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OVERVIEW
Intro Determinants of Demand & Supply Market Equilibrium Using supply and demand as a qualitative forecasting tool Price floors and ceilings Using supply and demand to manage: a. Raw Materials b. Human Resources c. Inventories
OVERVIEW
Intro
Determinants of Demand & Supply Market Equilibrium Using supply and demand as a qualitative forecasting tool Price floors and ceilings Using supply and demand to manage: a. Raw Materials b. Human Resources c. Inventories
Philosophy: Used to extol capitalism Macro : Understand what causes inflation and business cycles
OVERVIEW
Intro
Price
Quantity
Price
$5.00
5,000 units
Quantity
Bam Something
Changes
SOMETHING CAUSES THE D CURVE TO SHIFT AND LEADS TO A NEW EQUILIBRIUM PRICE AND QUANTITY HAVE PRESSURE TO CHANGE
S
Price
D
Quantity
GENERAL POINT
Many
factors can change This causes changes in supply and/or demand This leads to pressures for industry price and output to change.
EXAMPLE D-RAM CHIPMAKERS RATTLED BY 70% FALL IN PRICES FT JULY 22, 2011
driven by global economic woes stifling consumer demand coupled with bloated inventory levels in the wake of the March Japanese earthquake. Computers are a highly cyclical product Samsung has done okay since they are more diversified but Hynix has suffered a 34.2% drop in second quarter net profit. Nanya and Inotera are moving away from commoditized chips to more specialized chips for mobile devices and servers
Price
D
Quantity
DETERMINANTS OF DEMAND
Quantity of goods households/persons want to buy Goal is to maximize satisfaction subject to constraints on income and prices Quantity demanded depends on:
Own price Income after taxes (inferior and normal goods) Net worth Advertising expenditures Tastes and preferences Price of substitutes Price of complements Weather Stuff
DEMAND SCHEDULE
Price of FJR1300
LAW OF DEMAND
Price of FJR1300
Downward slope reveals Law of Demand: shows the effect of changes in own price.
Price of FJR1300
Price of FJR1300
cut raises after tax income Green revolution pushes demand for motorcycles People just love the looks of the new model FJR1300 Prices of BMWs K1200GT increase significantly Yamaha advertises in Bloomington Herald Times Price of Leather clothing falls (complementary good)
Price of FJR1300
income People expect price of FJR1300 to decline next year Honda goes on very aggressive advertising campaign Safety report details rising deaths from motorcycle riding
RECENT APPLICATIONS
What is causing recent changes in demand for? Nokia phones? Palm Oil? Kia/Hyundai cars in the USA? Government bonds of EU countries? Oil?
Quantity
Own price law of supply Price of labor, energy, other inputs Technological change Quality of labor Government regulations/infrastructure Number of firms Taxes paid by firms (labor taxes, profit taxes, excise and ad valorem) Producer expectations Stuff
Price
Quantity
Price
Quantity
Workers receive more training that improves output per day Energy costs fall Firm shifts health care cost to thirdparty Excise (or sales) tax cut
Quantity
Government puts new higher tariff on imported raw materials Workers demand large wage increase Government passes new pollution/safety regulation that adds cost to production Intellectual property protection
Price
Quantity
OVERVIEW
Market Equilibrium
Using supply and demand as a qualitative forecasting tool Price floors and ceilings Using supply and demand to manage: a. Raw Materials b. Human Resources c. Inventories
Price
Pe
Qe
Quantity
Surplus
Price
At Ph, S>D
Ph
D
Quantity
Surplus!
D
Quantity
Price
PL At PL, S<D
D
Quantity
Shortage
Shortage!
Price
D
Quantity
OVERVIEW
Experiment #1: Input cost increases wage cost, capital cost, energy cost, benefits cost, etc
At any given price, profits are lower.
MC > MB
Result: P
D Quantity
D If price does not immediately rise, a Shortage exists creating upward price pressure Quantity
D Quantity
EXPERIMENT 2: DEMAND
Price
Result: P
D Quantity
Interim step
What if price did not fall right away? At original price.. D<S So Surplus exits
EXPERIMENT 2: DEMAND
Price
If price does not immediately fall a Surplus exists causing downward pressure on price S
P D P D Quantity S
EXPERIMENT 2: DEMAND
Price
As P falls we move along both curves S D rises and S falls until surplus disappears
P P
D Quantity
Supply decreases
Demand Increases Supply increases
increases
? ?
decreases
? ?
OVERVIEW
Intro Determinants of Demand & Supply Market Equilibrium Using supply and demand as a qualitative forecasting tool
Price floors and ceilings are forms of government intervention A floor prevents price from falling too low floors are intended to help producers A ceiling prevents price from rising too highceilings are intended to help consumers All government regulations have both intended and unintended effects
Price floors
Regulation that says that the price cannot go lower than a specified price, called the price floor Canada has price floors on telephone companies to prevent below cost pricing in competitive situations When a government raises a tariff on an imported good (US, steel, 2003) it effectively creates a price floor for the imported item The Minimum wage is a wage floor. It prevents a wage from falling to a level that is deemed too low.
PRICE FLOOR KEEPS PRICE HIGH TO HELP PRODUCER: PROTECT US STEEL WITH TARIFF ON IMPORTED STEEL
S
Pf Price P* Price floor
P* would exist if government did not put a floor on this product. P* is so low D that it might injure this industry Quantity
D
Qsf Quantity
D
Qdf Quantity
PRICE FLOOR LEADS TO LOWER SALES BECAUSE THE HIGHER PRICE (PF>P*) REDUCES DEMAND**
Even though firms want to sell Qsf they will only produce Qdf! S So this point is irrelevant
D
Qdf ** Unless the government buys the surplus Qsf
Quantity
Prevents price from rising to a level that might injure the consumer Some countries put ceilings on necessities like milk, gasoline, eggs, bread. Rent controls in New York are infamous. We have usury laws to prevent financial firms from charging high interest rates
VENEZUELA EXAMPLE
Article in WSJ July 18, 2011 A survey of the of major supermarkets found that 10 out of 16 price regulated products were scarce. Could not find cooking oil, cuts of meat, cheeses, corn flour, aspirin, pharma drugs, etc Producers explained that inflation of their inputs prices meant they lose money producing products with price ceilings.
S
Price P*
Pc
Price Ceiling
D
Qdc Quantity
S
Price P*
Pc
Price Ceiling
D
Qsc Quantity
PRICE CEILING INTENDED TO HELP CONSUMER, BUT LEADS TO LOWER OUTPUT BECAUSE IT REDUCES SUPPLY
Price P*
S Buyers want Qdc at the low price but firms are not at profit maximizing point. They wont produce this much at Pc
So this point is irrelevant Price Ceiling
Pc
D
Qsc Qdc Quantity
Upshot:
Price floors and ceilings interfere with efficiency They may solve a social goal but they always lead to economic waste since resources are not fully utilized.
OVERVIEW
Intro Determinants of Demand & Supply Market Equilibrium Using supply and demand as a qualitative forecasting tool Price floors and ceilings Using supply and demand to manage: a. Raw Materials b. Human Resources c. Inventories
S
Price Of Raw Mats.
S
Price Of inventories
Quantity of inventories
S
Compensation
Employment