arnold 8e ch 03 final
TRANSCRIPT
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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?