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Macroeconomics ECON 2301 Fall 2009

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

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  1. MacroeconomicsECON 2301Fall 2009 Marilyn Spencer, Ph.D. Professor of Economics Chapter 4

  2. 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.

  3. 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.

  4. 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 marilyn.spencer@tamucc.edu. 4 points possible

  5. Chapter 4: Extensions of Demand and Supply Analysis

  6. 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

  7. Changes in Demand and Supply • Changes in supply and demand create a disequilibrium. • The market price and quantity adjust to a new equilibrium.

  8. 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.

  9. 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

  10. Estimating the Demand for Printers at Hewlett-Packard Inaccurate forecasts in 2001 caused Hewlett-Packard to produce more printers than they could sell.

  11. 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.

  12. 3 - 1 Variables That Shift MarketDemand Curves The Demand Side of the Market Variables That Shift Market Demand

  13. Variables That Shift MarketDemand Curves 3 - 1 (continued) The Demand Side of the Market Variables That Shift Market Demand

  14. 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.

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

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

  17. 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.

  18. 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.

  19. 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

  20. 3 - 2 Variables That Shift MarketSupply Curves The Supply Side of the Market Variables That Shift Supply

  21. Variables That Shift MarketSupply Curves 3 - 2 (continued) The Supply Side of the Market Variables That Shift Supply

  22. The Supply Side of the Market Variables That Shift Supply

  23. 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.

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

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

  26. 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.

  27. Changes in Demand and Supply Changes in supply and demand create a disequilibrium. The market price and quantity adjust to a new equilibrium.

  28. 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.

  29. 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.

  30. 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

  31. 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

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

  33. 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

  34. 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.

  35. 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.

  36. 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

  37. 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

  38. 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.

  39. 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.

  40. 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 marilyn.spencer@tamucc.edu. 4 points possible

  41. 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 marilyn.spencer@tamucc.edu. 4 points possible

  42. 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.

  43. 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

  44. 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

  45. Figure 4-3 Black Markets

  46. 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

  47. 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.

  48. 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”

  49. The Policy of Controlling Rents (cont'd) Attempts to evade rent controls Forcing tenants to leave Tenants subletting apartments Housing courts

  50. 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

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