MICROECONOMICS BU 224 SeminarThree

Agenda Course Issues and Questions Course Issues and Questions Chapters Three and Four: Questions and Problems from the text. Chapters Three and Four: Questions and Problems from the text. Review of Market Allocation Mechanisms Review of Market Allocation Mechanisms Homework Review Homework Review

Demand Schedule or curve Schedule or curve Amount consumers are willing and able to purchase at a given price Amount consumers are willing and able to purchase at a given price Other things equal Other things equal Individual demand Individual demand Market demand Market demand

Quantity Demanded (bushels per week) Price (per bushel) PQdQd $ P Q D The Demand Curve LO1 The Demand Curve 3-4

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 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 Supply

Chapter 3 Questions 1. What are some examples of inferior products? 2.Who does the demanding and the supplying in the labor market? The loanable funds market? 3.Is the price system a "just" or "fair" way to allocate products? What about medical services? 4.What can we say about the demand and supply curves for products which are "free", like matches, toothpicks, and kittens? 5.Why do you think "rock" stars charge concert ticket prices below what they could charge and still sell out their performances?

Chapter 3 Questions 1. A survey indicated that chocolate ice cream is America’s favorite ice-cream flavor. For each of the following, indicate the possible effects on demand and/or supply and equilibrium price and quantity of chocolate ice cream. a. A severe drought in the Midwest causes dairy farmers to reduce the number of milk-producing cattle in their herds by a third. These dairy farmers supply cream that is used to manufacture chocolate ice cream. b. A new report by the American Medical Association reveals that chocolate does, in fact, have significant health benefits. c. The discovery of cheaper synthetic vanilla flavoring lowers the price of vanilla ice cream. d. New technology for mixing and freezing ice cream lowers manufacturers’ costs of producing chocolate ice cream.

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

Market Allocation Mechanisms Four Market Allocation Mechanisms: 1. The market (price), 2. Government, 3. Random choice, and 4. First-come, first-served

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

Consumer Surplus Difference between what a consumer is willing to pay for a good and what the consumer actually pays Difference between what a consumer is willing to pay for a good and what the consumer actually pays Extra benefit from paying less than the maximum price Extra benefit from paying less than the maximum price 5-14

Consumer Surplus LO2 Consumer Surplus (1) Person (2) Maximum Price Willing to Pay (3) Actual Price (Equilibrium Price) (4) Consumer Surplus Bob$13$8$5 (=$13-$8) Barb128 4 (=$12-$8) Bill118 3 (=$11-$8) Bart108 2 (=$10-$8) Brent98 1 (= $9-$8) Betty88 0 (= $8-$8) 5-15

Consumer Surplus LO2 Price (per bag) Quantity (bags) D Q1Q1 P1P1 Consume r Surplus Equilibriu m Price 5-16

Producer Surplus Difference between the actual price a producer receives and the minimum price they would accept Difference between the actual price a producer receives and the minimum price they would accept Extra benefit from receiving a higher price Extra benefit from receiving a higher price LO2 5-17

Producer Surplus LO2 Producer Surplus (1) Person (2) Minimum Acceptable Price (3) Actual Price (Equilibrium Price) (4) Producer Surplus Carlos$3$8$5 (=$8-$3) Courtney48 4 (=$8-$4) Chuck58 3 (=$8-$5) Cindy68 2 (=$8-$6) Craig78 1 (=$8-$7) Chad88 0 (=$8-$8) 5-18

Producer Surplus LO2 Price (per bag) Quantity (bags) S Q1Q1 P1P1 Equilibriu m price Producer surplus 5-19

Efficiency Revisited LO2 Price (per bag) Quantity (bags) S Q1Q1 P1P1 D Consumer surplus Producer surplus 5-20

Microeconomics Questions?