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Lecture 6 : Examining Market Mechanics. Money prices and relative real prices Influences on demand Influences on supply Prices and quantities determined by demand and supply Why prices change Work for the Week Chapter 4 in both book and EIA. Opportunity Cost and Price. - PowerPoint PPT Presentation
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Lecture 6 : Examining Market Mechanics
Money prices and relative real prices Influences on demand Influences on supply Prices and quantities determined by
demand and supply Why prices change Work for the Week
– Chapter 4 in both book and EIA
MACRO HAPPENS
ECON 111HOFFMAN
Opportunity Cost and Price
Economic actions arise from scarcity, wants in excess of available resources.
Scarcity implies choices. Choices are influenced by
opportunity costs through substitution.
MACRO HAPPENS
ECON 111HOFFMAN
Opportunity Cost and Relative Price
The ratio of one price to another is called a relative price.
A relative price is an opportunity cost.
We often measure prices relative to a price index, the average price of a basket of goods.
MACRO HAPPENS
ECON 111HOFFMAN
Demand, Supply and Relative Prices
Demand and supply determine relative prices. The word “price” means relative price. If we predict a price will fall, we mean its price
will fall relative to the average price of other goods and services.
All movements in price in the market analysis that we examine refers to relative price
movements. Relative Price is not “Money” Price.
MACRO HAPPENS
ECON 111HOFFMAN
The Price of Wheat
MACRO HAPPENS
ECON 111HOFFMAN
Demand If a person demands something, they
– Want it,– Can afford it, and– Have made a definite plan to buy it.
Wants are the unlimited desires or wishes that people have for goods and services.
MACRO HAPPENS
ECON 111HOFFMAN
Demand The quantity demanded of a good or
service is the amount that consumers plan to buy during a given time period at a particular price.
MACRO HAPPENS
ECON 111HOFFMAN
Demand What determines buying plans?
– The price of the good– The prices of related goods– Income– Population– Preferences– Expected future prices
MACRO HAPPENS
ECON 111HOFFMAN
Demand The Law of Demand
– Other things remaining the same, the higher the price of a good, the smaller is the quantity demanded.
Reasons for the Law of Demand
– Substitution Effect– Income Effect
MACRO HAPPENS
ECON 111HOFFMAN
Demand Demand Curve and Demand
Schedule– Demand curves show the relationship between
the quantity demanded of a good and its price (ceteris paribus).
– Demand schedules list the quantities demanded at each different price (ceteris paribus).
MACRO HAPPENS
ECON 111HOFFMAN
Demand
a 1 9
b 2 6
c 3 4
d 4 3
e 5 2
Price Quantity(dollars per tape) (millions of tapes per week)
MACRO HAPPENS
ECON 111HOFFMAN
Demand
0 2 4 6 8 10
1
2
3
4
5
6
Quantity (millions of tapes per week)
Pri
ce (
doll
ar p
er ta
pe)
MACRO HAPPENS
ECON 111HOFFMAN
Demand
0 2 4 6 8 10
1
2
3
4
5
6
Quantity (millions of tapes per week)
Pri
ce (
doll
ar p
er ta
pe)
e
d
c
b
a
MACRO HAPPENS
ECON 111HOFFMAN
Demand
0 2 4 6 8 10
1
2
3
4
5
6
e
d
c
b
aDemand for tapes
Quantity (millions of tapes per week)
Pri
ce (
doll
ar p
er ta
pe)
MACRO HAPPENS
ECON 111HOFFMAN
Demand A Change in Demand
– When any factor that influences buying plans other than the price of the good changes, there is a change in demand.
• An increase in demand causes the demand curve to shift rightward.
• A decrease in demand causes the demand curve to shift leftward.
MACRO HAPPENS
ECON 111HOFFMAN
A Change in Demand Price of Related Goods
– Substitutes - goods used in the place of another good– Complements - goods used in conjunction with
another good
What Happens to Demand if the price of a substitute good increases? A complement?
MACRO HAPPENS
ECON 111HOFFMAN
A Change in Demand Income
– Normal Goods — demand increases as income increases
– Inferior Goods — demand decreases as income increases
MACRO HAPPENS
ECON 111HOFFMAN
A Change in Demand Population
– Size and age structure
Preferences
– Attitudes toward goods and services
Expected Future Prices
MACRO HAPPENS
ECON 111HOFFMAN
DemandOriginal demand schedule New demand schedule
Walkman $200 Walkman $50
Price Quantity Price Quantity (dollars (millions of tapes (dollars (millions of tapes
per tape) per week) per tape) per week))
a 1 9
b 2 6
c 3 4
d 4 3
e 5 2
Assume the original price of Walkmans is $200. The demand schedule showsthe Price-Quantity relationship for tapes.
MACRO HAPPENS
ECON 111HOFFMAN
DemandOriginal demand schedule New demand schedule
Walkman $200 Walkman $50
Price Quantity Price Quantity (dollars (millions of tapes (dollars (millions of tapes
per tape) per week) per tape) per week))
a 1 9 a' 1
b 2 6 b' 2
c 3 4 c' 3
d 4 3 d' 4
e 5 2 e' 5
MACRO HAPPENS
ECON 111HOFFMAN
DemandOriginal demand schedule New demand schedule
Walkman $200 Walkman $50
Price Quantity Price Quantity (dollars (millions of tapes (dollars (millions of tapes
per tape) per week) per tape) per week))
a 1 9 a' 1 13
b 2 6 b' 2 10
c 3 4 c' 3 8
d 4 3 d' 4 7
e 5 2 e' 5 6
MACRO HAPPENS
ECON 111HOFFMAN
Demand
0 2 4 6 8 10 12 14
1
2
3
4
5
6
Quantity (millions of tapes per week)
Pri
ce (
doll
ar p
er ta
pe)
e
d
c
b
aDemand for tapes(Walkman $200)
MACRO HAPPENS
ECON 111HOFFMAN
Demand
0 2 4 6 8 10 12 14
1
2
3
4
5
6
e
d
c
b
aDemand for tapes(Walkman $200)
Quantity (millions of tapes per week)
Pri
ce (
doll
ar p
er ta
pe)
e'
d'
c'
b'
a'
Demand for tapes(Walkman $50)
MACRO HAPPENS
ECON 111HOFFMAN
The Demand for Tapes The Law of Demand
– The quantity of tapes demanded• Decreases if:
– The price of a tape rises
• Increases if:
– The price of a tape falls
MACRO HAPPENS
ECON 111HOFFMAN
The Demand for Tapes Changes In Demand
– The demand for tapes• Decreases if:
– The price of a substitute falls
– The price of a complement rises
– Income falls (a tape is a normal good)
– The population decreases
– The price of a tape is expected to fall in the future
MACRO HAPPENS
ECON 111HOFFMAN
The Demand for Tapes Changes In Demand
– The demand for tapes• Increases if:
– The price of a substitute rises
– The price of a complement falls
– Income rises (a tape is a normal good)
– The population increases
– The price of a tape is expected to rise in the future
MACRO HAPPENS
ECON 111HOFFMAN
A Change in the Quantity Demanded Versus a Change in Demand
A movement along a demand curve, which results from a change in price, shows a change in the quantity demanded.
If some other influence on buyers’ plans changes, holding price constant, there is a change in demand.
MACRO HAPPENS
ECON 111HOFFMAN
A Change in the Quantity Demanded Versus a Change in
Demand
Quantity
Pri
ce
D0
MACRO HAPPENS
ECON 111HOFFMAN
A Change in the Quantity Demanded Versus a Change in
Demand
Quantity
Pri
ce
D0
Decrease inquantitydemanded
Increase inquantitydemanded
MACRO HAPPENS
ECON 111HOFFMAN
A Change in the Quantity Demanded Versus a Change in
Demand
Quantity
Pri
ce
D0
P0
Q0 MACRO HAPPENS
ECON 111HOFFMAN
A Change in the Quantity Demanded Versus a Change in Demand
Quantity
Pri
ce
D0
P0
P1
Q0Q1 MACRO HAPPENS
ECON 111HOFFMAN
A Change in the Quantity Demanded Versus a Change in
Demand
Quantity
Pri
ce
D0
P0
P2
P1
Q0 Q2Q1 MACRO HAPPENS
ECON 111HOFFMAN
A Change in the Quantity Demanded Versus a Change in Demand
Quantity
Pri
ce
D0
MACRO HAPPENS
ECON 111HOFFMAN
A Change in the Quantity Demanded Versus a Change in Demand
Quantity
Pri
ce
D0
D1
Increase in
demand
MACRO HAPPENS
ECON 111HOFFMAN
A Change in the Quantity Demanded Versus a Change in Demand
Pri
ce
Quantity
D0
D1
D2
Increase inDecrease in demand demand
MACRO HAPPENS
ECON 111HOFFMAN
A Change in the Quantity Demanded Versus a Change in Demand
Quantity
Pri
ce
D0
D1
D2D0
Decrease inquantitydemanded
Increase inquantitydemanded
Increase in
demand
Decrease in demand
MACRO HAPPENS
ECON 111HOFFMAN
Movement Along Versus a Shift of the Demand Curve
If the price of a good changes but everything else remains the same, there is a movement along the demand curve.
If the price of a good remains constant but some other influence on buyers’ plans changes, there is a shift of the demand curve.
MACRO HAPPENS
ECON 111HOFFMAN
A Change in Quantity Demanded Versus a Change
in Demand A movement along the demand curve
shows a change in the quantity demanded.
A shift of the demand curve shows a change in demand.
MACRO HAPPENS
ECON 111HOFFMAN