Demand, Supply, and the Market Process (15th ed)

Demand, Supply, and the Market Process (15th ed)

PRIVATE AND PUBLIC CHOICE 16TH EDITION GWARTNEY STROUP SOBEL MACPHERSON Demand, Supply, and the Market Process Full Length Text Part: 2 Micro Only Text Part: 2 Macro Only Text Part: 2 Chapter: 3 Chapter: 3 Chapter: 3 To Accompany: Economics: Private and Public Choice, 16th ed. James Gwartney, Richard Stroup, Russell Sobel, & David Macpherson Slides prepared by Joseph Connors with the assistance of Charles Skipton & James Gwartney Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page Consumer Choice and the Law of Demand th 16 edition Gwartney-Stroup Sobel-Macpherson Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page Economics and Your World th

16 edition Gwartney-Stroup Sobel-Macpherson Your local grocery store is a great place to see economics in action. Literally millions of individuals from around the world have been involved in the process of getting these goods to the shelves in just the right quantities. Market prices, reflecting the forces of demand and supply, coordinate their actions and bring their choices into harmony. Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page Law of Demand th 16 edition Gwartney-Stroup Sobel-Macpherson Law of Demand: the inverse relationship between the price of a good and the quantity consumers are willing to purchase. As the price of a good rises, consumers buy less. The availability of substitutes (goods that perform similar functions) explains this negative relationship. Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.

First page Market Demand Schedule th 16 edition Gwartney-Stroup Sobel-Macpherson A market demand schedule shows the quantity of a good people will demand at varying prices. Consider the market for pizza. A market demand schedule lays out the quantity of pizzas demanded at various prices. We can graph these points (the different prices and respective quantities demanded) to make a demand curve for pizzas. Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page th 16 edition Market Demand Schedule Price of Pizza $ 35 $ 30 $ 25 $ 20 $ 15

$ 10 $ 5 Quantity of Pizza (thousands per month) 4 6 8 10 12 14 16 Note: While a straight line is used to depict the demand curve here, there is no presumption that this will be the case. Gwartney-Stroup Sobel-Macpherson Price 35 30 25 20 15 10 Demand 5 Quantity 0

4 6 8 10 12 14 (thousands 16 per month) Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page th 16 edition Market Demand Schedule Gwartney-Stroup Sobel-Macpherson Price 35 Notice how the law of demand is reflected by the shape of the demand curve. As the price of a good rises

consumers buy less. 30 25 20 15 10 Demand 5 Quantity 0 4 6 8 10 12 14 (thousands 16 per month) Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page th 16 edition

Market Demand Schedule Gwartney-Stroup Sobel-Macpherson Price The height of the demand curve at any particular quantity shows the maximum price consumers are willing to pay for that additional unit. Thus, the height of the curve reflects the consumers valuation of the marginal unit. For example, when 6 thousand pizzas are consumed, the value of the last pizza is $30. 35 30 25 20 15 10 Demand 5 Quantity 0 4 6

8 10 12 14 (thousands 16 per month) Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page Consumer Surplus th 16 edition Gwartney-Stroup Sobel-Macpherson Consumer Surplus: the area below the demand curve but above the actual price paid. Consumer surplus is the difference between the amount consumers are willing to pay and the amount they have to pay for a good. Lower market prices increase the amount of consumer surplus in the market. Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page

th 16 edition Price and Quantity Purchased Consider the market for pizzas. Suppose the market price is $20. At $20 (the market price), the 16 thousandth pizza will not be purchased because the consumer who demands it is only willing to pay up to $5 for it. The 4 thousandth pizza will be purchased because the consumer who demands it is willing to pay up to $35. The 10 thousandth pizza, and those that precede it, will be purchased because each of these pizzas are valued as much or more than the $20 market price. Gwartney-Stroup Sobel-Macpherson Price 35 30 Market price = $20 20 10 5

Demand Quantity 0 4 6 8 10 12 (thousands 14 16 per month) Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page th 16 edition Consumer Surplus Gwartney-Stroup Sobel-Macpherson Price Consumer surplus is the difference between what the consumer is willing to pay and what they have to pay. Buyers of the first 10 thousand pizzas are willing to pay more than

$20. Hence, the area above the actual price paid (the market price) and below the demand curve represents consumer surplus. Consumer surplus represents the net gains to buyers from the purchases. Consumer surplus 35 30 Market price = $20 20 10 5 Demand Quantity 0 4 6 8 10 12 (thousands 14 16 per month)

Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page Elastic and Inelastic Demand Curves th 16 edition Gwartney-Stroup Sobel-Macpherson Elastic demand A change in price leads to a relatively large change in quantity demanded. Demand will be elastic when close substitutes for the good are readily available. Inelastic demand A change in price leads to a relatively small change in quantity demanded. Demand will be inelastic when few, if any, close substitutes are available. Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page th 16 edition Elastic and Inelastic Demand Curves When the market price for gasoline increases from $2 to $4 a gallon, the quantity demanded in the market falls relatively little from 10

to 8 million units per week. In contrast, when the market price for tacos rises from $2 to $4, the quantity demanded in the market falls sharply from 10 to 4 million units per week. Because the quantity demanded for tacos is highly sensitive to price changes, the demand for tacos is elastic. Because the quantity demanded of gas is largely insensitive to price changes, the demand for gasoline is inelastic. Gwartney-Stroup Sobel-Macpherson Price $4 Gasoline market $2 D Quantity (gasoline) 8 10 Price $4

Taco market $2 D Quantity 4 10 Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. (tacos) First page Questions for Thought: th 16 edition Gwartney-Stroup Sobel-Macpherson 1.(a) Are prices an accurate reflection of a goods total value? Are prices an accurate reflection of a goods marginal value? What is the difference? (b) Consider diamonds and water. Which of these goods provides the most total value? Which provides the most marginal value? Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page Changes in Demand versus

Changes in Quantity Demanded th 16 edition Gwartney-Stroup Sobel-Macpherson Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page Changes in Demand and Quantity Demanded th 16 edition Gwartney-Stroup Sobel-Macpherson Change in Demand a shift in the entire demand curve. Change in Quantity Demanded a movement along the same demand curve in response to a change in its price. Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page th 16 edition An Increase in Demand Gwartney-Stroup

Sobel-Macpherson Price (dollars) If tablet computers cost $300 each, the demand curve for DVDs, D1, 300 indicates that Q1 units will be demanded. If the price of tablet computers falls to $100, the quantity demanded will 200 increase to Q2 units (where Q2 > Q1). Several factors will change the demand for the good (shift the entire demand curve). 100 As an example, suppose consumer income increases. The demand for tablet computers at all prices will increase. After the shift of demand, Q3 units are demanded at $100 instead of Q2 (Q3 > Q2 > Q1). D2 D1 Quantity Q1 Q2

computers Q3 (tablet per month) Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page th 16 edition A Decrease in Demand If a pizza costs $20, then the demand curve for pizzas, D1, indicates that 200 units will be demanded. If the price falls to $10, the quantity demanded of pizzas will increase to 300 units. If the number of pizza consumers changes, then the demand for it will generally change. For example, in a college town during the summer students go home and the demand for pizzas at all prices decreases. After the shift of demand, 200 units are demanded at $10. Gwartney-Stroup Sobel-Macpherson Price (dollars) 20

10 D2 D1 Quantity 0 200 (Pizzas 300 per week) Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page Demand Curve Shifters th 16 edition Gwartney-Stroup Sobel-Macpherson The following will lead to a change in demand (a shift in the entire curve): Changes in consumer income Change in the number of consumers Change in the price of a related good Changes in expectations Demographic changes Changes in consumer tastes and preferences

Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page Questions for Thought: th 16 edition Gwartney-Stroup Sobel-Macpherson 1. Which of the following do you think would lead to an increase in the demand for beef: (a) higher pork prices, (b) higher incomes, (c) higher grain prices used to feed cows, (d) a scientific study linking high beef consumption with cancer, (e) an increase in the price of beef? 2. What is being held constant when a demand curve for a product (like shoes or apples) is constructed? Explain why the demand curve for a product slopes downward and to the right. Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page Producer Choice and the Law of Supply th 16 edition Gwartney-Stroup Sobel-Macpherson Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.

First page Cost and the Output of Producers th 16 edition Gwartney-Stroup Sobel-Macpherson Producers purchase resources and use them to produce output. Producers will incur costs as they bid resources away from their alternative uses. Opportunity cost of production: The sum of the producers costs of employing each resource required to produce the good. Firms will not stay in business for long unless they are able to cover the cost of all resources employed, including the opportunity cost of the resources owned by the firm. Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page Economic and Accounting Cost th 16 edition Gwartney-Stroup Sobel-Macpherson Economic Cost the cost of all resources used to produce the good.

Accounting Cost often ignores the opportunity costs of resources owned by the firm (for example, the firms equity capital). Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page Keys to Prosperity: Role of Profits and Losses th 16 edition Gwartney-Stroup Sobel-Macpherson Profit occurs when a firms revenues exceed its costs. Firms supplying goods for which consumers are willing to pay more than the opportunity cost of the resources required to produce the good will make a profit. Firms making profits will expand, while those making losses will contract. Profits are a reward for producing products that are valued more than the resources required for their production. Losses are a penalty imposed on firms that use resources in ways that reduce their market value. Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page Law of Supply th

16 edition Gwartney-Stroup Sobel-Macpherson Law of Supply: there is a positive relationship between the price of a product and the amount of it that will be supplied. As the price of a product rises, producers will be willing to supply a larger quantity. Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page th 16 edition Market Supply Schedule Price of Pizza $ $ $ $ $ $ $ 5 10 15 20 25 30

35 Quantity of Pizza (thousands per month) 4.0 5.3 6.7 8.0 9.3 10.7 12.0 Gwartney-Stroup Sobel-Macpherson Price Supply 35 30 25 20 15 10 5 Quantity 0 4 6

8 10 12 14 (thousands 16 per month) Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page th 16 edition Market Supply Schedule Price of Pizza $ $ $ $ $ $ $ 5 10 15 20 25

30 35 Quantity of Pizza (thousands per month) 4.0 5.3 6.7 8.0 9.3 10.7 12.0 Gwartney-Stroup Sobel-Macpherson Price Supply 35 30 25 20 15 10 5 Quantity 0 4 6

8 10 12 14 (thousands 16 per month) Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page th 16 edition Market Supply Schedule Gwartney-Stroup Sobel-Macpherson Price Supply 35 Notice how the law of supply is reflected by the shape of the supply curve. As the price of a good rises producers supply more.

30 25 20 15 10 5 Quantity 0 4 6 8 10 12 14 (thousands 16 per month) Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page th 16 edition Market Supply Schedule The height of the supply curve at

any quantity shows the minimum price necessary to induce producers to supply that unit. The height of the supply curve at any quantity also shows the opportunity cost of producing that unit. Here, producers require $15 to induce them to supply the 6.7 thousandth unit while they would require $25 to supply the 9.3 thousandth unit. Gwartney-Stroup Sobel-Macpherson Price Supply 35 30 25 20 15 10 5 Quantity 0 4 6 8

10 12 14 (thousands 16 per month) Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page th 16 edition Price and Quantity Supplied Consider the market for pizzas. Suppose the market price is $20. The 12 thousandth unit will not be produced as the cost of supplying it ($35) exceeds the market price. The 4 thousandth unit will be produced because the cost of supplying it ($5) is less than the market price of $20. The 8 thousandth unit, and all those that precede it, will be produced as the cost of supplying them is equal to or less than the market price. Gwartney-Stroup Sobel-Macpherson

Price Supply 35 Market price = $20 20 5 Quantity 0 4 6 8 10 (thousands 12 per month) Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page th 16 edition Producer Surplus Producer surplus is the difference

between the lowest price a supplier will accept to produce the good (the opportunity cost of the resources) and the price they actually get (the market price). Producers are willing to supply the first 8 thousand pizzas for less than $20. Hence, the area above the supply curve but below the actual market price represents producer surplus. Producer surplus represents the net gains to producers (including resource suppliers) from the sales. Gwartney-Stroup Sobel-Macpherson Price Supply (monthly bill) 35 Market price = $100 20 Producer surplus 5

Quantity 0 4 6 8 10 (thousands 12 per month) Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page Elastic and Inelastic Supply Curves th 16 edition Gwartney-Stroup Sobel-Macpherson Elastic supply Quantity supplied is relatively sensitive to changes in price. Thus, a change in price leads to a relatively large change in quantity supplied. Inelastic supply Quantity supplied is not very sensitive to changes in price. Thus, a change in price leads to only a relatively small change in quantity supplied.

Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page th 16 edition Elastic and Inelastic Supply Curves When the market price for soft drinks increases from $1.00 to $1.50 a six-pack, the quantity supplied to the market rises from 100 to 200 million units per week. When the market price for physician services rises from $100 to $150 an office visit, the quantity supplied rises from 10 to 12 million visits per week. Because soft drink supply is quite sensitive to price changes, its supply is elastic. Because the supply of physician services is relatively insensitive to changes in price, its supply is inelastic. Gwartney-Stroup Sobel-Macpherson Price Soft drink market S

$1.50 $1.00 Quantity 50 100 Price 150 200 S $150 (million . 6-packs) Physician Services market $100 Quantity 10 12 Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. (million. visits) First page Questions for Thought:

th 16 edition Gwartney-Stroup Sobel-Macpherson 1. (a) What is being held constant when the supply curve for a specific good like pizza or cars is constructed? (b) Why does the supply curve for a good slope upward and to the right? 2. What is producer surplus? Is producer surplus basically the same thing as profit? 3. What must an entrepreneur do in order to earn a profit? How do the actions of firms earning a profit influence the value of resources? What happens to the value of resources when losses are present? Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page Questions for Thought: th 16 edition Gwartney-Stroup Sobel-Macpherson 4. What does the cost of a good or service reflect? Will producers continue to supply a good or service if consumers are unwilling to pay a price sufficient to cover the cost? 5. Suppose you decide that it is in your self-interest to establish a computer repair business. Will others be better off or worse off if your business earns a profit? How will the well-being of your customers be affected?

Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page Changes in Supply versus Changes in Quantity Supplied th 16 edition Gwartney-Stroup Sobel-Macpherson Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page Changes in Supply and Quantity Supplied th 16 edition Gwartney-Stroup Sobel-Macpherson Change in Supply a shift in the entire supply curve. Change in Quantity Supplied movement along the same supply curve in response to a change in its price. Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page th

16 edition A Decrease in Supply Gwartney-Stroup Sobel-Macpherson Price (dollars) If the market price for gasoline is $3.00 a gallon, the supply curve for gasoline $3 S1 indicates Q1 units would be supplied. If the price fell to $2.00, the quantity supplied would fall to Q2 units (where Q2 < Q1). $2 If, somehow, the opportunity costs for gasoline producers changed then the supply of gas would change. Consider the case where the cost of $1 crude oil (an input in the production of gasoline) increases the supply of gasoline at all potential market prices would fall. Now at $2.00, Q3 units are supplied instead of Q2 (Q3 < Q2 < Q1). S2 S1 Quantity Q3

Q2 Q1 Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. (units of gasoline per year) First page Supply Curve Shifters th 16 edition Gwartney-Stroup Sobel-Macpherson The following will cause a change in supply (a shift in the entire curve): Changes in resource prices Changes in technology Elements of nature and political disruptions Changes in taxes Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page How Market Prices are Determined th 16 edition

Gwartney-Stroup Sobel-Macpherson Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page th 16 edition Market Equilibrium Gwartney-Stroup Sobel-Macpherson This table & graph indicate demand & supply conditions of the market for calculators. Equilibrium will occur where the quantity demanded equals the quantity supplied. If the price in the market differs from the equilibrium level, market forces will guide it to equilibrium. A price of $12 in this market will result in a quantity demanded of 450 and a quantity supplied of 600 resulting in an excess supply. With an excess supply present, there will be downward pressure on price to clear the market. Price (dollars) 12 Quantity Quantity supplied demanded (per day)

600 (per day) > 450 10 550 550 8 500 650 Condition Direction in the of pressure market on price Excess supply Downward S Price ($) 13 12 11

10 9 8 7 D 450 500 550 600 650 Quantity Quantity supplied = 600 Quantity demanded = 450 Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page th 16 edition Market Equilibrium Gwartney-Stroup Sobel-Macpherson S Price ($) A price of $8 in this market will result in a quantity supplied of 500 and quantity demanded of 650 resulting in an excess demand. With an excess demand present, there will be upward pressure on price to clear the market.

Price (dollars) 12 Quantity Quantity supplied demanded (per day) 600 10 550 8 500 (per day) > 450 Condition Direction in the of pressure market on price Excess supply

Downward 650 Excess demand Upward D 450 500 550 600 650 Quantity Quantity demanded = 650 Quantity supplied = 500 550 < 13 12 11 10 9 8 7 Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page th

16 edition Market Equilibrium Gwartney-Stroup Sobel-Macpherson S Price ($) A price of $10 in this market results in quantity supplied of 550 and a quantity demanded of 550 resulting in market balance. When the market is in balance, there will be an equilibrium present and the market will clear. Price (dollars) Quantity Quantity supplied demanded (per day) 12 600 10 550 8 500

(per day) > = < 450 550 650 Condition Direction in the of pressure market on price Excess Downward supply Market Equilibrium Balance Excess demand Upward 13 12 11 10 9 8 7 D 450 500 550 600 650 Quantity

Quantity supplied = 550 Quantity demanded = 550 Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page th 16 edition Market Equilibrium At every price above market equilibrium there is excess supply and there will be downward pressure on the price level. At every price below market equilibrium there is excess demand and there will be upward pressure on the price level. At the equilibrium price, quantity demanded and quantity supplied are in balance. Price (dollars) Quantity Quantity supplied demanded (per day) 12 600

10 550 8 500 (per day) > = < 450 550 650 Condition Direction in the of pressure market on price Gwartney-Stroup Sobel-Macpherson S Price ($) 13 12 11 10 9 8

7 Excess supply Equilibrium price Excess demand 450 500 550 600 650 D Quantity Excess Downward supply Market Equilibrium Balance Excess demand Upward Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page th 16 edition Net Gains to Buyers and Sellers Lets return to the market for calculators. When the market is in equilibrium where quantity supplied just equals quantity demanded price equals $10.

Recall that the area above the market price and below the demand curve is called consumer surplus and that the area above the supply curve but below the market price is called producer surplus. Together, these two areas represent the net gains to consumers and producers of the product. When equilibrium is present, all of the potential gains from production and exchange are realized. Gwartney-Stroup Sobel-Macpherson Price Supply Net gains to buyers and sellers 14 12 Market price = $10 10 Equilibrium 8

6 Demand 0 450 550 650 Quantity Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page th 16 edition Equilibrium and Efficiency Gwartney-Stroup Sobel-Macpherson Price It is economically efficient to undertake actions when the benefits of doing so exceed the costs. What is the consumers valuation of the 450th unit of calculators brought to market? What is the opportunity cost of delivering the 450th unit to

market? Does it make sense, from an economic efficiency standpoint, to use resources to supply this unit? Supply 14 12 10 8 6 Demand 0 450 550 650 Quantity Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page th 16 edition Equilibrium and Efficiency

Gwartney-Stroup Sobel-Macpherson Price (monthly bill) What is the consumers valuation of the 650th unit of calculators brought to market? What is the opportunity cost of delivering the 650th unit to market? Does it make sense, from an economic efficiency standpoint, to use resources to supply this unit? Supply 14 12 10 8 6 Demand 0 450 550 650

Quantity Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page th 16 edition Equilibrium and Efficiency Gwartney-Stroup Sobel-Macpherson Price At the equilibrium output level (the 550th unit), the consumers valuation of the marginal unit and the producers opportunity cost of the resources necessary to bring that unit to market are equal. In equilibrium all units valued more than their costs are produced and the potential gains from production and exchange are maximized. This outcome is economically efficient. Supply 14 12

10 8 6 Demand 0 450 550 650 Quantity Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page Questions for Thought: th 16 edition Gwartney-Stroup Sobel-Macpherson 1. How is the market price of a good determined? When the market for a good is in equilibrium, how will the consumers evaluation of the marginal unit compare with the opportunity cost of producing the unit? Is the equilibrium price consistent with economic efficiency? Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.

First page How Markets Respond to Changes in Demand & Supply th 16 edition Gwartney-Stroup Sobel-Macpherson Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page Effects of a Change in Demand th 16 edition Gwartney-Stroup Sobel-Macpherson When demand decreases the equilibrium price and quantity will fall. When demand increases the equilibrium price and quantity will rise. Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page Market Adjustment to an Increase in Demand Consider the market for eggs. Prior to the Easter season, the market for eggs produces an equilibrium where quantity supplied equals

quantity demanded at a price of $1.60 a dozen & output of Q1. Every year during the Easter holiday the demand for eggs increases (shifts from D1 to D2). What happens to the equilibrium price and output level? Now at $1.60, quantity demanded exceeds quantity supplied. An upward pressure on price induces existing suppliers to increase their quantity supplied. Equilibrium now occurs at output level Q2 and price $2.00. What do you think will happen to price and output after the Easter holiday? th 16 edition Gwartney-Stroup Sobel-Macpherson Price ($ per doz) S 2.40 2.00 1.60 D2 1.20

D1 Q1 Q2 Quantity (million doz eggs per week) Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page Effects of a Change in Supply th 16 edition Gwartney-Stroup Sobel-Macpherson When supply decreases the equilibrium price will rise and the equilibrium quantity will fall. When supply increases the equilibrium price will fall and the equilibrium quantity will rise. Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page th 16 edition

Market Adjustment to a Decrease in Supply Consider the market for lemons. Initially equilibrium is present where quantity demanded equals quantity supplied at a market price of $0.20 and output of Q1. Suppose adverse weather reduces the supply of lemons (shift from S1 to S2). What happens to both the price and output level in the market? Now at $0.20, quantity demanded exceeds quantity supplied. Upward pressure on price reduces quantity demanded by consumers. Equilibrium now occurs at a price of $0.30 and output level of Q2. What do you think will happen to the price and output of lemons when weather returns to normal? Gwartney-Stroup Sobel-Macpherson Price S2 ($ per lemon) S1 0.40 0.30

0.20 0.10 D Q2 Q1 Quantity (millions of lemons per week) Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page Questions for Thought: th 16 edition Gwartney-Stroup Sobel-Macpherson 1. How has the availability and growing popularity of online music stores (like Apples iTunes) affected the market for music CDs purchased from brick-and-mortar stores like Target or Wal-Mart? Use the tools of demand and supply to illustrate. 2. How have technological advances in miniature batteries and lower computer chip prices affected the market for smart phones? Use the tools of demand and supply to illustrate. Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part.

First page The Invisible Hand Principle th 16 edition Gwartney-Stroup Sobel-Macpherson Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page Keys to Prosperity: The Invisible Hand th 16 edition Gwartney-Stroup Sobel-Macpherson Invisible hand: the tendency of market prices to direct individuals pursuing their own self interests into productive activities that also promote the economic well-being of society. This direction, provided by markets, is a key to economic progress. Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page The Invisible Hand th

16 edition Gwartney-Stroup Sobel-Macpherson Adam Smith highlights the role of self interest and the invisible hand of market forces in the following passage. Every individual is continually exerting himself to find out the most advantageous employment for whatever capital [income] he can command. It is his own advantage, indeed, and not that of the society which he has in view. But the study of his own advantage naturally, or rather necessarily, leads him to prefer that employment which is most advantageous to society He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was not part of his intention. Adam Smith, The Wealth of Nations (1776) Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page Communicating Information th 16 edition Gwartney-Stroup Sobel-Macpherson Product prices communicate up-to-date information about the consumers valuation of additional units of each commodity. Without the information provided by market prices it would be impossible for decision-makers to determine how intensely a good was desired relative to its opportunity cost.

Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page Coordinating Actions of Market Participants th 16 edition Gwartney-Stroup Sobel-Macpherson Price changes coordinate the choices of buyers and sellers and bring them into harmony. Price changes create profits and losses which direct producers toward the production of goods and services that are valued most highly relative to cost. Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page Motivating Economic Participants th 16 edition Gwartney-Stroup Sobel-Macpherson Suppliers have an incentive to produce efficiently (at a low cost). Entrepreneurs have an incentive to both innovate and produce goods that are highly valued relative to cost. Resource owners have an incentive both to develop and supply resources that producers value highly.

Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page Market Order th 16 edition Gwartney-Stroup Sobel-Macpherson Competitive markets the forces of supply and demand lead to market order, low-cost production, and economic progress. One statisticthe current market price of a particular good or serviceprovides buyers and sellers with what they need to bring their actions into harmony with the best possible information on the current actions and preferences of others. The pricing system coordinates the choices of literally millions of consumers, producers, and resource owners and thereby provides market order. The process works so automatically that it is often taken for granted. Hence, the term invisible hand. Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page Qualifications th 16 edition Gwartney-Stroup Sobel-Macpherson

The efficiency of market organization is dependent upon: The presence of competitive markets. Well-defined and enforced private property rights. Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page Questions for Thought: th 16 edition Gwartney-Stroup Sobel-Macpherson 1. Consider a large business firm like Wal-Mart. Does it need to be regulated in order to assure that it produces efficiently? Is regulation needed to assure that it will supply the goods and services that consumers want? 2. How can you explain that the quantities of milk, bananas, candy bars, televisions, notebook paper and thousands of other items available in your hometown are approximately equal to the quantities of these items that local consumers desire to purchase? Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page Questions for Thought: th 16 edition Gwartney-Stroup

Sobel-Macpherson 3. What is the invisible hand principle? Does it indicate that good intentions are necessary if ones actions are going to be beneficial to others? What are the necessary conditions for the invisible hand to work well? Why are these conditions important? 4. The output generated by our economy should not be left to chance. We need to have someone in charge who will make sure that resources are used wisely. (a) When resources and goods are allocated by markets, is the output left to chance? (b) In a market economy, what determines whether or Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page End of Chapter 3 Copyright 2017 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible web site, in whole or in part. First page

Recently Viewed Presentations

  • PearsonAccess Next

    PearsonAccess Next

    PearsonAccess Next User Accounts. See the . PearsonAccess Next and Training Center User Role Matrix. under User Guides on the Resources & Training page on PearsonAccess Next. All DAC accounts are created by Pearson from MDE-ORG. DACs are responsible for...
  • Chapter 3

    Chapter 3

    CHAPTER 3 THERAPEUTIC RANGE And ROUTES OF ADMINISTRATION Part 1 PROPER DRUG ADMINISTRATION PROPER DRUG ADMINISTRATION is not simply calculating the correct amount of medication to prescribe to a patient.
  • Unit 3 Level F - Augusta County Public Schools

    Unit 3 Level F - Augusta County Public Schools

    UNIT 1 LEVEL F Noun Definition: a combination, union, or merger for some specific purpose. Synonyms: alliance, league, federation, combine Antonym: splinter group Sentence: The various community organizations formed a coalition to lobby against parking laws; this alliance helped to...
  • Industry Day Brief Template November 2017 DHA Industry ...

    Industry Day Brief Template November 2017 DHA Industry ...

    Acquisition Decision Brief planned for 2QTRFY19 . Contract opportunities in FY21 - FY25. Learning Strategy, Tactics and Technology (LSTT) ... Industry Day Brief Template November 2017 DHA Industry Exchange November 30, 2017 Last modified by:
  • Corporate powerpoitn template

    Corporate powerpoitn template

    In 6 months to March 2016, only one 3 bed home advertised on rightmove within LHA limits in B&H (monthly snapshot) Brighton & HoveAverage Property Prices(to end March 2016) England & Wales 36982 37012 37043 37073 37104 37135 37165 37196...
  • Switching from Field Enumeration to an ABS Frame:

    Switching from Field Enumeration to an ABS Frame:

    Did this analysis in a continued quest for a pattern of when bias would be a problem and when it would not. Given that NSDUH is SO large, we thought this was driving the large number of significant differences. If...
  • Figure 1 Return and Risk December 1969 to May 2004

    Figure 1 Return and Risk December 1969 to May 2004

    NBER, Cambridge, MA USA Commodity Futures: Summary Statistics Since 1969, the Goldman Sachs Commodity Index (GSCI) has outperformed the S&P 500 What does this imply about our asset allocation decision to commodity futures? The critical question is whether the past...
  • Evidences Class N.T. Greek Manuscript Evidence 1. What

    Evidences Class N.T. Greek Manuscript Evidence 1. What

    As it is written in Isaiah the prophet (the prophets; NKJV), "Behold, I send my messenger before your face, who will prepare your way, the voice of one crying in the wilderness: 'Prepare the way of the Lord, make his...