26 slides images from McConnellBrue

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26 slides (images from McConnell/Brue)

• Chapter 3 Supply and Demand

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Lets go shopping!!

• Right now image you have 10 the following
  things are available
• Soda--.50 per can
• Candy bar--.50 each
• Gum--.25 per pack
• Propel--2.00 each
• What how much would you personally buy?

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A few ways to go

• Based on the simple idea of shopping, we get the
  bulk of the content for this chapterdemand,
  supply, and equilibrium
• Overall ideas very importanta few details will
  also be critical

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Me, me, me

• As a consumer you are always looking out for your
  own self-interest, trying to maximize your
  utility
• Since you are trying to get the most for your
  money, you are therefore willing to buy more when
  the price is lower

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Very Simple

• Dont get hung up with the definition in the
  bookit is as simple as it was in principles
• As a consumer you buy more when the price is low,
  less when the price is higher

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Go again

• Lets go back to the store suppose we find the
  following changes
• Soda--.50 per can--now 1.00
• Candy bar--.50 each--now .35
• Gum--.25 per pack--still .25
• Propel--2.00 each--now 1.50
• Would your original list change? Why?

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Changes make changes

• If your purchases changed, then you just
  demonstrated the reasons for the law of demand
• Better understood by thinking of the graph

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3 Reasons for Downward Sloping Demand Curve

• 1. Substitution Effect
• 2. Income Effect
• 3. Law of Diminishing Marginal Utility
• We know we buy less when price high more when
  price low these three justify why

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Demand can change

• The principle is always the same, but our
  purchases change frequently
• 5 reasons listed in the book
• Key is to understand whether change will result
  in curve shifting in or out
• Look at the x-axis (quantity)

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Opposite Side

• Producers and consumers alike look out for
  themselves
• We want cheap products
• They want to sell expensive ones

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Law of Supply

• That considered, producers are willing to offer
  more for sale at a higher price
• Doesnt mean they will automatically sell them,
  but point is they want a high price

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Consider Yourself

• Would you be willing to shovel snow for 2 per
  hour? If yes, how many hours on a snow day?
• How about 20 per hour?
• 200 per hour?
• Point proven that you will offer more at a higher
  price

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Cant sell too cheap

• We want to sell high, but there is also a price
  that you cant go under
• The COSTS OF PRODUCTION will most determine how
  low your price can be
• Not going to sell a product if it means you are
  losing money

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Alone Nothing, Together Everything

• By themselves these concepts are little more than
  abstract trends
• Together they form the INTERSECTION OF HAPPINESS

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Happiness is like a Pirate

• Thinking about ourselves, the producers and
  consumers want to be happy
• Only one point where that can happen
• That price and quantity alone keeps everyone
  pleased
• How do you determine it?

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Assuming Nothing Changes

• Like Newton, objects left alone tend to remain
  where they are
• SD left alone will remain at market equilibrium
  price and quantity
• Problem is that both curves continuously shift as
  previously discussed

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Fix the problem

• Anytime a curve shifts, the market needs to
  adjust to a new equilibrium price and quantity
• If the price is set too high, the result will be
  a SURPLUS with producers unhappy with unsold
  product

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Surplus
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Shortage

• If price too low, the opposite occurs
• Why would a low price upset us as consumers? I
  thought we liked prices to be low?

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Govt Goofs

• Left alone the market will take care of itself
  (Smiths invisible hand)
• If a business doesnt provide a desirable product
  at a desirable price they go bankrupt
• Why do we need the govt to interfere with
  pricing?
• Always trying to help someone out
• How do they?

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Price floors vs price ceilings

• Think about the ceiling and floor in this
  roomwhat do they do?
• Floor is the lowest you can go, ceiling the
  highest
• Same thing here
• Price floor is the lowest legal price (min wage,
  cigarettes)
• Price ceiling is the max (rent control, milk)

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What do they look like?
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Instant offset

• Govt intervention always goofs up the natural
  point of equilibrium
• Price floors are used to keep prices higher,
  reducing quantity demanded (dont want us to buy)
• Price ceilings are used to keep prices down,
  increasing quantity demanded (want us to buy)

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A B 5

• Can you solve this equation?
• More than two variables is too hard
• We keep it simpleall else held constant (CETERIS
  PARABUS) and only analyze change in situation

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Shift of versus shift along

• TECHNICALITY
• A shift of the demand curve shifts the demand
  curve, but causes a shift along the supply curve
• A shift along the demand curve shifts the supply
  curve, keeping the demand curve stationary
• Shift of that curve moving
• Shift along other curve moving

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HAPPINESS IS BLISS

• OVERVIEW
• Our goal is for everyone to be happy
• Producers are happy when selling for a high price
• Consumers are happy when buying for a low price
• Goal is to find that point, even though it rarely
  exists