Law of Demand:Price of good rises (falls) quantity demanded of good decreases (increases), ceteris paribus Individual Demand Schedules for movie tickets (per week): Ticket Tickets bought Price JoPat 7.40 $95 5.00 $137 3.60 $1810 2.80 $2913 . Pat's Demand.
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.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.
1. Basic Market Process: Mutually beneficial for demanders & suppliers to come together to make exchanges
$-price lowers transaction costs, coordinates exchanges, improving economic well-being Markets: Demand, Supply, and Coordinating Process
2. Law of Demand:
Price of good rises (falls) quantity demanded of good decreases (increases), ceteris paribus
Individual Demand Schedules for movie tickets (per week):
Ticket Tickets bought Price Jo Pat 7.40 $ 9 5 5.00 $ 13 7 3.60 $ 18 10 2.80 $ 29 13
4. Changes in Demand, ceteris paribus Demand Determinants:
Price of Related Goods
Substitutes vs. Compliments
Expectations of Future Prices
# of Buyers
5. Graphs: Change in Quantity Demanded for Movie Tickets Price of Movies Tickets Change, Quantity Demanded Changes, ceteris paribus
6. Graphs: Change in Demand for Movies Income Rises, then Demand?
Inferior Good, Demand?
Normal Good, Demand?
Population growth (more buyers), then demand?
Expectations of increase in ticket prices, demand this week?
7. Graphs: Change in Demand for Movies (cont.) Price of Popcorn Decreases, Demand for Movies?
Price of Video Rentals Decreases, Demand for Movies?
Change in Preferences
8. Demand as Marginal Benefit (Value) Curve Price is opportunity cost of consuming a good
Demand Curve reflects people’s marginal value of another unit of good
Price reflects “willingness to pay” or give up
Market Demand = Society’s Marginal Benefit (Value) of more of good
9. Concept of Supply Supplier costs are opportunity costs:
Suppliers must pay to use resources
Resource price reflects its next-best alternative
$-value of resources’ foregone opportunities is cost of supplying good
What’s cost (price) for land to build a home?
10. Law of Supply Good’s price rises (falls), quantity suppliers willing/able to supply rises (falls), ceteris paribus
Individual Supply Schedules for Movies (e.g., movies theaters A & B) per week:
Price per Ticket Tickets Supplied Firm A Firm B 7.40 $ 20 10 5.00 $ 13 7 3.60 $ 8 5 2.80 $ 5 3
12. Increasing Opportunity Costs of Supplying:
Producing more means attracting resources away from uses with higher opportunity costs
Drives up marginal costs of additional production. Why?
Price must rise to induce suppliers to supply more Most Supply Curves Slope Up
13. Increasing Opport. Costs of Supply (cont.)
Supply curve reflects opportunity cost of producing additional unit
Market Supply = Social Marginal Costs of providing good/activity
14. Supply Determinants: Changes (Shifts) in Supply, ceteris paribus Price of Relevant Resources
Expectations of Future Prices
Taxes and Subsidies
# of Sellers
15. Price of Tickets Change, Quantity Supplied Changes, ceteris paribus
Move along supply curve Graphs: Change in Quantity Supplied of Movie Tickets
16. Graphs: Changes in Supply for Movie Tickets Price of Resource Increase, Supply?
Expectations of higher (lower) future prices, Supply?
Tax per unit produced, Supply?
Subsidy per unit output, Supply?
17. Equilibrium Price and Quantity Market tends toward equilibrium price/quantity (PE and QE )
18. At P1, quantity supply > quantity demand
Surplus (QS - QD)
How will suppliers change price? Quantity supplied?
How does price change impact quantity demanded?
19. At P2 , QS < QD
Shortage (QD - QS)
Lines, waiting, violence,...
How will Suppliers change Price? Quantity supplied?
How does price change impact quant. demanded?
20. Consumer Surplus:
Difference btw. price buyers pay and what they’re willing to pay
$ measure of benefit of paying less than willingness to pay
Consumer Surplus of 1st unit is $7 - $5 = $2
Shaded Triangle: Total Consumer Surplus at market equilibrium
21. Supplier Surplus:
Difference btw. price suppliers receive and price willing to accept
$ measure of benefit of supplying good for more than willing to accept
Supplier Surplus of 1st unit is $5 - $1 = $4
Shaded Triangle: Total Supplier Surplus at market equilibrium
22. Competitive Markets and Allocative Efficiency Consumer Surplus = area ABPE
Supplier Surplus = area CBPE
Market Surplus = area ABC
Competitive Equilibrium maximizes market surplus
What about Q1?
23. Economic Efficiency in Equilibrium Market Demand = Society’s Marginal Value of additional unit of good
Price paid reflects buyers’ opportunity costs
Market Supply = Society’s Marginal Costs of providing more of good
At Equilibrium Market Price:
Social Marginal Benefit (Demand) = Social Marginal Cost (Supply)
Can’t re-allocate resources to make someone better off without hurting another
24. Production and Costs (Short Run) Focus on Total Cost, Average Total Cost, Marginal Cost
Total Costs (TC) = Cost of using inputs to produce any given output (Q)
Average Total Cost (ATC) = (TC) / (Q)
Marginal Cost (MC) = D in TC of producing extra unit of output = (D TC) / (D Q)
25. Marginal Physical Product (MPP) and Marginal Cost MPP = Extra output from hiring another unit of input (e.g., labor hour):
MPP = (D Output) / (D Input)
Law of Diminishing Marginal Returns
As more input added (to fixed inputs) at some point it’s additional productivity declines
Adding extra worker increases output, but by incrementally less than previous worker.
MPP may increase, but at some point declines
26. Diminishing Marginal Returns Underlies Concept of Marginal Cost (MC) MC = D in cost associated with D in Q = (D TC) / (D Q)
Changing output means hiring extra inputs
If MPP increases, MC of producing declines
But as diminishing marginal returns sets in, MPP declines
27. Diminishing marginal returns means MC rises
As input’s productivity (MPP) declines, why must (MC) increase?
If extra workers become less productive, must hire more to produce another unit of output
28. MPP & MC move in Opposite Directions (using examples in text)
29. Shape of ATC Curve: Average-Marginal Rule Marginal > Average means average rises
Marginal < Average means average falls
“Marginal” pulls “Average” in same direction
30. Relation Between Average Total Cost and Marginal Cost ATC decreasing when MC < ATC
ATC increasing when MC > ATC
At minimum ATC, MC = ATC
Minimized per unit cost
31. Theory of Perfect Competition Characteristics:
Sell identical product (perfect substitutes)
Perfect information for buying/selling decisions
No Barriers to Entry/Exit of firms
32. Competitive Firms are “Price Takers” Change price/output, no impact on market
Firm “sees” perfectly elastic demand for its good at market price. Why?
Firms can sell all they desire at market price
Price increase--Buyers substitute to other sellers
Price decrease--Firm loses profits
33. MR = extra revenue of selling 1 more unit = (DTR) / (DQ)
Firm “takes” price and decides how much to sell.
Firm’s MR = firm's demand = Market Price
Price Quantity Total Revenue Marginal Revenue (P) x (Q) (DTR) / (DQ)
$5 1 $5 $5
5 2 10 5
5 3 15 5 Firm’s Demand = Marginal Revenue (MR)
34. Firm’s demand = MR = Market Price
35. Profit Maximization Firm’s Profit Maximizing Output
Produce as long as MR > MC
Firm earns marginal profit (on last unit, not all units)
Producing when MR < MC means losses
Why not stop producing where MR > MC?
Profits maximized by producing up to:
MR ( = P) = MC
36. Graph: Firm’s Profit-Maximizing Output
37. Graphing Firm’s Profits (example) Profits = Revenue - Total Cost = (P) x (q) - (ATC) x (q) = (15)x(100) - (10)x(100) = 500 Profits (shaded area)
38. Long Run Competitive Equilibrium Firms Enter/Exit Industry & Inputs Variable
Long-Run Equilibrium Conditions:
Firms max profits producing at P (=MR) = MC
Firms Producing at Minimum ATC
Zero Econ Profit: P = ATC
No incentive for firms enter/exit industry. Why not?
No incentive to change plant size
39. Long Run Competitive Equilibrium P = MC = Minimum ATC
40. Industry Adjustment to Increase Demand Market Demand rises, Price rises
Raises firm’s demand/MR
Firm raises output (new P = MR = MC)
P > ATC, short-run profits attract firms.
New firms increase market supply, reducing P
This lowers firm’s demand/MR
Firms enter & P falls until 0 econ profit earned
Long-run equilibrium achieved
Firms profit-seeking drives adjustment process
41. Long Run Adjustment Process (Increased Market Demand)
42. Efficiency Criterion & Perfectly Competitive Markets (1) Resource Allocative Efficiency
Firms produce at MR = MC
Since MR = P, then P = MC
Marginal Benefit (demanders) = Marginal Cost (to suppliers of using society’s resources)
Society’s marginal value of resources equals Society’s opportunity costs of resources
Allocative Efficiency satisfied
43. Competitive Markets and Allocative Efficiency Consumer Surplus = area ABPE
Supplier Surplus = area CBPE
Market Surplus = area ABC
Competitive Equil. maximizes market surplus
What about Q1?
44. (2) Productive Efficiency
Firms produce at Min. ATC in long-run
Firms economizing on resource use Efficiency Criterion & Perfectly Competitive Markets (cont.)
45. Market Failures—Inefficient Resource Allocation Implications of Competitive Markets:
Market outcome efficient, or maximizes overall economic well-being.
Market Failures imply one or more assumptions of competitive model breaks down
Can some outside intervention “correct” the problem?
46. Types of Market Failure Imperfect Competition
Nonrival in consumption, cannot exclude people who don’t pay.
Inequitable Income/Welfare Distribution