William Rainey Harper College

MACROECONOMICS ONLINE!

MACROECONOMICS IN THE GLOBAL ECONOMY

FALL 2008

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WEEK 3 Demand, Supply, and the Efficiency of Markets

QUESTIONS ???

SURVEY RESULTS

WEEKLY ASSIGNMENTS

 

DEMAND and SUPPLY

In Class Worksheets / Handouts:

 

DEMAND

Change in Demand vs. Change in Quantity Demanded: Worksheet

Matching: Which of the follow tables/graphs shows: [answers]

1. a decrease in demand __________

2. a change in quantity demanded ___________

3. an increase in demand _________

A

Change in Quantity Demanded
B

Increase in Demand (a change in demand itself)
C

Decrease in Demand (a change in demand itself)

 

Non-Price Determinants of Demand

Non-price determinants of demand: Pe, Pog, I, Npot, T

A change in demand is caused by a CHANGE in the non-price determinants of demand:

Pe = change in expected price
Pog = a change in the price of other goods (substitutes or complements)
I = a change in incomes
Npot = a change in the number of potential consumers
T = a change in consumer tastes and preferences

 

Pe -- expected price

Pe in the future D today
Pe in the future D today

Pog -- price of other goods 

1) substitute goods
P Maxwell House coffee D Folgers coffee

P of one product D of its substitute

2) complementary goods

P of wieners D of buns

P of one product D of its compliment

3) independent goods

I -- income

1) normal goods
Income D for normal goods
Income D for normal goods

2) inferior goods

Income D for inferior goods
Income D for inferior goods

Npot -- number of POTENTIAL consumers

Npot D
Npot D

T -- tastes and preferences

Tastes for a product D for that product
Tastes for a product D for that product 

 

SUPPLY

Change in Supply vs. Change in Quantity Supplied

Matching: Which of the follow tables/graphs shows: [answers]

1. a decrease in supply __________

2. a change in quantity supplied ___________

3. an increase in supply _________

A

Change in Quantity Supplied
B

Increase in Supply (a change in supply itself)
C

Decrease in Supply (a change in supply itself)

Non-Price Determinants of Supply

Non-price determinants of supply: Pe, Pog, Pres, Tech, Tax, Nprod

Changes in supply are caused by a CHANGE in the non-price determinants of supply

Pe = change in expected price
Pog = change in price of other goods ALSO PRODUCED BY THE FIRM
Pres = change in price of resources
Tech = change in technology
Tax = change in taxes and subsidies
Nprod = change in number of producers/sellers

Pe -- expected price

Pe S today
Pe S today

Pog -- price of other goods ALSO PRODUCED BY THE FIRM

P soybeans S corn
P soybeans S corn

Pres -- price of resources

P autoworkers wages costs of producing cars S cars

Pres costs S
Pres costs S

Tech --technology

Improved technology costs S

Tax --taxes and subsidies

Taxes costs S
Taxes costs S

Subsidies costs S
Subsidies costs S

N -- number of producers/sellers

Nprod S
Nprod S

 

USING SUPPLY AND DEMAND

Required Weekly Activity (Determinants)

In Class Review Worksheet (Worksheet with answers)

Analyzing News Articles

Use supply and demand curves to analyze why the price and quantity of the products in the following news have changed. to dothis you should answer the following questions:
(1) Which determinant has changed?
(2) Will it affect supply or demand?
(3) Will supply or demand increase or decrease?

and then GRAPH IT! to show what happens to price and quantity?

GASOLINE: "Gasoline prices jump" (February 16, 2004)
http://money.cnn.com/2004/02/16/markets/gas_prices/index.htm

AIR TRAVEL: "Air customers to pay for fuel" (January 21, 2000)
http://money.cnn.com/2000/01/21/companies/airfuel/

"USED SUV prices fall 5 percent" (July 25, 2005)
http://www.cnn.com/2005/AUTOS/07/25/used_suv_prices/index.html 

 

Tortillas:
http://www.statesman.com/news/content/news/stories/world/01/28/28mexcorn.html

Use supply and demand curves to illustrate how each of the following changes will affect the price and quantity of the stated PRODUCT, ceterus paribus.

Before you guess, answer the following questions:
(1) Which determinant has changed?
(2) Will it affect supply or demand?
(3) Will supply or demand increase or decrease?
(4) GRAPH IT! What happens to price and quantity?

What happens to the price and quantity of ETHANOL if the US government subsidizes corn ethanol production to stimulate the use of ethanol gasoline?

What happens to the price and quantity of CORN if more companies produce E85 cars?

What happens to the price and quantity of TORTILLAS in Mexico if the price of corn increases?

 

SO, what happens to the price and quantity of TORTILLAS in Mexico if the US government subsidizes corn ethanol production to stimulate the use of ethanol gasoline?

 

THE EFFICIENCY OF MARKETS

Online Lecture

Why are Markets Efficient?

Businesses will produce the profit maximizing quantity. This is the equilibrium quantity where Qd=Qs (see graph below on the right). This is WHAT WE GET.

Society wants the allocatively efficient quantity. This is the quantity where MSB=MSC (see graph above on the left). This is WHAT WE WANT.

If there are no negative externalities (spillover costs) the S = MSC, and if there are no positive externalities (spillover benefits) the D = MSB, THEREFORE: WHAT WE GET = WHAT WE WANT and self-interested, profit maximizing, businesses will end up doing what is best for society - achieving allocative efficiency - as if there is some "invisible hand " guiding their decisions.

SUMMARY:

  • Businesses will produce the profit maximizing or market equilibrium quantity - the quantity where Qd=Qs; (WHAT WE GET)

 

  • Society wants the allocatively efficient quantity - the quantity where MSB=MSC ; (WHAT WE WANT)

 

  • WHAT WE GET = WHAT WE WANT if:
    • Market Demand = Marginal Social Benefits (D=MSB)
      (and this is true if there are no positive externalities (spillover benefits))
    • Market Supply = Marginal Social Costs (S=MSC)
      (and this is true if there are no negative externalities (spillover costs))
    • THEREFORE if there are no negative externalities (spillover costs) and no positive externalities (spillover benefits) competitive markets (capitalism) achieves allocative efficiency

      WHAT WE GET = WHAT WE WANT

      This is the "invisible hand" of capitalism.

In a market economy with no positive externalities (spillover benefits) and no negative externalities (spillover costs):

the profit maximizing or market equilibrium quantity
(what we get)

WILL BE THE SAME AS

the allocative efficient quantity
(what we want)

 

REVIEW: Benefit-Cost Analysis: "the economic perspective"

1. definition
the selection of ALL possible alternatives where the marginal benefits are greater than the marginal cost

select all where: MB > MC
up to where: MB = MC
but never where: MB < MC

2. marginal benefits and marginal costs

3. Marginal Benefit = Marginal Cost Rule

select all where: MB > MC
up to where: MB = MC
but never where: MB < MC

What happens if the MB change?

An increase in MB will encourage the activity

A decrease in MB will discourage the activity

What happens if MC change?

An increase in MC wil discourage the activity

A decrease in MC will encourage the activity

4. ignore fixed or sunk costs

  • any cost that does not change as a result of the decision

5. examples

a. Should I go to class today?
  • What are the MB?
  • What are the MC?
  • Ignore fixed costs = tuition

b. Should I wear a Ski Helmet ?

c. Should I drive fast?

d. Should I wear a helmet while skiing?

5. GRAPHICALLY [mcmb.jpg]

  • as you do more of something what happens to the additional costs (MC)?
    • law of increasing costs
    • opportunity costs and marginal utility
  • as you do more of something what happens to the additional benefits (MB)?
    • diminishing marginal utility

 

6. REVIEW

 

 

 

 

 

 

ANSWERS FROM ABOVE

Matching: Which of the follow tables/graphs shows:

1. a decrease in demand ___C_____

2. a change in quantity demanded ___A_____

3. an increase in demand ___B____

 

Matching: Which of the follow tables/graphs shows:

1. a decrease in supply ___C_____

2. a change in quantity supplied ____A____

3. an increase in supply ____B___