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What, How, and For Whom? Central Planning Versus the Market
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What, How, and For Whom? Central Planning Versus the Market
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What, How, and For Whom? Central Planning Versus the Market
What
Establish
farms
How
Plan
For Whom
Distribute
produced
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What, How, and For Whom? Central Planning Versus the Market
careers to pursue Which products to produce or buy When to start and shut-down a business Who gets what is decided by individual preferences and purchasing power
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Consists of all buyers and sellers of a good or service What determines the price of pizza, gasoline, a car wash, or other goods and services?
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A schedule or graph that tells us the quantity of a good that buyers wish to buy at each price
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As price of a good or service goes down the quantity consumers wish to buy will increase, other things remaining the same Therefore, the demand curve is downwardsloping
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4 3 2
Demand
12
16
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The change in the quantity demanded of a good that results because buyers switch to substitutes when the price of the good changes
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The change in the quantity demanded of a good that results because a change in the price of a good changes the buyers purchasing power
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A curve or schedule showing the quantity of a good that sellers wish to sell at each price
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2 3 4
8 12 16
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Supply
4 3 2
12
16
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Market Equilibrium
Equilibrium
A system is in equilibrium when there is no tendency for it to change Occurs in a market when all buyers and sellers are satisfied with their respective quantities at the market price
Market Equilibrium
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Price ($/slice) 2 3 4
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Supply
4 3 2
Demand
Quantity (1000s of slices per day)
12
16
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Market Equilibrium
The values of price and quantity for which quantity supplied and quantity demanded are equal
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Market Equilibrium
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Excess Supply
Excess supply = 8,000 slices per day
Price ($ per slice)
Supply
4 3 2
Demand
Quantity (1000s of slices per day)
12
16
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Excess Demand
Price ($ per slice)
Supply
Demand
Quantity (1000s of slices per day)
16
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Graphing Supply and Demand and Finding the Equilibrium Price and Quantity
Supply
Demand
2 4 5 6 8 10
Quantity (1000s of slices per day)
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Market Equilibrium
Is the market equilibrium always an ideal outcome for all market participants?
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Supply
1,600
What Do You Think? Is $1600 more than some people can afford?
Demand
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Rent Controls
Monthly Rent ($/apartment)
Supply
2,400
1,600
Controlled = 800
Demand
Quantity (Millions of apartments/day)
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Market Equilibrium
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Market Equilibrium
How can we make housing affordable for poor people without using rent ceilings?
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Rent Controls
Monthly Rent ($/apartment)
Supply
800
Demand
Quantity (Millions of apartments/day)
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Supply
4
Excess demand = 8,000 slices per day
3 Price ceiling = 2
Demand
Quantity (1000s of slices per day)
12
16
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Market Equilibrium
lines Preferential treatment to selected customers Alternative pricing strategies Poorer quality ingredients Black-market pizzas
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Distinguishing Between:
movement along the demand curve that occurs in response to a change in price shift of the entire demand curve
A change in demand
A
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6 5 4 3 2 1
D
2 4 6 8 10 12
Quantity (1000s of cans/day)
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6 5 4
Increase in demand
3 2 1
D D
12
Quantity (1000s of cans/day)
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A movement along the supply curve that occurs in response to a change in price A shift of the entire supply curve
Change in supply
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6 5 4 3 2
S
Increase in quantity supplied
S
1
Quantity (1000s of cans/day)
10
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6 5 4 3 2 1
Increase in supply
S
0 2 4
S
6 8 10
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The Effect on the Market for Tennis Balls of a Decline in Court-Rental Fees
Price ($/ball)
1.40 1.00
D D
40 58
Quantity (letters/month)
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Shifts in Demand
Complements
Two
goods are complements in consumption if an increase (decrease) in the price of one cause a decrease (increase) in the demand for the other
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Shifts in Demand
Substitutes
Two
goods are substitutes in consumption if an increase (decrease) in the price of one causes an increase (decrease) in the demand for the other
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Shifts in Demand
Changes In Demand
An
increase (decrease) in the demand for a good will shift the demand curve to the right (left)
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A Change In Income
Normal Good
One
whose demand increases (decreases) when the incomes of buyers increase (decrease)
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A Change In Income
Inferior Good
One
whose demand decreases (increases) when the incomes of buyers increase (decrease)
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The Effect of a Credible Rumor on the Market for Apple Macintosh Computers
D = demand after rumor of cheaper model soon to be released Price
P P D
Apple Computers (units per month)
D Q Q
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P P D
Housing NY City (units per month)
D Q Q
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The Effect on the Market for New Houses of a Decline in Carpenters Wage Rates
Price ($1000/house)
S S
120 90
D
40 50
Quantity (houses/month)
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Predicting and Explaining Changes In Prices and Demand Factors That Cause an Increase (rightward or upward shift) in Demand
1. A decrease in the price of complements to the good or service 2. An increase in the price of substitutes for the good or service 3. An increase in income (for a normal good)
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Predicting and Explaining Changes In Prices and Demand Factors That Cause an Increase (rightward or upward shift) in Demand
4. An increased preference by demanders for the good or service 5. An increase in the population of potential buyers 6. An expectation of higher prices in the future
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1. A decrease in the cost of materials, labor, or other inputs used in the production of the good or service 2. An improvement in technology that reduces the cost of producing the good or service 3. Price of other goods alternate goods and joint products
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End of Chapter
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