is stable
• Price and quantity is exactly what both buyers and sellers are willing to give up
• Quantity supplied = Quantity demanded
Equilibrium?
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SUPPLY AND DEMAND TOGETHER
• Equilibrium Price– The price that balances quantity supplied and
quantity demanded.
• Equilibrium Quantity– The quantity supplied and the quantity
demanded at the equilibrium price.
• Both are found where supply and demand intersect
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At $2.00, the quantity demanded is equal to the quantity supplied!
SUPPLY AND DEMAND TOGETHERDemand Schedule
Supply Schedule
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Figure 8 The Equilibrium of Supply and Demand
Price ofIce-Cream
Cone
0 1 2 3 4 5 6 7 8 9 10 11 12Quantity of Ice-Cream Cones
13
Equilibriumquantity
Equilibrium price Equilibrium
Supply
Demand
$2.00
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Disequilibrium
• When quantity supplied is NOT equal to quantity demanded in the market
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Two Types of Disequilibrium
• Shortage (excess demand)– When quantity demanded is more than
quantity supplied– Price is below equilibrium price
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Figure 9 Markets Not in Equilibrium
Price ofIce-Cream
Cone
0 Quantity ofIce-Cream
Cones
Supply
Demand
(b) Excess Demand
Quantitysupplied
Quantitydemanded
1.50
10
$2.00
74
Shortage
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Two Types of Disequilibrium
• Shortage (excess demand)– When quantity demanded is more than
quantity supplied– Price is below equilibrium price
• Surplus (excess supply)– When quantity supplied is more than quantity
demanded– Price is above equilibrium price
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Figure 9 Markets Not in Equilibrium
Price ofIce-Cream
Cone
0
Supply
Demand
(a) Excess Supply
Quantitydemanded
Quantitysupplied
Surplus
Quantity ofIce-Cream
Cones
4
$2.50
10
2.00
7
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Disequilibrium: Changes in demand and/or supply
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Table 3: Three Steps for Analyzing Changes in Equilibrium
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Figure 10 How an Increase in Demand Affects the Equilibrium
Price ofIce-Cream
Cone
0 Quantity of Ice-Cream Cones
Supply
Initialequilibrium
D
D
3. . . . and a higherquantity sold.
2. . . . resultingin a higherprice . . .
1. Hot weather increasesthe demand for ice cream . . .
2.00
7
New equilibrium$2.50
10
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Figure 11 How a Decrease in Supply Affects the Equilibrium
Price ofIce-Cream
Cone
0 Quantity of Ice-Cream Cones
Demand
Newequilibrium
Initial equilibrium
S1
S2
2. . . . resultingin a higherprice of icecream . . .
1. An increase in theprice of sugar reducesthe supply of ice cream. . .
3. . . . and a lowerquantity sold.
2.00
7
$2.50
4
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Last one….
What happens to the equilibrium price and equilibrium quantity if BOTH supply and demand increase?
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Table 4: What Happens to Price and Quantity When Supply or Demand Shifts?
Summary
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• Economists use the model of supply and demand to analyze competitive markets.
• In a competitive market, there are many buyers and sellers, each of whom has little or no influence on the market price.
Summary
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• The demand curve shows how the quantity of a good depends upon the price.– According to the law of demand, as the price of a good
falls, the quantity demanded rises. Therefore, the demand curve slopes downward.
– In addition to price, other determinants of how much consumers want to buy include income, the prices of complements and substitutes, tastes, expectations, and the number of buyers.
– If one of these factors changes, the demand curve shifts.
Summary
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• The supply curve shows how the quantity of a good supplied depends upon the price.– According to the law of supply, as the price of a good rises,
the quantity supplied rises. Therefore, the supply curve slopes upward.
– In addition to price, other determinants of how much producers want to sell include input prices, technology, expectations, and the number of sellers.
– If one of these factors changes, the supply curve shifts.
Summary
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• Market equilibrium is determined by the intersection of the supply and demand curves.
• At the equilibrium price, the quantity demanded equals the quantity supplied.
• The behavior of buyers and sellers naturally drives markets toward their equilibrium.
Summary
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• To analyze how any event influences a market, we use the supply-and-demand diagram to examine how the event affects the equilibrium price and quantity.
• In market economics, prices are the signals that guide economic decisions and thereby allocate resources.
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Supply or Demand Activity• On a separate sheet of blank paper, please
do the following:– Write a specific market at the top (Shoes for
example)– Write a scenario that will affect that market
(Adidas spends 50 million dollars on a new advertisement campaign).
– MAKE IT UNIQUE (take your time thinking)– Pass the paper behind you (group at the end…
walk to the front)
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Partner Activity
• Read your market and the scenario.
• Determine if the scenario would have an impact on supply or demand.
• Then, graph and provide a written description of the market change
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Bringing it Back
• Each group will read their market and scenario they received. – Every student must write the market and
scenario they hear in their notes
• Each group will then explain the affect the scenario had on their demand.– Every student must write the effect in their
notes.