Arnold 8e Ch 03 Final

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    PaulSchneiderman,Ph.D.,ProfessorofFinance&Economics,SouthernNewHampshireUniversity

    2008SouthWestern

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    In

    This

    Lecture..

    Demand

    AbsolutePriceandRelativePrice

    SupplyTheMarket

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    In

    This

    Lecture..

    Consumers Surplus,ProducersSurplus,andTotalSurplus

    PriceCeilings

    PriceFloors

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    Theory

    Economistsbuildtheoriestoanswer

    questionsthatdonothaveobviousanswers.

    Cause Effect

    Theory

    is

    an

    abstract

    representation

    oftherealworlddesignedwiththeintenttobetterunderstandthe

    world.

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    Market

    Anyplacepeoplecometogethertotrade

    Tradeorexchangemaytakeplaceataphysicalorvirtual

    location

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    CeterisParibus

    ALatintermmeaningallotherthings

    constant ornothingelsechanges.

    Ceterisparibus isanassumptionusedtoexaminetheeffectofoneinfluenceonan

    outcomewhileholdingallotherinfluencesConstant.

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    DemandSchedule

    Thenumericaltabulationofthequantitydemanded ofagoodat

    differentprices.Ademandscheduleis

    thenumericalrepresentationofthelaw

    ofdemand.

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    DownwardSloppingDemand

    CurveThegraphicalrepresentationofthedemand

    scheduleandlawofdemand.

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    Prices

    Absolute(Money)Price Thepriceofa

    goodinmoneyterms.RelativePrice(opportunitycost) The

    priceofagoodintermsofanothergood.

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    Demand

    ScheduleandGraph

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    LawofDiminishing

    MarginalUtility

    Foragiventimeperiod,themarginal(additional)utilityorsatisfactiongainedby

    consumingequalsuccessiveunitsofagoodwilldeclineastheamountconsumed

    increases.

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    DerivationofMarketDemand

    Schedule

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    DerivationofMarketDemand

    Curve

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    ChangeinQuantityDemanded

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    ChangeinDemand

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    IncreaseinDemand

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    DecreaseinDemand

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    FactorsCausingaShiftinthe

    DemandCurve

    IncomePreferences

    PricesofsubstitutegoodsPricesofcomplementarygoods

    NumberofbuyersExpectationsoffutureprices

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    FactorsCausingaShiftinthe

    DemandCurve Income

    NormalGood Agoodthedemandforwhichrises(falls)asincomerises(falls).

    InferiorGood Agoodthedemandforwhichfalls(rises)asincomerises(falls).

    NeutralGood Agoodthedemandforwhichdoesnotchangeasincomerisesor

    falls.

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    FactorsCausingaShiftinthe

    DemandCurve Complements

    ComplementsTwogoodsthatareusedjointlyin

    consumption.

    If

    two

    goods

    arecomplements,thedemandforonerisesas

    the

    price

    of

    the

    other

    falls

    (or

    the

    demandforonefallsasthepriceoftheotherrises).

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    SelfTestQuestions

    1. AsSandisincomerises,herdemandforpopcornrises.AsMarksincomefalls,his

    demandforprepaidtelephonecardsrises.Whatkindsofgoodsarepopcornandtelephonecardsforthepeoplewho

    demand

    each?2. Whyaredemandcurvesdownwardsloping?

    3. Giveanexamplethatillustrateshowtoderiveamarketdemandcurve.

    4. Whatfactorscanchangedemand?Whatfactorscanchangequantitydemanded?

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    Supply

    Thewillingnessandabilityofsellers

    toproduceandoffertoselldifferentquantitiesofagoodatdifferentprices

    duringaspecifictimeperiod.

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    LawofSupply

    Asthepriceofagoodrises,thequantity

    suppliedofthegoodrises,andastheprice

    ofagoodfalls,thequantitysuppliedofthe

    goodfalls,ceterisparibus.

    QuantityPrice

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    SupplyCurve

    Thegraphicalrepresentationofthelawof

    supply,whichstatesthatpriceandquantity

    suppliedaredirectlyrelated,ceterisparibus.

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    FixedSupply

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    SupplySchedule

    Thenumericaltabulationofthe

    quantitysupplied ofagoodat

    differentprices.

    Asupplyscheduleisthenumerical

    representation

    of

    the

    law

    of

    supply.

    Deriving a Market Supply

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    DerivingaMarketSupply

    Schedule

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    DerivingaMarketSupplyCurve

    Factors that Cause the Supply

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    FactorsthatCausetheSupply

    CurvetoShiftPricesofrelevantresources

    Technology

    Numberofsellers

    Expectationoffutureprices

    Taxes

    and

    subsidiesGovernmentrestrictions

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    ChangeinSupply

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    ChangeinQuantitySupplied

    Achangeinquantitysuppliedreferstoa

    movementalongasupplycurve.Theonlyfactorthatcandirectlycauseachangein

    the

    quantity

    supplied

    of

    a

    good

    is

    a

    changeinthepriceofthegood,orownprice.

    h i i li d

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    ChangeinQuantitySupplied

    S lf T t Q ti

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    SelfTestQuestions1. Whatwouldthesupplycurveforhouses(ina

    givencity)looklikeforatimeperiodof(a)thenexttenhoursand(b)thenextthreemonths?

    2. Whathappenstothesupplycurveifeachofthefollowingoccurs?

    a.Thereisadecreaseinthenumberofsellers.b.Aperunittaxisplacedontheproductionofagood.

    c.Thepriceofarelevantresourcefalls.3. Ifthepriceofapplesrises,thesupplyofapples

    willrise. Trueorfalse?Explainyouranswer.

    Putting Supply and Demand

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    PuttingSupplyandDemand

    Together

    M k t E ilib i

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    MarketEquilibrium

    Equilibriuminamarketistheprice

    Quantitycombinationfromwhichthereisnotendencyforbuyersor

    sellerstomoveaway.Graphically,

    equilibriumistheintersectionpointof

    thesupplyanddemandcurves.

    Auction at Work in a

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    AuctionatWorkina

    MarketSupplyandDemandatWork

    Theauctioneercallsoutdifferentprices,andbuyersrecordhowmuchtheyarewillingand

    able

    to

    buy.

    At

    prices

    of

    $6.00,

    $5.00,

    and

    $4.00,

    quantitysuppliedisgreaterthanquantitydemanded.Atpricesof$1.25and$2.25,

    quantity

    demanded

    is

    greater

    than

    quantity

    supplied.

    A ti t W k i M k t

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    AuctionatWorkinaMarket

    Atapriceof$3.10,quantitydemandedequalsquantitysupplied.

    E ilib i

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    Equilibrium

    EquilibriumPrice(Market ClearingPrice)

    Thepriceatwhichquantitydemandedofthegoodequalsquantitysupplied

    Su lu a d Sho ta e

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    SurplusandShortage

    Surplus(ExcessSupply)

    A

    condition

    in

    which

    quantity

    supplied

    isGreaterthanquantitydemanded.Surpluses

    occur

    only

    at

    prices

    above

    equilibrium

    price.Shortage(ExcessDemand)

    Aconditioninwhichquantitydemandedis

    greaterthanquantitysupplied.Shortages

    occuronlyatpricesbelowequilibriumprice.

    Mo e to Market Equilibrium

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    MovetoMarketEquilibrium

    Market Demand and

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    MarketDemandand

    Supply

    Moving to Equilibrium

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    MovingtoEquilibrium

    Equilibrium

    Consumer Producer and Total Surplus

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    Consumer,ProducerandTotalSurplus

    Consumers Surplus(CS)CS=Maximumbuyingprice PricepaidThedifferencebetweenthemaximumpriceabuyeris

    willingandabletopayforagoodorserviceandthepriceactuallypaid.

    Producers (Sellers)Surplus(PS)PS=Pricereceived MinimumSellingpriceThedifferencebetweenthepricesellersreceiveforagood

    and

    the

    minimum

    or

    lowest

    price

    for

    which

    they

    would

    havesoldthegood.

    TotalSurplus(TS)TS_CS_PSThesumofconsumers surplusandproducers surplus.

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    Producer Surplus

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    ProducerSurplus

    Total Surplus

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    TotalSurplus

    Equilibrium

    EquilibriumPriceandQuantityEffectsof

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    SupplyandDemandCurveShifts

    SelfTest Questions

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    SelfTestQuestions

    1. Whenapersongoestothegrocerystoretobuyfood,thereisnoauctioneercallingoutpricesforbread,milk,andotheritems.Therefore,supplyanddemand

    cannot

    be

    operative.

    Do

    you

    agree

    or

    disagree?Explainyouranswer.

    2. Thepriceofagivenqualitypersonal

    computerislowertodaythanitwasfiveyearsago.Isthisnecessarilytheresultofalowerdemandforcomputers?Explainyouranswer.

    SelfTest Questions

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    Self TestQuestions(continued)

    3.

    What

    is

    the

    effect

    on

    equilibrium

    price

    andquantityofthefollowing?a.Adecreaseindemandthatisgreater

    thantheincreaseinsupplyb.Anincreaseinsupply

    c.

    A

    decrease

    in

    supply

    that

    is

    greater

    thantheincreaseindemandd.Adecreaseindemand

    SelfTest Questions

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    Self TestQuestions(continued)

    4.Atequilibriumquantity,whatistherelationship betweenthemaximumbuyingpriceandtheminimumselling

    price?5.Ifthepricepaidis$40andtheconsumerssurplusis$4,thenwhatisthemaximum

    buyingprice?Iftheminimumsellingpriceis$30andproducers surplusis$4,thenwhatisthepricereceivedbytheseller?

    Price Controls

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    PriceControls

    PriceCeiling

    A

    government

    mandated

    maximumpriceabovewhichlegaltradescannot

    bemade.

    PriceFloor

    Agovernmentmandatedminimum

    pricebelowwhichlegaltradescannotbemade.

    Price Ceiling

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    PriceCeiling

    Price Floor

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    PriceFloor

    Self Test Questions

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    SelfTestQuestions

    1. Dobuyerspreferlowerpricestohigherprices?

    2. Whentherearelonglastingshortages,therearelonglinesofpeoplewaitingto

    buygoods.Itfollowsthattheshortagescausethelonglines. Doyouagreeordisagree?Explainyouranswer.

    3. Whomightargueforapriceceiling?apricefloor?