MICROECONOMICSMICROECONOMICS BU 224 BU 224

Seminar Seminar

Three Three

AgendaAgenda Course Issues and QuestionsCourse Issues and Questions Chapters Three and Four: Questions Chapters Three and Four: Questions

and Problems from the text.and Problems from the text. Review of Market Allocation Review of Market Allocation

MechanismsMechanisms Where are we going next?Where are we going next?

• TastesTastes

• Number of BuyersNumber of Buyers

• IncomeIncome

• - Normal Goods- Normal Goods

• - Inferior Goods- Inferior Goods

• Price of Related GoodsPrice of Related Goods

• - Substitute Good- Substitute Good

• - Complementary Good- Complementary Good

• Consumer ExpectationsConsumer Expectations

Determinants of DemandDeterminants of Demand

• Resource PricesResource Prices

• TechnologyTechnology

• Taxes and SubsidiesTaxes and Subsidies

• Prices of Other GoodsPrices of Other Goods

• Producer ExpectationsProducer Expectations

• Number of SellersNumber of Sellers

Determinants of SupplyDeterminants of Supply

Chapter 3 QuestionsChapter 3 Questions1.1. What are some examples of inferior products?What are some examples of inferior products?

2.2. Who does the demanding and the supplying in the Who does the demanding and the supplying in the labor market? The loanable funds market?labor market? The loanable funds market?

3.3. Is the price system a "just" or "fair" way to allocate Is the price system a "just" or "fair" way to allocate products? What about medical services?products? What about medical services?

4.4. What can we say about the demand and supply What can we say about the demand and supply curves for products which are "free", like matches, curves for products which are "free", like matches, toothpicks, and kittens?toothpicks, and kittens?

5.5. Why do you think "rock" stars charge concert ticket Why do you think "rock" stars charge concert ticket prices below what they could charge and still sell out prices below what they could charge and still sell out their performances?their performances?

Chapter 3 QuestionsChapter 3 Questions1. A survey indicated that chocolate ice cream is America’s 1. A survey indicated that chocolate ice cream is America’s

favorite ice-cream flavor. For each of the following, indicate favorite ice-cream flavor. For each of the following, indicate

the possible effects on demand and/or supply and equilibrium the possible effects on demand and/or supply and equilibrium

price and quantity of chocolate ice cream.price and quantity of chocolate ice cream.

a. a. A severe drought in the Midwest causes dairy farmers to A severe drought in the Midwest causes dairy farmers to

reduce the number of milk-producing cattle in their herds by reduce the number of milk-producing cattle in their herds by

a third. These dairy farmers supply cream that is used to a third. These dairy farmers supply cream that is used to

manufacture chocolate ice cream.manufacture chocolate ice cream.

b. A new report by the American Medical Association reveals b. A new report by the American Medical Association reveals

that chocolate does, in fact, have significant health benefits.that chocolate does, in fact, have significant health benefits.

c. The discovery of cheaper synthetic vanilla flavoring lowers c. The discovery of cheaper synthetic vanilla flavoring lowers

the price of vanilla ice cream.the price of vanilla ice cream.

d. New technology for mixing and freezing ice cream lowers d. New technology for mixing and freezing ice cream lowers

manufacturers’ costs of producing chocolate ice cream.manufacturers’ costs of producing chocolate ice cream.

Market Allocation MechanismsMarket Allocation Mechanisms

Inputs or factors of production need Inputs or factors of production need to be used to produce goods and to be used to produce goods and services. The ways such inputs can services. The ways such inputs can be utilized to serve the needs of be utilized to serve the needs of consumers are called the allocation consumers are called the allocation mechanisms. mechanisms.

Market Allocation Mechanisms Market Allocation Mechanisms

Four Market Allocation MechanismsFour Market Allocation Mechanisms::

1. The market (price), 1. The market (price),

2. Government, 2. Government,

3. Random choice, and 3. Random choice, and

4. First-come, first-served4. First-come, first-served

Market Allocation Mechanisms Market Allocation Mechanisms

EfficiencyEfficiency: If an allocation mechanism : If an allocation mechanism is efficient, it means that it best is efficient, it means that it best satisfies the needs and wants of a satisfies the needs and wants of a society compared to the other society compared to the other allocation mechanisms. A system of allocation mechanisms. A system of markets and prices is generally the markets and prices is generally the most efficient way of allocating most efficient way of allocating scarce resources. As a result, it is scarce resources. As a result, it is predominantly used in most industrial predominantly used in most industrial countries today.countries today.

Chapter 4 QuestionsChapter 4 Questions1. If the government banned the sale and purchase of a good or 1. If the government banned the sale and purchase of a good or

service (for example, cigarettes, or abortion services), then what service (for example, cigarettes, or abortion services), then what impact would this have on the market for this item?impact would this have on the market for this item?

2. If the price of televisions has increased over the last year and 2. If the price of televisions has increased over the last year and people are buying more televisions, is this an exception to the law people are buying more televisions, is this an exception to the law of demand, or has there been a change in demand or supply which of demand, or has there been a change in demand or supply which could account for this?could account for this?

3. Why has the price of most computers and other electronic product 3. Why has the price of most computers and other electronic product been falling over the past several years while the demand for been falling over the past several years while the demand for these products has been rising at the same time?these products has been rising at the same time?

4. Why has government been involved in setting prices---price 4. Why has government been involved in setting prices---price controls?controls?

5. How does government attempt to correct for an inequitable 5. How does government attempt to correct for an inequitable distribution of income?distribution of income?

6. How would an economist answer the question: "What is the 6. How would an economist answer the question: "What is the appropriate level of government involvement?"appropriate level of government involvement?"

Chapter 4 QuestionsChapter 4 Questions1. Suppose it is decided that rent control in New York City will be 1. Suppose it is decided that rent control in New York City will be

abolished and that market rents will now prevail. Assume that all rental abolished and that market rents will now prevail. Assume that all rental units are identical and are therefore offered at the same rent. To units are identical and are therefore offered at the same rent. To address the plight of residents who may be unable to pay the market address the plight of residents who may be unable to pay the market rent, an income supplement will be paid to all low income households rent, an income supplement will be paid to all low income households equal to the difference between the old controlled rent and the new equal to the difference between the old controlled rent and the new market rent.market rent.

a. Use a diagram to show the effect on the rental market of the a. Use a diagram to show the effect on the rental market of the elimination of rent control. What will happen to the quality and elimination of rent control. What will happen to the quality and quantity of rental housing supplied?quantity of rental housing supplied?

b. Now use a second diagram to show the additional effect of the b. Now use a second diagram to show the additional effect of the income-supplement policy on the market. What effect does it have on income-supplement policy on the market. What effect does it have on the market rent and quantity of rental housing supplied in the market rent and quantity of rental housing supplied in comparison to your answers to part a?comparison to your answers to part a?

c. Are tenants better or worse off as a result of these policies? Are c. Are tenants better or worse off as a result of these policies? Are landlords better or worse off?landlords better or worse off?

d. From a political standpoint, why do you think cities have been d. From a political standpoint, why do you think cities have been more likely to resort to rent control rather than a policy of income more likely to resort to rent control rather than a policy of income supplements to help low-income people pay for housing?supplements to help low-income people pay for housing?

Chapter 4 QuestionsChapter 4 Questions

Chapter 4 QuestionsChapter 4 Questions

MicroeconomicsMicroeconomics

Questions?Questions?