Embed Size (px)
Citation preview
“Free Market Capitalism is the worst economic system
except for every other system ever tried”
Winston Churchill
Capitalism Economic system in which the means of
production are privately owned
Decisions are made by private actors in a free market: A market in which there is NO economic intervention and NO regulation by the government, except to enforce private contracts and the ownership of property.
Free Market Forces
Determine what to produce: Choose winners and losers among goods.
Determine how to produce: Choose winners and losers among firms.
Determine the “correct” prices.
3
MarketsGoods and Services
Labor
Money
Price
Wage
What makes people pay more?
Price of a gallon of Perfume (Channel No.5) is $25,600
Price of a gallon of gasoline is $2.40
Price of a gallon of tap water is ~$0
5
Perfectly Competitive Market There are so many buyers that no single buyer can
affect the price: buyers are price takers. There are so many firms that no single firm can affect
the price: firms are price takers. All firms sell identical products. Established firms have no advantages over new firms:
If a firm experiences a technological breakthrough other firms will copy immediately.
Sellers and buyers have all necessary information about prices.
There are no costs to enter or exit the industry.
Free Market Mechanism1. Behavior of buyers
2. Behavior of sellers
3. Mechanics of the interaction between buyers and sellers which result in the “best” price
4. When we do not like the “best” price
In a Perfectly Competitive Market
There are so many buyers that no buyer has the power to affect the price.
9
We say thatBuyers are
price takers.
Demand CurvesSlope DOWN to the right.
10
$15,000
$20,000
$30,000
$60,000
1 2 3 4
PRICE per unit
QUANTITY Demanded (Cars)
$90,000
0
Szekelys Demand line
A movem
ent Along
A
B
Buy more as the price drops
Quantity Demanded increases as the price drops
$15,000
$20,000
$30,000
$60,000
1 2 3 4
PRICE
QUANTITY Cars
$90,000
0
Szekelys are now RicherAn increase in Incomes shifts Demand to the
right
An increase in Incomes shifts Demand to the
right
Poor Szekelys Demand line
Rich Szekelys Demand line
Buy more when Income
increases
Demand increase when Income
increases
12
$90,000
$100,000
$120,000
$150,000
10 20 30 40
PRICE
Quantity Mercedes-Benz
$170,000
0
“Mercedes-Benz is now worldwide known as the top choice of tyrannical dictators
and corrupt politicians”
A change in Tastes shifts Demand
A change in Tastes shifts Demand
Colombian Government Demand
Buy less when tastes
change
Demand decrease when tastes change
$60,000
$70,000
$80,000
$90,000
10 20 30 40
Price
Quantity Tesla
$100,000
0
Price
Quantity Mercedes-Benz
Price of Tesla drops
Demand for M
ercedes drops
Quantity Demanded increases as the price drops
Buy more Tesla Buy fewer
Mercedes
A drop in Price of a substitute good shifts
Demand to the left
A drop in Price of a substitute good shifts
Demand to the left
Important Distinction!
Important Distinction!
1515
$15,000
$20,000
$30,000
$60,000
1 2 3 4
PRICE per unit
QUANTITY Demanded
$90,000
0
2010
Changes in Quantity Demanded are represented by a Movement Along the Demand Curve
120
150
0 6 24 30
D0
30
100
50
A movem
ent Along
A
B
Changes in Quantity Demanded are caused by a change in the price
DemandDemandThe The complete set complete set
of price and of price and quantity quantity demanded for demanded for an individualan individual
$15,000
$20,000
$30,000
$60,000
1 2 3 4
Price
QUANTITY Demanded
$90,000
0
Changes in Demand are represented by SHIFTS of the entire line
Changes in Demand are caused by changes in Incomes, Tastes, Prices of related goods and expectations
10 20 30 40
Price
Quantity Mercedes-Benz
0
The Law of Demand
19
Implies that
Demand CurvesSlope DOWN to the right.
The Ceteris Paribus Assumption
20
Means that all other factors –Income, taste, prices of related goods and expectations that affect a buyer’s decision are assumed to remain constant, whether they actually remain constant or not.
“Other things constant” means that all other factors –different from the price- that affect a buyer’s decision are assumed to remain constant
Use the law of demand to predict how buyers will react to a decrease in the price of cars.
Quantity Demanded increases: IF and only IF nothing but the price changes.
What if at the same time that car prices drop, incomes also drop?
We can not use the law of demand. Two variables changed (income and prices).
21
Use the law of demand to predict how buyers will react to a decrease in the price of California wines.
Quantity Demanded increases: IF and only IF nothing but the price changes.
What if at the same time the price of French wines also drops?
We can not use the law of demand. Two variables changed (price and price of a related good).
22
Use the law of demand to predict how buyers will react to a decrease in the price of jeans.
Quantity Demanded increases: IF and only IF nothing but the price changes.
Suppose that Bluefly jeans were $240 at Nordstrom and now they are available at Costco for $19.99!
We can not use the law of demand. Two variables changed (tastes and prices).
23
24
Use the law of demand to predict how buyers will react to a decrease in the price of pork
Quantity Demanded increases: IF and only IF nothing but the price changes.
At the same time a news report warns of infected pork meat.
We can not use the law of demand. Two variables changed (price and tastes).
The Law of Demand
25
When the price drops ceteris paribus the quantity demanded increases
and vice versa.
26
Normal Goods Goods that people buy
more when their income increases
Goods that people buy less when their income decreases Homes
Health Care Services
Restaurant Meals
Demand for Normal Goods Increase when income increases
Demand for Normal Goods Decrease when income decreases
27
Inferior Goods Goods that people are
forced into buying when incomes drop.
Goods that people buy less or stop buying when income increases.
Bus Rides
Generic ProductsGeneric Products
Demand for Inferior Goods Decrease when income increases
Demand for Inferior Goods Increase when income decreases
28
Substitute Goods:
Goods that can serve as replacements for one another.
When one of the goods becomes more expensive, demand for the other good increases.
Perfect substitutes are identical products from the point of view of the buyer.
29
Substitute Goods Fuel oil, natural gas (used for heating or electricity), coal,
nuclear fuels, windmills, etc
Butter and margarine
Wood and bricks
Cellular phones and public pay phones
Compact discs and cassettes
Zip disks, memory sticks, CDs.
Different brands of the same product.
30
Complements
Goods that are used together.When one becomes more expensive, we buy fewer units of both goods. When the price of one increases, demand for the other decreases.
31
Complements ipods and itunes
Video game consoles and video games
Computers and software/printers/internet service
Printers and ink cartridges.
Hamburgers and French fries
Cars and gasoline
Phone service and phones
ExpectationsConsumer beliefs about what will happen in the future.
When consumers expect an increase in price of a good in the future, they will increase their purchases of the good TODAY.
When consumers expect an increase in their Income in the future, they will increase their purchases of the good TODAY.
a
b
a
d
c
b
Increase in demand
Increase in quantity demanded
Decrease in quantity demanded
Decrease in demand
Price is the same
Price is the same
Price decreased
Quantity increased
Price increased
Quantity decreased
c
d
34
Apple iPhone and Samsung cell phones are substitutes
Samsung
Price
D
iPhones
Price
DWhat happens to the demand Samsung phones?
Price of Samsung increases.
What happens to quantity demanded of Samsung phones?
35
Demand for Samsung does
not change
0Quantity demanded
Price
A decrease in Quantity Demanded.
D1
A movem
ent UP Along
Increase in Price of
Samsung
Price of Samsung increases.
36
iPhones and Samsung are substitutes
Samsung
Price
D
What will happen to the demand iPhones?
iPhones
Price
D
Price of Samsung increases.
An increase in Demand.
iPods and iTunes songs are complement goods
37
a
d
c
b
Price of Ipod decreases
What will happen to the demand for itunes?
What will happen to the demand for ipods?
What will happen to the quantity demanded for ipods?
a
bNo change
“The current trade agreement between the US and France will expire at the end of next month. This will result in higher prices on French goods”.
What will be the effect on demand for French wine today?
What will be the effect on demand for French wine once tariffs are re-established and prices increase?
What will be the effect on quantity demanded of French wine once tariffs are re-established and prices increase?
3838
a
d
c
b
a
No change
c
3939
4040
4141
4242
DA
$3.50
$1.50
4 8 Qd 3
$1.50
$3.50DB
Qd
P
$1.50
$3.50DC
94 Qd
0
P
$3.50
$1.50
Qd
Market Demand = Horizontal Sum of Individual Demands
PP
From the Individual demand curves to Market demand:
0
208
When more consumers come into the market
44
The market demand increases: shifts to the right
Demand ShiftsPrices of related goods
(complement/substitute)
Incomes(Normal/inferior)
Tastes and Preferences
Expectations(today/future)
Number of consumers in the market.
45
46
In 1996 the “mad cow disease” scare kept Americans from beef and beef products. Consider the effect of this event on purchases of beef in the U.S.The effect of this event on the behavior of buyers in this market would best be represented by arrow ______ which shows a change in (Demand/Quantity Demanded) __________________. This change was caused by a change in (price/incomes/prices of other goods/expectations/tastes and preferences/number of consumers) __________________________
1.
47
In 1996 the “mad cow disease” scare kept Americans from beef and beef products. Consider the effect of this event on purchases of chicken in the U.S.The effect of this event on the behavior of buyers in this market would best be represented by arrow ______ which shows a change in (Demand/Quantity Demanded) __________________. This change was caused by a change in (price/incomes/prices of other goods/expectations/tastes and preferences/number of consumers) __________________________
2.
48
A successful advertising campaign increases the number of teenage smokers. Consider the effect of this event on purchases of cigarettes.The effect of this event on the behavior of buyers in this market would best be represented by arrow ______ which shows a change in (Demand/Quantity Demanded) __________________. This change was caused by a change in (price/incomes/prices of other goods/expectations/tastes and preferences/number of consumers) __________________________
3.
49
Synthetic fibers(like rayon) become available as a substitute for natural fibers(like cotton). Consider the effect of this event on purchases of natural fibers like cotton.The effect of this event on the behavior of buyers in this market would best be represented by arrow ______ which shows a change in (Demand/Quantity Demanded) __________________. This change was caused by a change in (price/incomes/prices of other goods/expectations/tastes and preferences/number of consumers) __________________________
4.
50
Potatoes are considered and inferior good in Bolivia. Incomes in Bolivia increase. What is the effect of this event on the market for potatoes?
The effect of this event on the behavior of buyers in this market would best be represented by arrow ______ which shows a change in (Demand/Quantity Demanded) __________________. This change was caused by a change in (price/incomes/prices of other goods/expectations/tastes and preferences/number of consumers) __________________________
5.
51
Potatoes are considered and inferior good in Bolivia. The price of potatoes increase. What is the effect of this event on the market for potatoes?
The effect of this event on the behavior of buyers in this market would best be represented by arrow ______ which shows a change in (Demand/Quantity Demanded) __________________. This change was caused by a change in (price/incomes/prices of other goods/expectations/tastes and preferences/number of consumers) __________________________
6.
52
Gasoline prices riseWhat is the effect of this event on purchases of gasoline?
What is the effect of this event on purchases of large vehicles?
What is the effect of this event on purchases of electric vehicles?
a
d
c
b
7.
53
Consumer incomes rise.
What is the effect of this event on purchases of gasoline?
What is the effect of this event on purchases of cars?
What is the effect of this event on purchases of public transportation?
a
d
c
b
8.
1. The price of a laptop falls. What is the effect of this price drop on the market for laptops?
2. The price of a laptop falls. What is the effect of this price drop on the market for printers?
3. The price of a laptop falls. What is the effect of this price change on the market for Desk tops?
4. The price of cable TV service increase. What is the effect of this price change on the market for dish TV service?
5. The price of soybeans increase. What is the effect of tyhis price change on the market for soybeans?
6. As the season progresses, it is clear that the Chicago Bulls will make it to the playoffs. What is the effect of this event on the market for tickets to the Chicago Bulls games?
55
7. Per capita incomes in China have risen. What is the effect of this event on the market for cars?
8. A recent report established that Vioxx, a popular drug used for Arthritis, may increase patients risk of heart attack, stroke and kidney failure. What is the effect of this event on the market for Vioxx?
9. A recent report established that Vioxx a popular drug used for Arthritis may increase patients risk of heart attack, stroke and kidney failure. What is the effect of this event on the market for Arthritest and other Arthritis medications?
Consumers consider Folgers and Nescafe substitute goods. Suppose that the price of Folgers increases.
7. What is the effect of this event on the market for Nescafe8. What is the effect of this event on the market for Folgers?
1 2 3 4
PRICE
Quantity Cars0
Changes in Incomes shift Demand to the right
Poor Szekely’s Demand line
Rich Szekely’s Demand line
10 20 30 40
PRICE
Quantity Mercedes-Benz
0
“Mercedes-Benz is now worldwide known as the top choice of tyrannical dictators
and corrupt politicians”
A change in Tastes shifts Demand
Colombian Government’s Demand
$70,000
$90,000
10 30
Price
0
Price
Price of Tesla drops
Demand for M
ercedes drops
Quantity Demanded increases as the price drops
Buy fewerMercedes
Changes in Price of a substitute/complement good
shifts Demand
1 2 3 4
PRICE
Quantity Cars
0
An increase in Number of Buyers shifts Market
Demand
Poor Szekely’s Demand line
Rich Szekely’s Demand line
