Demand, Supply, and Equilibrium · 2016-11-27 · Demand, Supply, and Equilibrium Microeconomics...
Transcript of Demand, Supply, and Equilibrium · 2016-11-27 · Demand, Supply, and Equilibrium Microeconomics...
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Demand, Supply, and EquilibriumMicroeconomics – Unit 2: Nature and Function of Product Markets
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The Relationship Between Demand and Total/Marginal Utility Total Utility Marginal Utility The Law of Diminishing Marginal Utility
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Demand
Amounts of a product consumers are willing and able to buy
Law of Demand = inverse or negative relationship between price and quantity demanded
Pric
e
Quantity
D
D
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Law of Demand
Why?◦ Price is an obstacle to buying◦ Diminishing marginal utility
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Determinants of Demand
Consumer tastes/preferences # of buyers in the market Consumers’ incomes◦ Income Effect
Prices of related goods◦ Substitute goods Substitution Effect
◦ Complementary goods
Consumer expectations
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Supply
Amounts of a product that producers are willing and able to make available for sale
Law of Supply = positive relationship between price and quantity supplied
Pric
e
Quantity
S
S
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Law of Supply
Why?◦ Price = incentive to sell more product◦ Increases in marginal cost
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Determinants of Supply
Resource prices Technology Taxes and subsidies Prices of other goods◦ Substitution in production
Producer expectations # of sellers in the market
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Market Equilibrium
Equilibrium price = “market clearing price”
Equilibrium price (Po) = ◦ A. Productive Efficiency◦ B. Allocative Efficiency
Market ensures MB ≥ MC Any price above equilibrium = surplus Any price below equilibrium = shortage
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Producer and Consumer Surplus
Consumer Surplus = the sum of the products of the prices and quantities consumers would have been willing to buy ABOVE the equilibrium price
Producer Surplus = the sum of the products of the prices and quantities suppliers would have been willing to sell BELOW the equilibrium price
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Producer and Consumer Surplus
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Calculating Producer and Consumer Surplus Calculating Producer and Consumer
Surplus
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Price Ceilings
Gov’t sets a maximum price sellers may charge consumers
EX: rent controls, usury lawsPr
ice
Quantity
S
SD
D
Po
Pc
QoQs Qd
Shortage
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Price Floors
Gov’t sets a minimum price buyers may pay sellers
EX: crop price supports, minimum wagesPr
ice
Quantity
S
SD
D
Po
Pf
QoQd Qs
Surplus
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Maximum and Minimum Price Controls Complete the Worksheet on Maximum
and Minimum Price Controls
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Equilibrium Price and Quantity
Complete the Worksheet on Equilibrium Price and Quantity
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Greebies
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Changes in Supply/Demand/Equilibrium ∆’s in Demand◦ Raises or reduces both equilibrium price (Po)
and equilibrium quantity (Qo) ∆’s in Supply◦ Increase in S = lower Po, higher Qo
◦ Decrease in S = higher Po, lower Qo
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Graph Shift
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Changes in Supply/Demand/Equilibrium S increases, D decreases◦ Qo depends on relative increase in S vs. D
S decreases, D increases◦ Qo depends on relative increase in S vs. D
S decreases, D decreases◦ If decrease in S > decrease in D = Po will
increase, Qo will decrease◦ If decrease in S < decrease in D = Po will
decrease, Qo will decrease
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Changes in Supply/Demand/Equilibrium S increases, D increases◦ If increase in S > increase in D = Po will
decrease Qo will increase◦ If increase in S < increase in D = Po will
increase, Qo will increase
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Graph Shift
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Changes in Demand/Supply/Equilibrium If increase in S EQUALs the increase in D
then Po will stay the same. If decrease in S EQUALs the decrease in
D then Po will stay the same
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Closure: Exit Ticket Activity
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