1. Unit 2 Supply & Demand and the Nature and Function of Markets

2. Demand Basics
Demand Schedule and Demand Curve

3. Demand Basics Demand versus Quantity Demanded
Demand- quantities consumers are willing and able to buy at various prices
Quantity Demanded- quantity consumers are willing and able to buy at a given price

4. Demand Basics Demand versus Quantity Demanded Demand- the whole curve
Quantity Demanded- a point on the curve

5. Demand Basics Demand versus Quantity Demanded
Change in Demand- the whole curve shifts
Change in Quantity Demanded- movement along the curve

6. Demand Basics Changes in Demand Consumer Income Population
Normal v. Inferior Goods
Population
Preference/Taste
Price of Other Goods
Compliments
Substitutes
Expectation of Change in Price

7. Supply Basics
Supply Schedule and Supply Curve

8. Supply Basics Supply versus Quantity Supplied
Supply - quantities producers are willing and able to sell at various prices
Quantity Supplied- quantity producers are willing and able to sell at a given price

9. Supply Basics Supply versus Quantity Supplied Supply - the whole curve
Quantity Supplied- a point on the curve

10. Supply Basics Change in Supply - the whole curve shifts
Change in Quantity Supplied- move from one point on the curve to another

11. Supply Basics- Changes
# of Producers
Technology
Price of Inputs
Taxes and Subsidies
Other Regulations
Producer expectations

12. Individual & Market Demand Curve
Horizontal sum of individual demand curves

13. Individual & Market Supply Curve
Horizontal sum of individual supply curves

15. What if they both shift? Equilibrium Price? Equilibrium Quantity?
One change is certain
The other is ambiguous

16. What if they both shift?
Coffee
New Rebecca Black Song
New Fertilizer

17. What if they both shift?
Same Shift- know Q
Opposite Shift- know P

18. S & D for Non-Smart Phones (inferior good)
Decrease in unemployment
Increase in the price of Smart Phones

19. Equilibrium Price = Market Clearing Price

20. What can you tell me? OPEC breaks up
EPA eliminates all regulation of oil industry

21. Why Demand Slopes Downward and what’s up with the shape?
Income Effect
Substitute Effect
Diminishing Marginal Utility

22. Conspicuous Goods

23. Why Demand Slopes Downward and what’s up with the shape?
Income Effect
Substitute Effect
Diminishing Marginal Utility

24. TVs
Consumers EXPECT prices to increase significantly in the coming months
Producers are plagued by a growing shortage of Europium

25. Why Demand Slopes Downward?
Income Effect
Higher price = Lower purchasing power
Lower price = Higher purchasing power
“ability to buy”

26. Why Demand Slopes Downward?
Substitute Effect- think opportunity cost
Higher price = Lower relative price of substitutes
Lower price = Higher relative price of substitutes

27. Why?
1st pizza for full price ($10.00), get a 2nd for $5?

28. Why? Buy one pair at regular price and get the second pair half off?
BOGO Days!

29. MU/$

31. Why Demand Slopes Downward?
Diminishing Marginal Utility

32. Why Demand Slopes Downward?
Diminishing Marginal Utility
MU= satisfaction (quantified in dollars) of an additional unit of consumption
Marginal Utility ALWAYS* decreases with additional consumption
Total Utility increases at a decreasing rate

33. Why Demand Slopes Downward?
Diminishing Marginal Utility/Benefit
Cost-Benefit Analysis
How many slices will you consume?
OPTIMAL PURCHASE RULE
MU=P

36. Optimizing Purchase of 2 or More Goods
MU per $1

37. Consumer Equilibrium
Maximize Total Utility
MU per $1 (MU/$)
MUx/Px = MUy/Py

38. New Housing Market- East Penn
Emmaus High named the 280th best high school in the country (best in area)
A decrease in the price of lumber (input of housing construction)

40. Races = $50 Musicals = $100 Budget = $300

41. If the market price is above equilibrium price…

42. If the market price is below equilibrium price…

45. Price Ceilings Non-Binding
Set above equilibrium
Market prices will remain below the ceiling
**Graph shows BINDING

46. Price Floors Non-Binding
Set below equilibrium
Market prices will remain above the floor
**Graph shows BINDING

47. Is minimum wage a binding price ceiling?

48. Now that you are thinking…
Is minimum wage a binding price floor?

49. Price Controls Effects beyond Surpluses and Shortages

50. Price Controls Effects beyond Surpluses and Shortages
BOTH reduce the quantity of a good bought and sold

51. Price Ceilings
Shortages
Inefficiencies
Black Markets

52. Price Ceilings- Inefficiencies
Misallocation of Resources
Need and willingness to pay
Wasted Resources
Time and money spent overcoming the shortage
Inefficiently Low Quality

53. Price Ceilings- Black Markets
Illegal Markets
Prices ABOVE equilibrium
Prices account for additional cost in the form of risk

54. Price Floors
Surpluses
Inefficiencies
Black Markets

55. Price Floors- Inefficiencies
Misallocation of Resources
Those willing to sell at the lowest price do not always succeed
Wasted Resources
Inefficiently High Quality

56. Price Floors- Black Markets
Illegal Markets

57. Price Elasticity of Demand (PED)

58. PED
Relationship between % change in price and % change in quantity

59. PED (absolute value) Perfectly Inelastic = 0 Unit Elastic = 1
Perfectly Elastic =

60. PED (expressed in absolute value)
PED (expressed in absolute value) *PED will always be negative unless perfectly inelastic
Perfectly Inelastic = 0
Unit Elastic = 1
Perfectly Elastic =
Inelastic <1
Unit Elastic = 1
Elastic > 1

61. PED

62. *Total Revenue Method*
Price Decrease – TR Increase
Elastic
Price Decrease – TR Constant
Unit Elastic
Price Decrease – TR Decrease
Inelastic

63. *Total Revenue Method*
Elastic Demand
Price and Total Revenue Move in OPPOSITE directions
Unit Elastic Demand- No Change in TR
Inelastic Demand
Price and TR move in the SAME direction

64. TIP of the DAY
Remember 2 not 6

65. TIP of the DAY Remember 2 not 6
1. Inelastic PED- Increase in Price will Increase Total TR
*Increase P will Increase TR
2. Perfectly Inelastic = 0

66. PES- Only difference?

67. Other Elasticities Price Elasticity- % Q/ % P PED versus PES
Income Elasticity of Demand
Normal
Inferior goods
Cross Price Elasticity
Complements and substitutes

68. Income Elasticity of Demand
% Q / % Income
Normal
Inferior

69. Income Elasticity of Demand
% Q / % Income
Normal = positive
Inferior = negative

70. Income Elasticity of Demand
% Q / % Income
Necessity 0-1
Luxury > 1

71. Cross Price Elasticity
% Qx / % Py
Substitutes =
Complements =
Neither = 0

72. Cross Price Elasticity
% Qx / % Py
Substitutes = positive
Complements = negative
Neither = 0

73. Tip of the Day
Study 2 days before the test as if it were the day before
The review will expose your weaknesses

77. Tax Incidence

78. Tax Incidence Nominal (Statutory) versus Economic Incidence
If “law” doesn’t matter, what does?

79. Draw TWO S & Ds Add a Binding Price Floor to one
Add a Binding Price Ceiling to the other
Shade DWL

80. Deadweight Loss Excess Burden Allocative Inefficiency
Do subsidies produce DWL??
If so, where does it appear?