Mpp#009+market.analysis.(30)

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Mpp#009+market.analysis.(30)

  1. 1. Only two things can change the relative scarcity of a product δ (Supply) δ (Demand) 1
  2. 2. How do changes in theSUPPLY Curve or theDEMAND Curve affect the equilibrium prices and the equilibriumquantities exchanged? 2
  3. 3. for the Quantity Exchanged It’s (ceteris paribus) simple. – An increase in the SUPPLY Curve or DEMAND Curve causes an increase in quantity exchanged. – A decrease in the SUPPLY Curve or DEMAND Curve causes a decrease in quantity exchanged. 3
  4. 4. Equilibrium Price It’s (ceteris paribus) simple. – An increase in the SUPPLY Curve or a decrease in the DEMAND Curve puts downward pressure on prices. – A decrease in the SUPPLY Curve or an increase in the DEMAND Curve puts upward pressure on prices. 4
  5. 5. Changes in SUPPLY or DEMANDfor changes (δ) in Impact on Impact on the respective Equilibrium Quantity Curves Price ExchangedIncrease in SUPPLY Down UpDecrease in SUPPLY Up DownIncrease in DEMAND Up UpDecrease in DEMAND Down Down 5
  6. 6. Changes in relative scarcity A product becomes more scarce if:  DEMAND increases  SUPPLY decreases – and the price of the product will rise A product becomes less scarce if:  DEMAND ____________  SUPPLY _____________ – and the price of the product will _______ 6
  7. 7. Changes in relative scarcity A product becomes more scarce if:  DEMAND increases  SUPPLY decreases – and the price of the product will rise A product becomes less scarce if:  DEMAND decreases  SUPPLY increases – and the price of the product will fall 7
  8. 8. Three Steps of Market Analysis1. Identify the Market  the product, the place, the time1. Identify the change  SUPPLY or DEMAND, increase or decrease?1. Identify the effect on relative scarcity, the effect on price, the effect on quantity 8
  9. 9. A MAJOR RULE (to remember): One event causes either the DEMAND to change or the SUPPLY to change, but never causes both of them to change. 9
  10. 10. with respect to: Predicting the Future For example consider: The world market for oil 2005. Iraqi oil wells come back on line. DEMAND or SUPPLY? Increase or decrease? What is the impact on relative scarcity, on the price and on the quantity? 10
  11. 11. with respect to: Predicting the FutureFor another example consider:What happened in San Francisco in 2011 inthe market for 49er stuff when the 49ers,under the amazing leadership of Alex Smiththe football playing economist, leads the 49erswin the 2012 Super Bowl.DEMAND or SUPPLY? Increase ordecrease?What is the impact on relative scarcity, onthe price and on the quantity? 11
  12. 12. with respect to: Explaining the FutureWhat would you expect to happen in the Californiagasoline marketplace this upcoming summer if:OPEC increases supplyCalifornians – decide to buy more, larger more powerful cars and further decide to drive them farther and faster – avoid mass transitSome oil refineries are shut down for maintenanceWhat would be the expected impact on the relativescarcity and the price of gasoline? 12
  13. 13. HAZARD A GUESS: What has caused these prices to change?  Computer prices fall.  It is September and peach, berry, and other fruit prices rise.  The price of a major league baseball star’s rookie card is falling.  The price of artichokes rises.  Saudi king dies and price of oil rises.  Dukes of Hazzard comes out and price of 1969 Dodge Charger increases.  The price of yo-yo’s go up and down.  The price of ancient statues falls. 13
  14. 14. with respect to: Explaining the Past Europe in 1510. The market for spices after Vasco da Gama found a less costly path to spices. SUPPLY or DEMAND? Increase or decrease? What is the impact or relative scarcity, on the price and on the quantity 14
  15. 15. Explaining the Past Sacramento in 1850. Consider the market for pick axes and pans. SUPPLY or DEMAND? Increase or decrease? Expected impact on relative scarcity, on the price and on the quantity 15
  16. 16. 16
  17. 17. A Price Ceiling is a maximum legal price set BELOW the equilibriumprice determined by the free market. It provides economically perverse incentives and thereby causes a shortage. Ceiling, below, shortage (CBS) 17
  18. 18. Price controls (a ceiling) Assume that a market is in equilibrium and there is no change in supply or demand; relative scarcity has not changed. A government sets a legal price below the equilibrium (price ceiling) Buyers will want to buy _________ Suppliers will want to supply ________ There is a (surplus or shortage). Examples are: rent controls, doctors, prescription drugs 18
  19. 19. A Price Floor is a minimum legal price set ABOVE the equilibriumprice determined by the free market. It provides economically perverse incentives and thereby causes a surplus. Floor, above, surplus (FAS) 19
  20. 20. Price Controls (floor) Assume that a market is in equilibrium and there is no change in supply or demand; relative scarcity has not changed. A government sets a legal price above the equilibrium Buyers will want to buy _________ Suppliers will want to supply ________ There is a (surplus or shortage). Examples are: minimum wage, agricultural price supports 20
  21. 21. Price Controls (after a natural disaster) The market for lumber in Los Angeles, after an earthquake destroys many buildings Demand has increased. Lumber is now relatively______ scarce. Price would be expected to ___________ 21
  22. 22. Price controls (after natural disaster = ceiling) To avoid “price gouging” government sets legal price below new higher equilibrium price. At the lower price, demanders demand ____ At the lower price, suppliers supply ______ The price ceiling causes a ________ 22
  23. 23. Another Example Maximum rent on apartments set below equilibrium Lower price will have what effect on prospective demanders? Lower price will have what effect on prospective suppliers? Price being set below the market clearing price will cause a ____________. 23
  24. 24. What will happen to the price of energy in California? if the population increases. if people have more computers. If many power plants are shut down for maintenance. if the snow pack in the Sierras is lower than normal. 24
  25. 25. Let’s save the energy consumers of California Impose a price ceiling (a legal price below the equilibrium) As the price falls, the incentives for the suppliers and the demanders changes With a lower price, suppliers will supply ________ With a lower price, demanders will want to buy _________ There will be a __________ of energy! 25
  26. 26. Let’s save the energyconsumers of California 26
  27. 27. Market AnalysisChange in Change in Equilibrium Quantity Quantity Quantity Supply Demand Price Supplied Demanded ExchangedIncrease Down Up Up _________ _________Decrease Up Down Down _________ _________ Increase Up Up Up_________ _________ Decrease Down Down Down_________ _________ 27
  28. 28. How do changes in DEMAND affect quantity supplied ? A change in quantity supplied occurs in the short- run as suppliers respond to a change in the price of the product. If DEMAND increases then price will rise and suppliers will attempt to squeeze more out of their resources. If DEMAND falls then price will fall and the action will cause suppliers to SUPPLY less. Change in demand causes a change in price which causes a change in quantity supplied. 28
  29. 29. How do changes in supply affect quantity demanded ? A change in quantity demanded occurs as buyers respond to a change in the price of the product. If SUPPLY increases then prices will fall and buyers will buy more. If SUPPLY decreases then prices will rise and buyers will buy less. Change in SUPPLY causes a change in price which causes a change in quantity demanded. 29
  30. 30. The “Usual” Questions DEMAND or SUPPLY? Increase or decrease? Equilibrium price? Quantity supplied? Quantity demanded? Quantity exchanged? 30

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