Download Mankiw: Brief Principles of Macroeconomics, Second Edition

Mankiw: Brief Principles of Macroeconomics,
2nd Edition (Harcourt, 2001)
Frank &Bernanke: Principles of
Macroeconomics (McGraw Hill, 2002)
Ch. 4: The Market Forces of Supply
and Demand
The Answer: Supply and
Demand

Why did gasoline prices almost doubled
between November 1999 and May 2000 but
fell by half by November 2001?
 Why could you buy the same computer at
half price in 1998 than in 1996?
 Why are prices at the College Bookstore
higher than the discount markets?
Econ 202
Dr. Ugur Aker
2
Markets

When in elementary school you traded your baloney
sandwich for your best friend’s peanut butter
sandwich, you were involved in an exchange. Trade
theory discussed in the previous chapter told us that
both of you were better off with this exchange.
 If you offered your baloney sandwich to whoever
wanted it for a “fair trade” there formed a market for a
single baloney sandwich.
 For a market to exist, there should be more than one
buyer or more than one seller.
– One seller and many buyers is called monopoly.
– One buyer and many sellers is called monopsony.
Econ 202
Dr. Ugur Aker
3
Market Types

Many buyers and many sellers with identical
products operate in competitive markets.
 Many buyers and many sellers with
differentiated (brand name) products operate in
monopolistically competitive markets.
 Many buyers and a few sellers constitute an
oligopoly.
 Many buyers and a single seller constitute a
monopoly.
Econ 202
Dr. Ugur Aker
4
Demand and Supply

The behavior of buyers is captured with the
demand curve.
 The behavior of the sellers is captured with
the supply curve.
 Each individual decision (both by consumers
and firms) is ruled by the marginal benefit vs.
marginal cost calculation.
 Opportunity cost determines if one is a buyer
or seller (ex: airplane tickets).
Econ 202
Dr. Ugur Aker
5
Determinants of Demand

Price of the product.


Income of the consumers.


Pc up => Q down.
Change in tastes and preferences.


Ps up => Q up.
Change in price of complements.


Y up => Q up.
Change in price of substitutes.


P up => Q down.
T favor the product more => Q up.
Expected price in the future.

Pe up => Q up.
Econ 202
Dr. Ugur Aker
6
Drawing the Demand Curve

In a two-dimensional space (the page in
your notebook, the chalkboard) we can only
measure two variables.
 We will pick “price” and “quantity
demanded” as our two variables.
 As we change the price of the product and
look at the change in quantity demanded,
we will assume that all the other variables
are kept constant.
Econ 202
Dr. Ugur Aker
7
An Example of Demand
Ticket Price for Cleveland Orchestra Number of Concerts Attended
100
0
50
1
30
3
20
6
10
12
Ticket Price
Demand for Cleveland Orchestra
150
100
50
0
0
5
10
Concerts
Attended
Econ 202
Dr. Ugur Aker
15
8
Income Increase
Ticket Price for Cleveland Orchestra Number of Concerts Attended
100
0
50
1
30
3
20
6
10
12
2Y
1
2
6
12
24
PricePrice
of
Ticket
Tickets
Demand
Demand
for Cleveland
with Higher
Orchestra
Income
150
150
100
100
5050
0 0
0 0
10 15
5 5
10
Concerts
Attended
Number
of Concerts
Econ 202
Dr. Ugur Aker
15
20
25
9
Exercises

Show what happens to the demand for Coke when
Pepsi price rises.
 Show what happens to demand for computers when
monitor prices increase.
 Show what happens to demand for Firestone tires after
the Federal government accused them of faulty
product.
 Show what happens to teenage demand for cigarettes if
originally price is $2 and consumption is 1 million and
price goes up to $2.20.
Econ 202
Dr. Ugur Aker
10
Teenage Smoking
$2.20
$2.00
880,000 1 million
Econ 202
Dr. Ugur Aker
11
Determinants of Supply

Price of the product


Input prices


W up => Q down
Technology


P up => Q up
New technology => Q up
Expected price

Pe up => Q down
Econ 202
Dr. Ugur Aker
12
An Example of Supply
Price of Chairs Quantity Supplied
0
0
25
100
50
200
75
300
100
400
Price
Supply of Chairs
120
100
80
60
40
20
0
0
100
200
300
Quantity
Econ 202
Dr. Ugur Aker
400
13
Input Price Increase
Price of Chairs Quantity Supplied Supply w/ higher wages
0
0
0
25
100
75
50
200
150
75
300
225
100
400
300
Price
Price
Rise
in Input
Prices
Supply
of Chairs
150
120
100
100
80
60
50
40
0
20
0 0
0
100
100
200
300
Quantity
200
Quantity 300
Econ 202
Dr. Ugur Aker
400
400
14
Exercises

Show what happens when new technology
is employed.
 Show what happens when cost of capital
increases.
 Show what happens when new firms enter
into the market.
Econ 202
Dr. Ugur Aker
15
Equilibrium

Equilibrium takes place when the quantity
supplied into the market exactly matches
quantity demanded.
 If quantity supplied exceeds quantity
demanded, there will be unsold quantities.
– Sellers will lower price to get rid of excess
inventory.

If quantity demanded exceeds quantity
supplied, price will inch up to bring the
market into equilibrium.
Econ 202
Dr. Ugur Aker
16
Price Controls, Price Supports

Show the effect of rent control, gas price
controls, wage controls.
 Show the effect of agricultural price
supports, export supports.
Econ 202
Dr. Ugur Aker
17
Disequilibrium and Social
Welfare

Why both the sellers and buyers are better
off when they move toward equilibrium?
Econ 202
Dr. Ugur Aker
18
Disequilibrium and Social
Welfare
Econ 202
Dr. Ugur Aker
19
Exercises

Show what will happen to quantity and
price when income rises and technology
improves.
 Show what will happen to quantity and
price when the state increases the sales tax.
 Show what will happen to quantity and
price when wages increase and tastes favor
the product.
Econ 202
Dr. Ugur Aker
20
What Is Happening to
Farmland Around Hiram?

Farmland is being transformed into
residential developments.
 Are we going to be without food?
 How does the price system allocate the land
between residential development and
farmland?
 Why don’t economists worry about the
shortage of food?
Econ 202
Dr. Ugur Aker
21
Social vs. Private Costs

Why an action might be smart for one but
dumb for all?
 How does the market reach optimal welfare
when social costs are different than private
costs?
Econ 202
Dr. Ugur Aker
22