Macroeconomics econ 2301 fall 2009
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Macroeconomics ECON 2301 Fall 2009. Marilyn Spencer, Ph.D. Professor of Economics Chapter 4. Exam 1, September 23. Study Chapters 1 – 4, including those portions of Ch. 4 we’ve finished in class. Come to the exam prepared to use one of the following choices: Textbook & notes 3”x5” card

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Macroeconomics econ 2301 fall 2009

MacroeconomicsECON 2301Fall 2009

Marilyn Spencer, Ph.D.

Professor of Economics

Chapter 4


Exam 1 september 23

Exam 1, September 23

  • Study Chapters 1 – 4, including those portions of Ch. 4 we’ve finished in class.

  • Come to the exam prepared to use one of the following choices:

    • Textbook & notes

    • 3”x5” card

    • Only your brains & a pencil

  • Scantron sheet will be provided.


Teaching project orientation

Teaching Project Orientation

  • Fill out these 2 forms ahead of time, to take with you:

    • Volunteer Conduct Standards

    • Volunteer Profile

  • Select a teaching partner.

  • Attend one of these 90-minute sessions, in FC 101, Sept. 23 or Sept. 24:

    • 3 p.m.

    • 5 p.m.


Don t forget to send this in bonus extra credit opportunity

Don’t forget to send this in: Bonus Extra Credit Opportunity

  • Attend the presentation, “Is America Going Socialist,” given by guest speaker, Dr. Daniel Mitchell of the CATO Institute, Thursday, September 17, 4:00-5:00 p.m.

  • Sign in with me.

  • Send a 50-100 word summary of the economic issues before class, Sept. 28, to [email protected]

    4 points possible


Macroeconomics econ 2301 fall 2009

Chapter 4: Extensions of Demand and Supply

Analysis


Learning objectives

Learning Objectives

Discuss the essential features of the price system

Evaluate the effects of changes in demand and supply on the market price and equilibrium quantity

Understand the rationing function of prices

Explain the effects of price ceilings

Explain the effects of price floors

Describe various types of government-imposed quantity restrictions on markets


Changes in demand and supply

Changes in Demand and Supply

  • Changes in supply and demand create a disequilibrium.

  • The market price and quantity adjust to a new equilibrium.


Review of the d side of the mkt

Review of The D Side of the Mkt.:

Variables That SHIFT Market Demand

  • Price of related goods

    • SubstitutesGoods and services that can be used for the same purpose.

    • ComplementsGoods that are used together.

  • Income

    • Normal goodA good for which the demand increases as income rises and decreases as income falls.

    • Inferior goodA good for which the demand increases as income falls, and decreases as income rises.


Macroeconomics econ 2301 fall 2009

The Demand Side of the Market

Variables That Shift Market Demand

Tastes

Population and demographics

  • DemographicsThe characteristics of a population with respect to age, race, and gender.

  • Expectations


  • Macroeconomics econ 2301 fall 2009

    Estimating the Demand for Printers at Hewlett-Packard

    Inaccurate forecasts in 2001 caused Hewlett-Packard to produce more printers than they could sell.


    Macroeconomics econ 2301 fall 2009

    When two goods, X and Y, are complements, which of the following occurs?

    • a. An increase in the price of good X leads to an increase in the price of good Y.

    • b. An increase in the price of good X leads to a decrease in the quantity demanded of good Y.

    • c. An increase in the price of good X leads to a decrease in the quantity demanded of good Y.

    • d. An increase in the price of good X leads to an increase in the quantity demanded of good Y.


    The demand side of the market

    3 - 1

    Variables That Shift MarketDemand Curves

    The Demand Side of the Market

    Variables That Shift Market Demand


    The demand side of the market1

    Variables That Shift MarketDemand Curves

    3 - 1 (continued)

    The Demand Side of the Market

    Variables That Shift Market Demand


    Macroeconomics econ 2301 fall 2009

    Refer to the graph below. Which of the following moves best describes what happens when a change in the price of printers affects the market demand for printers?

    • a.A move from A to B.

    • b.A move from A to C.

    • c.Either move from A to B or A to C.

    • d.None of the above.


    Figure 4 1 shifts in demand and in supply determinate results panel a

    Figure 4-1 Shifts in Demand and in Supply: Determinate Results, Panel (a)


    Figure 4 1 shifts in demand and in supply determinate results panel b

    Figure 4-1 Shifts in Demand and in Supply: Determinate Results, Panel (b)


    Macroeconomics econ 2301 fall 2009

    Which of the following defines a supply curve?

    • a. The quantity of a good or service that a firm is willing to supply at a given price.

    • b. A table that shows the relationship between the price of a product and the quantity of the product supplied.

    • c. A curve that shows the relationship between the price of a product and the quantity of the product supplied.

    • d. None of the above.


    The supply side of the market

    The Supply Side of the Market

    The Law of Supply

    • Law of supplyHolding everything else constant, increases in price cause increases in the quantity supplied, and decreases in price cause decreases in the quantity supplied.


    The supply side of the market1

    The Supply Side of the Market

    Variables That Shift Supply

    • Price of inputs

    • Technological change

      • A positive or negative change in the ability of a firm to produce a given level of output with a given amount of inputs.

    • Prices of substitutes in production

    • Expected future prices

    • Number of firms in the market


    The supply side of the market2

    3 - 2

    Variables That Shift MarketSupply Curves

    The Supply Side of the Market

    Variables That Shift Supply


    The supply side of the market3

    Variables That Shift MarketSupply Curves

    3 - 2 (continued)

    The Supply Side of the Market

    Variables That Shift Supply


    The supply side of the market4

    The Supply Side of the Market

    Variables That Shift Supply


    Macroeconomics econ 2301 fall 2009

    Refer to the graphs below. Each graph refers to the supply for printers. Which best describes the impact of an increase in productivity?

    • a. The graph on the left.

    • b. The graph on the right.

    • c. Both graphs.

    • d. Neither graph.


    Figure 4 1 shifts in demand and in supply determinate results panel c

    Figure 4-1 Shifts in Demand and in Supply: Determinate Results, Panel (c)


    Figure 4 1 shifts in demand and in supply determinate results panel d

    Figure 4-1 Shifts in Demand and in Supply: Determinate Results, Panel (d)


    Macroeconomics econ 2301 fall 2009

    The Falling Price of

    Large Flat-Screen Televisions

    Corning’s breakthrough spurred the manufacture of LCD televisions in Taiwan, South Korea, and Japan, and an eventual decline in price.


    Changes in demand and supply1

    Changes in Demand and Supply

    Changes in supply and demand create a disequilibrium.

    The market price and quantity adjust to a new equilibrium.


    Changes in demand and supply cont d

    Changes in Demand and Supply(cont'd)

    • Summary

      • Increases in demand increase equilibrium price and quantity.

      • Decreases in demand decrease equilibrium price and quantity.

      • Increases in supply decrease equilibrium price and increase quantity.

      • Decreases in supply increase equilibrium price and decrease quantity.


    Macroeconomics econ 2301 fall 2009

    When BOTH Demand & Supply Are Shifting:

    High Demand and Low Prices in the Lobster Market:

    Supply and demand for lobster both increase in summer, but the supply increase EXCEEDS the demand increase; therefore, equilibrium price falls.


    Changes in demand and supply cont d1

    Changes in Demand and Supply (cont'd)

    When both demand and supply increase:

    Change in price is indeterminate

    Quantity will increase

    When both demand and supply decrease:

    Change in price is indeterminate

    Quantity will decrease


    Changes in demand and supply cont d2

    Changes in Demand and Supply (cont'd)

    When supply decreases and demand increases:

    Price will increase

    Change in quantity is indeterminate

    When supply increases and demand decreases:

    Price will decrease

    Change in quantity is indeterminate


    Macroeconomics econ 2301 fall 2009

    Remember: A Change in a Good’s Price Does Not Cause the Demand or Supply Curve to Shift.


    Changes in demand and supply cont d3

    Changes in Demand and Supply (cont'd)

    Price Flexibility and Adjustment Speed

    Prices quite flexible in unfettered markets can be less flexible in other market scenarios.

    May experience indirect adjustments such as hidden payments, quality changes

    May not reach equilibrium right away


    Changes in demand and supply cont d4

    Changes in Demand and Supply (cont'd)

    Adjustment speed

    Market characteristics influence adjustment speed.

    Markets may overshoot in the adjustment process.

    Markets are subject to energy shocks, labor strikes, severe weather.


    Example why gasoline prices increased over the past 3 years

    Example: Why Gasoline Prices Increased over the Past 3 Years

    • One factor—an increase in demand, shown by a rightward shift in the demand curve

    • Another factor—a reduction in supply, shown by a leftward shift in the supply curve

    • As a result, the equilibrium price of gasoline increased.


    The price system and markets cont d

    The Price System and Markets (cont'd)

    Transaction Costs: The costs associated with exchange

    Examples

    Price shopping

    Determining quality

    Determining reliability

    Service availability

    Cost of contracting


    The rationing function of prices

    The Rationing Function of Prices

    Methods of non-price rationing include:

    Rationing by queues (waiting in line)

    Rationing by random assignment, and/or coupons

    First come, first served

    Political power

    Physical force

    Random assignment

    Coupons


    The rationing function of prices cont d

    The Rationing Function of Prices (cont'd)

    The essential role of rationing (with scarcity rationing must occur)

    We must choose the rationing mechanism: price or non-price.

    Price rationing leads to most efficient use of available resources; all gains from mutually beneficial trade are captured.


    The rationing function of prices cont d1

    The Rationing Function of Prices (cont'd)

    Question

    If price rationing is the most efficient is it the “best” way to ration?

    Answer

    Economists cannot say which system is “best.” They can say rationing via the price system leads to the most efficient use of available resources.


    Bonus extra credit

    Bonus Extra Credit

    • Attend the lecture, “Healthcare Reform: The Good, the Bad & the Ugly,” given by Dr. Raj Ambay, member of the Board of Directors of the American Medical Association:

      • Tuesday, Sept. 29, 4-5 p.m.

      • Bay Hall, Room 104

    • Email a 50-100 word summary before class, October 7, to [email protected]

      4 points possible


    Extra credit 5

    Extra Credit #5

    • Use some credible news source to read about Ben Bernanke’s 9/23 announcement of the decisions made by the Federal Reserve’s Open Market Committee meeting (Sept. 22-23).

    • Email a 50-100 word summary before class, October 7, to [email protected]

      4 points possible


    Wednesday september 30

    Wednesday, September 30

    • We will not hold class on Wed., Sept. 30.

    • You should use those 75 minutes to work on your research project or teaching project.


    One type of government policy imposed price controls

    One Type of Government Policy: Imposed Price Controls

    Price Controls: Government-mandated minimum or maximum prices

    Price Ceiling: A legal maximum price

    Price Floor: A legal minimum price


    Government imposed price controls cont d

    Government-Imposed Price Controls (cont'd)

    Price ceiling and illegal (black) markets

    Price ceilings may prevent the equilibrium price from being achieved if it is above the ceiling price.

    Black Market: A market in which price-controlled goods are sold at an illegally high price


    Figure 4 3 black markets

    Figure 4-3 Black Markets


    The policy of controlling rents

    The Policy of Controlling Rents

    The functions of rental prices:

    Promote the efficient maintenance and construction of housing

    Allocate existing housing

    Ration the use of housing


    The policy of controlling rents cont d

    The Policy of Controlling Rents (cont'd)

    Rent controls and construction

    Controls discourage construction

    With a 16% vacancy rate and no controls, Dallas recently built 11,000 new rental units.

    With a 1.6% vacancy rate and controls, San Francisco recently built 2,000 new rental units.


    The policy of controlling rents cont d1

    The Policy of Controlling Rents (cont'd)

    Effects on the existing supply of housing and current use of housing

    Property owners cannot recover costs

    Maintenance, repairs, capital improvements

    Rations the current use of housing

    Reduces mobility, e.g., New York’s “housing gridlock”


    The policy of controlling rents cont d2

    The Policy of Controlling Rents (cont'd)

    Attempts to evade rent controls

    Forcing tenants to leave

    Tenants subletting apartments

    Housing courts


    The policy of controlling rents cont d3

    The Policy of Controlling Rents (cont'd)

    Who gains and who loses from rent controls?

    Losers

    Property owners

    Some low-income individuals

    Gainers

    Upper-income professionals


    Price floors in agriculture

    Price Floors in Agriculture

    Support Price: The governmentally established price floor

    Usually associated with agricultural products

    Later we’ll study the minimum wage with this same analysis


    Figure 4 4 agricultural price supports

    Figure 4-4 Agricultural Price Supports


    Price floors in agriculture cont d

    Price Floors in Agriculture (cont'd)

    Questions

    How could the government keep the price from falling?

    Who benefits from agricultural price supports?


    Policy example king cotton receives royal government subsidies

    Policy Example: King Cotton Receives Royal Government Subsidies

    Every year, the federal government gives a direct payment based on the average size of the farmer’s past planting.

    After the crop is planted, the farmer can borrow from the government, using the newly sown cotton as collateral.

    If the world price of cotton falls below a price floor of 65 cents per pound, the grower receives a payment from the government--compensating the farmer for surplus cotton the farmer has planted—equal to 13 cents per pound.

    If the world price of cotton falls below 52 cents per pound, farmers turn their cotton over to the government, which sells the cotton at the world price and absorbs loan losses. Thus the government usually provides about 80% of all revenues received by cotton farmers.

    What would happen to cotton farmers’ revenues if the price floor were raised? Lowered?


    Price floors in the labor market

    Price Floors in the Labor Market

    Minimum Wage: A wage floor, legislated by government, setting the lowest hourly wage rate that firms may legally pay their workers


    Figure 4 5 the effect of minimum wages

    Figure 4-5 The Effect of Minimum Wages


    Quantity restrictions

    Quantity Restrictions

    Governments can impose quantity restrictions, most obvious - banning ownership or trading of a good

    Human organs

    Drugs

    Hospital beds

    Gold from 1933 to 1973


    Quantity restrictions cont d

    Quantity Restrictions (cont'd)

    Government Prohibitions and Licensing Requirements

    Some commodities cannot be purchased at all legally; others require a license

    Import Quota: Supply restriction that prohibits the importation of more than a specified quantity of a particular good


    Summary of learning objectives

    Summary of Learning Objectives

    Essential features of the price system

    A price system (market system) allows prices to respond to changes in supply and demand for different commodities.

    The terms of exchange – prices - are communicated in markets, tending to minimize transactions costs.


    Summary of learning objectives cont d

    Summary of Learning Objectives (cont'd)

    How changes in demand and supply affect market price and equilibrium quantity

    Increases in demand increase equilibrium price and quantity; decreases in demand decrease equilibrium price and quantity.

    Increases in supply decrease market price and increase equilibrium quantity; decreases in supply increase market price and decrease equilibrium quantity.

    When both demand and supply shift at the same time, the result is indeterminate.


    Summary discussion of learning objectives cont d

    Summary Discussion of Learning Objectives (cont'd)

    The rationing function of prices

    In a market system, prices ration scarce goods and services.

    Other ways of rationing include first come, first served; political power; physical force; random assignment; and coupons.


    Summary discussion of learning objectives cont d1

    Summary Discussion of Learning Objectives (cont'd)

    The effects of price ceilings

    A price ceiling set below the market (equilibrium) price results in a shortage.

    The resulting shortage can lead to non-price rationing devices and black markets.

    The effects of price floors

    If the price floor is set above the market price, a surplus results.

    A price floor can take the form of a government-imposed price support or minimum wage.


    Summary discussion of learning objectives cont d2

    Summary Discussion of Learning Objectives (cont'd)

    The rationing function of prices

    In a market system, prices ration scarce goods and services.

    Other ways of rationing include first come, first served; political power; physical force; random assignment; and coupons.

    The effects of price ceilings

    A price ceiling set below the market (equilibrium) price results in a shortage. The resulting shortage can lead to non-price rationing devices and black markets.


    Summary discussion of learning objectives cont d3

    Summary Discussion of Learning Objectives (cont'd)

    The effects of price floors

    If the price floor is set above the market price, a surplus results. A price floor can take the form of a government-imposed price support or minimum wage.

    Government-imposed restrictions on market quantities

    Bans on sale or ownership

    Licensing restrictions

    Import quotas


    Assignment to be completed before class september 23

    Assignment to be completed before class, September 23:

    Study for Exam 1!

    Assignment to be completed before class, September 28:

    Pre-read Ch.6& look over end-of-chapter questions:

    14th ed: Problems 6-2, 6-4, 6-6, 6-10 & 6-12, pp. 156-158

    15th ed: Problems 6-2, 6-4, 6-8, 6-12 & 6-14, pp. 156-158


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