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Market Model. Supply and Demand. Markets. Institutions that allow buyers and sellers to exchange Demand Supply Examples Posted-price Haggling Auctions. Equilibrium Price/Quantity. Demand Curve. Demand: how much consumer are willing and able to buy at different prices. Pepsi Auction.

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market model

Market Model

Supply and Demand

markets
Markets
  • Institutions that allow buyers and sellers to exchange
    • Demand
    • Supply
  • Examples
    • Posted-price
    • Haggling
    • Auctions

Equilibrium Price/Quantity

demand curve
Demand Curve
  • Demand: how much consumer are willing and able to buy at different prices

Pepsi Auction

market equilibrium
Market Equilibrium

price

S1

P1

At P1: Qd = Qs

The market “clears”

D1

quantity

Q1

Note: Quantity Demanded vs Demand

demand shifters
Demand Shifters
  • Preferences
  • Population
  • Income
    • Normal goods
    • Inferior goods
  • Price of Related Goods
    • Substitutes
    • Complements
  • Expectations

If income rises, demand rises

If income rises, demand falls

If Px rises, demand for Y rises

If Px rises, demand for Y falls

supply shifters
Supply Shifters
  • Number of firms
  • Cost of inputs
  • Technology
  • Expectations
slide7

Market Disequilibrium

price

Surplus

S1

Surplus

PHi

At PHi: Qd < Qs

P1

 Pressure on price to fall

PLo

Shortage

D1

At PLo: Qd > Qs

Shortage

 Pressure on price to rise

Qd

quantity

Qd

Qs

Q1

Qs

slide8

In the fall of 1903 Ohio Tech students for the first time had to pay to attend university football games; as a result, every game had many empty seats. This decline in attendance suggests that:

  • the demand for football games declined.
  • attending football games is an inferior good.
  • attending football games is a normal good.
  • the quantity demanded of football games fell.
slide9

A newspaper story recently reported that the price of new cars has increased, and the quantity of new cars sold has dropped. The price and quantity changes were probably caused by:

  • a decrease in buyers\' incomes.
  • an increase in buyers\' incomes.
  • an increase in production costs.
  • a decrease in production costs.
slide10

Consider the market for computers. Suppose that the price of plastic decreases and the income of consumers decreases. What may we conclude about the equilibrium price and quantity of computers?

  • price will fall and quantity is indeterminate.
  • quantity will rise and price is indeterminate.
  • quantity will rise and price will rise.
  • both price and quantity will be indeterminate.
market efficiency
Market Efficiency
  • Invisible Hand Theorem
    • Adam Smith: Wealth of Nations (1776)
    • Competitive, free markets will maximize social welfare

“It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our necessities but of their advantages.”

consumer surplus
Consumer Surplus
  • Net gain to consumers from buying at a single price
  • CS = Buyer Value - Price

Price

Buyer Values (or WTP)

$50

Consumer Surplus

Market price

$25

Demand

Total Expenditure

quantity

1

5

producer surplus
Producer Surplus
  • Net gain to sellers from selling at a single price
  • PS = Price – Seller Cost

Price

Supply

Market price

$25

Producer Surplus

Seller Costs

$10

Total Cost

3

quantity

which of the following is an example of consumer surplus
Which of the following is an example of consumer surplus?
  • Bo Yuan buys a hamburger for $2 and tells you she would not have paid a penny more.
  • Carrie believes the price she paid for her computer was too high.
  • Logan buys a paper tablet for $2 and finds the same good at another store for $1.50
  • Cody would have paid $20 for a new compact disc but paid only $15.
social welfare
Free Market Outcome: P*, Q*

Maximizes social welfare: SW = CS + PS

Social Welfare

Price

Supply

CS

Deadweight Loss

P*

PS

Demand

quantity

Q*

slide16

Garden of Eden

Tradeoff: Efficiency vs. Equity

Adam and Eve in the Garden of Eden, by Titian (c. 1550)

slide17

Supply

Demand

slide18

Session 4

Session 2

Session 1

Session 3

government intervention
Government Intervention
  • Why does government intervene?
    • Market failures
      • Monopoly
      • Externalities
      • Public goods
    • Fairness
  • How does government intervene?
    • Price Controls
    • Quantity Controls
    • Regulations

All generate some DWL

price ceiling rent control

DWL

Price Ceiling: Rent Control
  • Free Market: R1, Q1
  • Gov’t imposes rent ceiling at R0

At R0: Qd > Qs  shortage

  • Non-Price Rationing
    • Black Market (Bribes)
    • Discrimination
    • Wait / Search
    • Lottery

Rent

S1

RF

R1

R0

D1

QS

Q1

QD

Apartments

Shortage

other examples of price ceilings
Other Examples of Price Ceilings
  • Gasoline (1970s)
  • Usury laws
  • Diagnostic Related Groups (DRGs)
slide22

Rapidly increasing health costs have been a major political concern since at least 1992. Suppose that to control rising health costs the government sets the maximum price for a normal doctor\'s visit at $20, but the current market price is $40. Then:

  • more people will try to visit the doctor, but the doctor will see fewer patients.
  • the same number of people will try to visit the doctor, and the doctor will see the same number of patients.
  • more people will be able to see the doctor, since the price is lower
  • fewer people will try to see the doctor, and the doctors will see fewer patients
price floor minimum wage
Price Floor: Minimum Wage
  • Fair Labor Standards Act (1938)
    • 1938: $0.25
    • 2008: $6.55

Federal minimum wage will rise to $ 7.25 this summer

Ohio’s minimum wage went up to $7.30 this past January

slide24

States with minimum wage rates higher than the Federal rate

States with minimum wage rates the same as the Federal rate

States with minimum wage rates lower than the Federal rate

States with no minimum wage law

slide25

minimum wage in 2008 dollars

minimum wage in current dollars

2009 poverty guidelines 48 contiguous states and dc
2009 Poverty Guidelines (48 Contiguous States and DC)

Source: http://aspe.hhs.gov/poverty/09poverty.shtml

labor market
Labor Market
  • Free Market: W1, Q1
    • no unemployment: QD = QS

(full-time income?)

  • Gov’t imposes min. wage at W2
    • at W2: QD < QS
    • Unemployment occurs
  • How can employers offset impact?
    • Reduce hours of work
    • Reduce fringe benefits
    • Raise price
    • Reduce quality
    • Hire illegal aliens

unemployment

Wage

S1

W2 = $7

W1= $6

DWL

D1

QD

Q1

QS

Labor

layoffs

new entrants

B

W

slide31

Suppose that the equilibrium wage in the low-skilled labor market is $8.00. Further, suppose the federal government raises the minimum wage to $7.25 an hour from its present level of $6.55. The government’s action of increasing the minimum wage will result in:

  • a decrease in unemployment
  • an increase in unemployment
  • a shortage of low-skilled labor.
  • neither a shortage nor a surplus of labor in the low-skilled labor market.
taxes
Taxes
  • Sales Tax: percentage of sales
  • Excise Tax: fixed dollar amount per unit

Sin Taxes?

taxes33
Taxes
  • Sales Tax: percentage of sales
  • Excise Tax: fixed dollar amount per unit
  • Buyer Tax vs Seller Tax
    • Economic burden does not depend on legal burden

Sin Taxes?

excise tax cigarettes
Excise Tax: Cigarettes
  • Free market:
    • P = $4.00
    • Q = 27.4 b
    • Consumer Spending ≈ $110 b
  • Gov’t imposes tax = $1/pack
  • Supply shifts upward by $1
    • Price rises (by less than $1)
    • Quantity falls
  • Economic burden of tax is split between buyers and sellers

S2

price

S1

buyer pays

4.40

Tax Revenue

tax = $1

4.00

3.40

seller keeps

D1

cigarettes

27.4

25.8

(Billions of packs)

slide39

Suppose the government imposes a $10 excise tax on the sale of sweaters by charging suppliers $10 for each sweater sold. Based on economic analysis, we would predict that:

  • The price of sweaters will increase by $10.
  • The price of sweaters will increase by more than $10.
  • Consumers of sweaters will bear the entire burden of the tax.
  • The price of sweaters will increase by less than $10.
  • (a) and (c) are true.
quantity controls
Quotas

International trade: agricultural goods, textiles

Taxis, liquor licenses

Prohibition

What goods and services are illegal to trade?

Why prohibit trade?

Victimless crime?

Immoral?

Externalities?

Quantity Controls

Drugs

Prostitution

Body organs

Babies

Guns

Exotic animals

Gambling

war on drugs
Intrinsic Effects

Health Damages

Spousal/Family abuse

DUI

Lower worker productivity

Black Market Effects

Crime

Property

Murder

Overdose

Uncertain product quality

Binge consumption

Clogged prisons

Corruption

Reduced civil liberties

Alcohol: 125m users-----85,000 annual deaths

Tobacco: 70m users-----400,000 annual deaths

Marijuana: 15m users-----0 annual deaths

Cocaine: 2m users----

Heroin: 0.2m users----

17,000 annual deaths

War on Drugs

Tradeoff: Intrinsic Effects v. Black Market Effects

marijuana market
Marijuana Market
  • Prohibition: P1, Q1
  • Legalization: P2, Q2
    • Consumption will rise

(how much?)

S1

price

S2

$200 = P1

P2

Tradeoff:

> More intrinsic costs

> Less black market effects

D1

Q1

Q2

Marijuana

  • What happens in the market for substitutes?
  • What happens in the market for complements?
when a government imposes penalties on both sellers and buyers of an illegal good
When a government imposes penalties on both sellers and buyers of an illegal good,
  • the price of the good falls as does the quantity purchased.
  • the price of the good falls, but the quantity purchased may increase or decrease.
  • the price of the good rises, but the quantity purchased may increase or decrease.
  • the quantity purchased of the good decreases, but the price may rise or fall.
slide47

"If the DEA intercepts 100 tons of cocaine, the supply of cocaine will fall. This will cause the price to rise, which will increase the supply back to its original position."

True, false, or uncertain. Explain.

which of the following influences does not shift the supply curve
Which of the following influences does NOT shift the supply curve?
  • an increase in consumer income
  • a decrease in the price firms expect to receive in the future
  • a rise in the wages paid workers
  • development of new technology
market equilibrium is a situation in which
Market equilibrium is a situation in which:
  • consumers obtain the highest quantity at the lowest prices
  • producers obtain the highest price for a given quantity sold
  • quantity supplied equals quantity demanded at a single price
  • the market yields a substantial surplus of goods produced
slide50

The number of people seeking to obtain tickets to an OSU football game is nearly always larger than the number of available tickets (and seats) to the game. This is evidence that the price of the ticket is

  • above the equilibrium level
  • below the equilibrium level
  • too high for many to afford
  • at the equilibrium level because the number of tickets bought always equals the number of tickets for sale.
slide51

Which of the following statements uses incorrect terminology:A: "The recent fare war among the major airlines has increased the demand for air travel.“B: "The terrorist attack on America has caused the demand for air travel to fall."

  • A is incorrect; B is correct
  • A is correct; B is incorrect
  • A and B are correct
  • A and B are incorrect
which of the graphs below best illustrates a situation in which price will fall
Which of the graphs below best illustrates a situation in which price will fall?
  • The graph on the left
  • The graph on the right
  • Both graphs
  • Neither graph
slide53

Between 2002 and 2003 bad weather affected the area where most of the world’s vanilla is grown. Which of the graphs below best depicts that situation?

  • A
  • B
  • C
  • D
slide54

After bad weather affected most of the world’s natural vanilla, which of the graphs below best depicts what happened in the market for synthetic vanilla?

  • A
  • B
  • C
  • D
slide55

You notice that the price of DVD players falls and the quantity of DVD players sold increases. This set of observations can be the result of:

  • a shift of the demand curve for DVD players to the right
  • a shift of the demand curve for DVD players to the left
  • a shift of the supply curve of DVD players to the right
  • a shift of the supply curve of DVD players to the left
slide56

In 1979 a revolution overthrew the government of Iran, disrupting oil production and causing the price of crude oil to increase by 300 percent. In most of the world this price increase:

  • led to severe shortages of gasoline
  • did not lead to shortages
  • led to substantial surpluses
  • did not affect supply or demand for gasoline substantially
slide57
Most economists believe that the U.S. minimum wage has relatively little effect because it is set too:
  • low and therefore is nonbinding
  • high and therefore is nonbinding
  • low and therefore is binding
  • high and therefore is binding
which of the following is an example of a black market
Which of the following is an example of a black market?
  • a tenant in a rent controlled apartment subletting at a higher rent
  • the purchase of an inferior radio at a department store
  • waiting in line during the oil shortages of the 1970s
  • none of the above
slide59

This figure shows the supply and demand for clams. The government imposes a quota limiting sales of clams to 8,000 lbs. The quota rent per pound is:

  • $2.00
  • $4.00
  • $5.00
  • $6.00
slide60
A consumer\'s willingness to pay for a surfboard is the minimum price at which he or she would buy the surfboard
  • True
  • False
slide61
To the extent that eBay moves the markets for collectibles and other items to equilibrium, it can be said to:
  • maximize consumer surplus
  • maximize producer surplus
  • maximize total surplus
  • create a market failure
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