householdsbusinesses product markets factor markets

HouseholdsBusinesses

Product Markets

Factor Markets

Selling Quantity Price Demanded

$ 3$ 2$ 1

$ 410

254060

15$ 5

Price

Quantity

$6

$5

$4

$3

$2

$1

10 20 30 40 50 600

Demand

Downsloping left

-Plot the pointsGraphing:

-Connect the dots

to right

Demand

Selling Quantity Price Supplied

$ 3$ 2$ 1

$ 460

251510

40$ 5

Price

Quantity

$6

$5

$4

$3

$2

$1

10 20 30 40 50 600

Upsloping right

-Plot the pointsGraphing:

-Connect the dots

to left

Supply

Selling Quantity Price Demanded Supplied

$ 3$ 2$ 1

$ 410

254060

15$ 5 60

251510

40$ 3 25 25

Price

Quantity

$6

$5

$4

$3

$2

$1

10 20 30 40 50 600

D

-Plot DemandGraphing:

-Plot Supply

D

S

S

Selling Quantity Price Old New

0

$ 3$ 2

$ 0$ 1

$ 41

$ 6

34

65

2$ 5

1

34

65

2

7

01

345

2

DecInc

Caused by a Change in a Determinant

Movement OF the curve

Price

Quantity

$6

$5

$4

$3

$2

$1

1 2 3 4 5 60

Old

Increase in Demand shifts out or to the right

Decrease in Demand shifts in or to the left

1

Why the curve shifts

2345

Consumer TastesPrice of Other GoodsConsumer IncomesNumber of

ConsumersConsumer Expectations

1 Consumer Tastes-beanie hats make a

comebackDemand increases-Hula Hoops go out

of styleDemand decreases

Or why the curve shifts

2 Price of Other GoodsIf airlines cut ticket prices

More demand for Luggage

Less demand for train tickets

Tickets and Luggage are compliments

Airlines and Trains are Substitutes

If ticket prices decrease, demand for Luggage increases

If ticket prices increase, demand for Luggage decreases

If air tickets increase, demand for Train tickets also increases

Compliments are consumed or used together (inverse relationship)

Substitutes replace each other (direct relationship)If air tickets decrease, demand for

Train tickets also decreases

3 Consumer Incomes

+tax cuts increase net incomes

Consumers have more money to spend, demand increases

-the $ depreciates against the EuroImported goods from Europe cost

more dollars, demand decreases

For Normal Goods!!!For Normal Goods!!!

-the $ depreciates against the EuroDomestic travel looks better,

demand increases

For Inferior Goods

Consumers switch to better goods, demand for Hot Dogs decreases

+tax cuts increase net incomes

4Number of Consumers(also Demographics)

-Hurricanes arrive on Labor Day weekend

Fewer tourists touring, demand decreases

Canada sells to 290 million US consumers, demand for their goods

increases

+NAFTANorth American Free Trade Agreement

5 Consumer Expectations-dealers reduce car

prices in AugustCar buyers wait, demand decreases-heavy rains have

damaged coffee cropConsumers expect shortages and higher prices so they buy more

now, demand increases

Quantity

$6

$5

$4

$3

$2

$1

1 2 3 4 5 60

Supply

Current Equilibrium

Price

P1

P2

P3

Q3 Q1 Q2

Caused by a change in a Determinant of Demand

Shifting the Demand Curve

decrease

increase

Demand

P Q

P Q

1

Why the curve shifts

2345

Consumer TastesPrice of Other GoodsConsumer IncomesNumber of

ConsumersConsumer Expectations

Selling Quantity Supplied Price Old New

6

$ 3$ 2$ 1

$ 45

$ 6

321

4$ 5

7

54

23

6 43

10

5

2

DecInc

Caused by a Change in a Determinant

Movement OF the curve

Price

Quantity

$6

$5

$4

$3

$2

$1

1 2 3 4 5 60

Old

Increase in Supply shifts out or to the right

Decrease in Supply

shifts in or to the left

1 Resource PricesWhy the curve shifts

2 Changes in Technology3 Prices of other goodsTaxes and Subsidies

45 Number of

Producers

1 Resource Prices-gas is discovered

under CVCCSupply increases

-Minimum wage goes up

Supply decreases

Or why the curve shifts

2 Changes in Technology+ If a more powerful

computer is developedMakes production

easier (and cheaper)

- If stronger pollution controls are required

Makes production harder (and costly)

3 Elements of Nature/Prices of other goods

Shift resources away from high production cost goods.

Caused by natural disasters or market price of other

goods

+ subsidies encourage production

Taxes and Subsidies- taxes discourage production

4

5 Number of Producers

-fewer firms decrease supply

+more firms increase supply

6 Producer Expectations

-if prices are expected to increase, more

production

about prices and resource availability

-if prices are expected to decrease, less

production

1 Resource PricesWhy the curve shifts

2 Changes in Technology3 Prices of other goodsTaxes and Subsidies

45 Number of

Producers6 Producer Expectations

Consumers responding to a Change in the Price of the good

Caused by factors related to production of the good

Harder or costlier to produce, price goes up

Movement ALONG the curve

Quantity

$6

$5

$4

$3

$2

$1

1 2 3 4 5 60

Demand

Supply Curve

Current Price

Price

P Q

P Q

decrease

increase

Easier or less expensive to produce, price goes down

What makes the Supply Curve Shift??

P1

P2

P3

Q2 Q1 Q3

The Supply Schedule!!

What makes the Supply Curve Shift??

Quantity

$6

$5

$4

$3

$2

$1

1 2 3 4 5 60

Demand

Current Equilibrium

Price

P Q

P Q

decrease

increaseP1

P2

P3

Q2 Q1 Q3

Supply

Caused by a change in a Determinant of Supply

Shifting the Supply Curve

Response to a Change in the Price of the goodCaused by factors related to consumers

Movement ALONG the curve

Quantity

$6

$5

$4

$3

$2

$1

1 2 3 4 5 60

SupplyCurrent

Price

Price

P1

P2

P3

Q2 Q1 Q3

Economic Examples

• A reduction in the supply of unskilled labor … pushes the wage rates of fast-food workers upward.

ResourcesMarket

Employment

$7.50

DR

S1

Price(wage)

E1E2

S2

$6.25

Resource Prices, and Product Markets

PriceProductMarket

Q1

DP

Q2

S1

Quantity

S2

$2.25

$2.00

• Higher wages cause a reduction in supply.

This leads to higher hamburger prices.

2. Increase in the Demand for Loanable Funds

r2

Q1

r1

Q2

Interestrate

Quantity of loanable funds

• At the interest rate r the quantity of loanable funds demanded by borrowers into equals quantity supplied by lenders.• An increase in demand will move D1 to D2

• Higher interest rates encourage additional savings, making it possible to fund more borrowing.

the interest rises to r2 and increasing borrowing to Q2

S

D1

D2

Lending

Borrowing

3. Increase in the Demand for Foreign Exchange

0.20

Q1 Q2

Exchange rate($ per quetzal)

Quantity of quetzal exchange

S

D1

U.S. sales toGuatemala

U.S. purchasesfrom Guatemala

D20.10

• Begin in equilibrium, where the dollar price of the quetzal is $.10 (10 cents = 1quetzal).• An increase in American demand for Guatemalan coffee will also increase the demand for quetzals (with which American importers pay Guatemalan coffee growers).

• Equilibrium occurs where the new demand D2 just equals the supply S

•– at $.20 per quetzal with Q2 > Q1 quetzals clearing the market.

Price Controls

• It stops the price from rising to the equilibrium level.

– Example: rent control• The direct effect of a price ceiling is a

shortage: quantity demanded exceeds quantity supplied.

1. Price Ceilings

• Price ceiling is a legally established maximum price that sellers may charge.

• In the rental housing market the price (rent) P0 would bring the quantity of rental units demanded into balance with the quantity supplied.• A price ceiling like P1sets a

price below equilibrium …

quantity demanded QD …

exceeds quantity supplied

QS … resulting in a shortage.

The Impact of a Price CeilingPrice(rent)

Quantity of housing units

Priceceiling

D

QS QD

P0

S

P1

Shortage

Rental housing market

• Price floor is a legally established minimum price that buyers must pay.

• It stops the price from dropping down to equilibrium level.

– Example: minimum wage• The direct effect of a price floor

above the equilibrium price is a surplus: quantity supplied exceeds quantity demanded.

2. Price Floors

• A price floor like P1 imposes a price above market equilibrium … causing quantity supplied

QD …

• Because prices are not allowed to direct the market to equilibrium, non-price elements of exchange will become more important in determining where scarce goods go.

to exceed quantity

demanded QS … results in a surplus.

The Impact of a Price FloorPrice

Quantity

Pricefloor

D

QD QS

P0

S

P1

Surplus

Employment and the Minimum Wage Price

(wage)

Quantity(employment)

Minimum wage level

D

E1 E0

S

$ 5.15

Excesssupply

$ 4.00

• Consider where a price (wage) of $4.00 could bring the quantity of labor demanded into balance with the quantity supplied.

• A minimum wage (price floor) of $5.15 would increase the earnings of those who were able to maintain employment (E1), but would reduce the employment of others. • Those who lose their job (E0 to E1) would be pushed into either the unemployment rolls or some other less preferred form of employment.

• Elastic demand– quantity demanded is sensitive to small changes in price.– Easy to substitute away from good.

• Inelastic demand – quantity demanded is not sensitive to changes in price.– Difficult to substitute away from good.

Elastic and Inelastic Demand Curves

Percent change in Quantity demandedPercent change in Price

Measuring Elasticity

> 1 : Elastic sensitive to Price changes

< 1 : Inelastic not sensitive to Price changes

Price Quantity (by more %) TRPrice Quantity (by more %) TR

Price Quantity (by less %) TR Price Quantity (by less %) TR

2. Necessity vs Luxury

What affects Elasticity???

3. Proportion of Income

1. Available Substitutes

4. Time to shop around

And the Drug Problem

Demand

Price

P1

Q1

Supply

Quantity

Inelastic Demand - necessity

Change supply:

Inelastic Demand

Price

decrease

increaseP1

P2

P3

Q2Q1Q3

Supply

Quantity

or Q then P

Q then P

eradication

legalization

• Elastic supply– quantity supplied is sensitive to changes in price.

Inelastic demand – quantity supplied is not sensitive to changes in price.

Elastic and Inelastic Supply Curves

Price Price

Quantity Quantity

a. Market Period

What affects Elasticity of Supply???

b. Short Run

1. Time

c. Long Run