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Mpp#010+more.on.markets.(36)
Mpp#010+more.on.markets.(36)
Mpp#010+more.on.markets.(36)
Mpp#010+more.on.markets.(36)
Mpp#010+more.on.markets.(36)
Mpp#010+more.on.markets.(36)
Mpp#010+more.on.markets.(36)
Mpp#010+more.on.markets.(36)
Mpp#010+more.on.markets.(36)
Mpp#010+more.on.markets.(36)
Mpp#010+more.on.markets.(36)
Mpp#010+more.on.markets.(36)
Mpp#010+more.on.markets.(36)
Mpp#010+more.on.markets.(36)
Mpp#010+more.on.markets.(36)
Mpp#010+more.on.markets.(36)
Mpp#010+more.on.markets.(36)
Mpp#010+more.on.markets.(36)
Mpp#010+more.on.markets.(36)
Mpp#010+more.on.markets.(36)
Mpp#010+more.on.markets.(36)
Mpp#010+more.on.markets.(36)
Mpp#010+more.on.markets.(36)
Mpp#010+more.on.markets.(36)
Mpp#010+more.on.markets.(36)
Mpp#010+more.on.markets.(36)
Mpp#010+more.on.markets.(36)
Mpp#010+more.on.markets.(36)
Mpp#010+more.on.markets.(36)
Mpp#010+more.on.markets.(36)
Mpp#010+more.on.markets.(36)
Mpp#010+more.on.markets.(36)
Mpp#010+more.on.markets.(36)
Mpp#010+more.on.markets.(36)
Mpp#010+more.on.markets.(36)
Mpp#010+more.on.markets.(36)
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Mpp#010+more.on.markets.(36)

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    • 1. More on MarketsConsidering Equilibrium andEquilibrium’s Interactions with DEMAND & SUPPLY 1
    • 2. Relative Scarcity How scarce is one good or service compared to all other goods and services? Relative scarcity is the relationship between SUPPLY and DEMAND. Price represents the measurement of relative scarcity. What determines the price of a work of art, or an antique, or an old stamp or coin? 2
    • 3. What is an Equilibrium Price? The measure of relative scarcity. Relative scarcity is the relation between SUPPLY and DEMAND. How scarce is one product compared to all others? The unit of measurement is the price in the domestic currency. (e.g. $43.37) 3
    • 4. Relative Prices: the Why? Diamond $50,000Insulin $5 4
    • 5. Price: as the Indicator of Relative Scarcity $ $ $how many units on the Scarcometer? 5
    • 6. Order these Products on the basis of Relative Scarcity yacht candy bar nice dinner for two in San Francisco mini truck laptop computer 6
    • 7. Order these Products on the basis of Relative Scarcity1 yacht5 candy bar4 nice dinner for two in San Francisco2 mini truck3 laptop computer 7
    • 8. the Equilibrium Price asthe Measure of Relative Scarcity Feet and inches measure distance. Pounds and ounces measure weight. Degrees Fahrenheit measure heat. Cups and pints and quarts measure volume. Dollars and cents measure relative scarcity in the U.S. economy. 8
    • 9. Relative Scarcity is NOT the same as rare  Rare tropical disease is not scarce (no DEMAND ).  Gold is more scarce than water even though water is essential for life. (the SUPPLY of water is greater than the SUPPLY of gold.)  Some collectors’ items are more scarce than others depending upon SUPPLY & DEMAND . Their prices go up or down depending upon changes in SUPPLY & DEMAND . 9
    • 10. Relative Scarcity Relative scarcity is not a subjective evaluation of worth or value or social contribution although some of those considerations may be included in the DEMAND function. To the extent someone can manipulate SUPPLY or DEMAND they may be able to influence relative scarcity and thus the price ~ but price remains the ultimate measurement of relative scarcity.  OPEC  Advertising In a market with CIIP, price is the accurate measure of the relative scarcity of a good or service. 10
    • 11. Relative Scarcity is the relationship existing between SUPPLY and DEMAND. is measured by the Equilibrium Price is not the same as rare is not a matter of SUPPLY alone Is neither “fair” nor “unfair” 11
    • 12. The Law of Supply Once all “other factors” have been considered, the quantity supplied of a good or service varies directly with the price of the good or service; so if price goes up then quantity supplied goes up. The influence of price on quantity supplied is a short run phenomenon and assumes no change in “other factors”. The Principle of Exchange – if the price received by the supplier is greater than all production costs the supplier will SUPPLY the product. Price is an incentive to suppliers 12
    • 13. Diminishing Marginal Returns Given some fixed inputs, additions of the variable inputs will yield lower additional products. Since each of the variable inputs are paid the same, marginal costs increase as production increases. Marginal resource costs rise as production increases. Therefore, suppliers must receive a higher price to supply a greater quantity, assuming no change in “other factors”. 13
    • 14. Price Elasticity of SUPPLY Measures the strength of sellers’ reactions to a price change. How much will quantity supplied change as a result of a price change? Depends upon suppliers’ ability to increase or decrease production in the short run. How flexible are the resources used in production? 14
    • 15. The Law of Demand Once all other factors have been considered, the quantity demanded of a good or service varies inversely with the price of the good or service. Price rises, quantity demanded falls; price falls, quantity demanded rises. The Principle of Exchange – if the price asked is greater than the expected benefit, the demander will not buy the product; if the price asked is less than the expected benefit, the demander will buy the product. Price is a disincentive to buyers. Higher prices send buyers in search of substitutes. 15
    • 16. Diminishing Marginal Utility and DEMAND Utility is the benefit consumers get from consuming goods and services As consumers consume more of a product, the additional utility from additional units of the product decreases – the Law of Diminishing Marginal Utility To entice buyers to buy more as their marginal utility falls the price must also fall thereby making the price lower than the expected benefit. (the Principle of Exchange ) 16
    • 17. Price Elasticity of DEMAND Measures the strength of buyers’ reactions to a price change. How much will quantity demanded change as a result of a price change? Depends upon  availability of substitutes  Percentage of total expenditures  time 17
    • 18. Allocative Efficiency At the equilibrium price the marginal utility of consuming the product is equal to the marginal resource cost of producing the product. From society’s perspective this is the optimal resource allocation to this particular activity Attempts to change the price of a product through regulation will distort incentives and cause some amount of resource misallocation. 18
    • 19. @ a Price Above Equilibrium If a price is set above equilibrium, a surplus exists. (wherein the quantity supplied is greater than the quantity demanded at the higher price.) Without artificial barriers to restrain “adjustment” the price will begin to fall towards equilibrium As price falls the quantity supplied will decrease and quantity demanded will increase. Eventually the price will fall to the equilibrium price where quantity supplied is equal to quantity demanded and the quantity exchanged. 19
    • 20. @ a Price Below Equilibrium If a price is set below equilibrium, a shortage exists. (wherein the quantity demanded is greater than the quantity supplied at the lower price.) Without artificial barriers to restrain “adjustment” the price will begin to rise towards equilibrium As price rises the quantity demanded will decrease and quantity supplied will increase. Eventually the price will rise to the equilibrium price where quantity demanded is equal to quantity supplied and the quantity exchanged. 20
    • 21. Surplus versus Shortage Surplus: at a price set above equilibrium the quantity supplied is greater than the quantity demanded. Shortage: at a price set below equilibrium the quantity demanded is greater than the quantity supplied. Surpluses and shortages are always in reference to specific non-equilibrium prices. They will be automatically eliminated by price changes if there are no barriers to price movements. 21
    • 22. Price Floors & Price Ceilings A legislated price  A price floor is a minimum price. Prices can be higher but not lower than a floor (minimum “rent”). If the floor is set above the equilibrium a surplus is created.  A price ceiling is a maximum price. Prices can be lower but not higher than a ceiling (re: rent controls). If the ceiling is set below the equilibrium a shortage is created. 22
    • 23. Price Floors & Price CeilingsPrice cannot fall below a floorPrice cannot rise above a ceiling 23
    • 24.  Who gains?  Politicians  Those who get the goods and services  Those who police the ceiling Who loses?  Those who supply the good or service  Those who can’t get the good or service  Taxpayers a Price Ceiling = shortage 24
    • 25. a Price Floor = surplus Who gains?  Politicians  Those who supply the goods and services  Those who police the floor  Those who store the surplus Who loses?  Those who demand the good or service  Taxpayers 25
    • 26. Price Controls - the Message Price Controls distort market incentives Price Controls can not change the relative scarcity of the product Price Controls cause over allocation or under allocation of resources Price Controls cause arbitrary distributive effects …..But they are great politics! 26
    • 27. the Markets during Disasters What happens to the markets for wood, tools and even water during a disaster?  Can’t get products in as SUPPLY decreases.  More people want these products as DEMAND increases.  the Product becomes relatively more scarce. 27
    • 28. the Markets during Disasters What happens to the markets for wood, tools and even water during a disaster?  What incentive would cause suppliers to SUPPLY more of the product?  A price ceiling prevents the price from rising.  The shortage worsens. 28
    • 29. Disasters usually causeshortages and Price Ceilings make the shortages worse. the Government’s Price Controls can’t change relative scarcity but they do distort incentives 29
    • 30. the Market in Disasters Considering what happens to markets for products like wood, tools and even water during a disaster?  Trucks can’t bring products in thereby decreasing SUPPLY  More people need these products than under “normal” thereby increasing DEMAND  So why do people cry price gouging? 30
    • 31. Price Gouging??? As economists we know if the government felt sorry for these people and imposed a price floor on certain products there will be a shortage. Other people feel the prices are “made artificially high” to take advantage of the affected “victims”. This is an untrue statement. 31
    • 32. PRICE CONTROLSDISTORT MARKET INCENTIVES AND CAUSE THE MISALLOCATION OF RESOURCES 32
    • 33. Main Points [continued (a)] Relative scarcity for a particular product is the defined by relationship between SUPPLY & DEMAND Consistent with CIIP, SUPPLY & DEMAND determine the relative scarcity of a product. The relative scarcity is accurately measured by the price of the product. The Law of SUPPLY states price and quantity move in the same direction. Price Elasticity of SUPPLY measures the strength of a suppliers’ response to price changes. 33
    • 34. Main Points [continued (b)] the Law of DEMAND states the price and the quantity demanded move in the opposite direction. the Price Elasticity of DEMAND measures the strength of the buyers’ reactions to price changes. 34
    • 35. Main Points [continued (c)] Supply represents the marginal opportunity cost of producing different quantities of a product. Demand represents the marginal utility of consuming different quantities of a product. Allocative efficiency occurs at the equilibrium where the marginal opportunity cost of producing a quantity is just equal to the marginal utility of consuming that quantity. 35
    • 36. Main Points a surplus exists at a price above the equilibrium point where the quantity supplied is greater than the quantity demanded a shortage occurs at a price below the equilibrium point where the quantity demanded is greater than the quantity supplied if there is no price floor a surplus will correct itself as the price falls if there is no price ceiling a shortage will correct itself as the price rises 36

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