© 2011 thomson south-western who has the absolute advantage in baking bread? maureen recap:...

© 2011 Thomson South-Western

Who has the absolute advantage in baking bread?

Maureen

Recap: Absolute Advantage

Bake Bread Sew Clothes

Maureen 15 5

Joseph 4 4

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Who has the absolute advantage in sewing clothes?

Maureen

Recap: Absolute Advantage

Bake Bread Sew Clothes

Maureen 15 5

Joseph 4 4

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Who has the comparative advantage in baking bread?Cost of baking bread?

Maureen -- 5 outfits/15 loaves of bread = 1/3 outfits

Joseph – 4 outfits/4 loafs of bread = 1 outfit

Recap: Comparative Advantage

Bake Bread Sew Clothes

Maureen 15 5

Joseph 4 4

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Who has the comparative advantage in sewing clothes?Cost of sewing clothes?

Maureen -- 15 loaves of bread/5 outfits = 3 loaves of bread

Joseph – 4 loafs of bread/4 outfits = 1 loaf of bread

Recap: Comparative Advantage

Bake Bread Sew Clothes

Maureen 15 5

Joseph 4 4

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At what price would they be willing to trade with one another?Maureen willing to buy outfits for at most 3 loaves of bread

Joseph willing to sell outfits for at least 1 loaf of bread

Both would agree to 1 outfit for 2 loaves of bread

Recap: Terms of Trade

Bake Bread

Sew Clothes

Opp. Cost Bread

Opp. Cost Clothes

Maureen 15 5 1/3 outfit 3 loaves

Joseph 4 4 1 outfit 1 loaf

© 2011 Thomson South-Western

© 2011 Thomson South-Western

• A market is a group of buyers and sellers of a particular good or service.

• The buyers as a group determine demand for a product• The sellers as a group determine supply of a product

What Is a Market?

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• Markets can take many forms: • Market for agricultural commodities

• Buyers and sellers meet at a particular time and place where an auctioneer helps set the prices and arrange sales

• Market for gaming devices:• Buyers do not meet together• Sellers are in different locations• No auctioneer to set prices• Yet buyers are choosing from a selection of gaming

devices and sellers are all competing to offer the best product

What Is a “Market”?

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What Is a “Competitive Market”?

• A competitive market is a market in which:• there are many buyers and many sellers so that;• each has a negligible impact on the market price.

(no one is able to control the price)

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Spectrum of Competition

CompetitiveMarket OligopolyMonopolistic

Competition Monopoly

One SellerMany Sellers

Few SellersMore Sellers

Max competition Least competition

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What Is “Perfect Competition”?

• We begin by assuming we have perfect competition:• Products are the same• Numerous buyers and sellers so that each has no

influence over price• Buyers and Sellers are price takers

(no one controls the price)

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DEMAND• Quantity demanded is the amount of a good

that buyers are willing and able to purchase.

• Law of Demand– The law of demand states that, other things equal,

the quantity demanded of a good falls when the price of the good rises.

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The Demand Curve: The Relationship between Price and Quantity Demanded

• Demand Schedule • The demand schedule is a table that shows the

relationship between the price of the good and the quantity demanded.

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Catherine’s Demand Schedule

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The Demand Curve: The Relationship between Price and Quantity Demanded

• Demand Curve • The demand curve is a graph of the relationship

between the price of a good and the quantity demanded.

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Figure 1 Catherine’s Demand Schedule and Demand Curve

Price ofIce-Cream Cone

0

2.50

2.00

1.50

1.00

0.50

1 2 3 4 5 6 7 8 9 10 11 Quantity ofIce-Cream Cones

$3.00

12

1. A decrease in price ...

2. ... increases quantity of cones demanded.

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Market Demand versus Individual Demand

• Market demand refers to the sum of all individual demands for a particular good or service.

• Graphically, individual demand curves are summed horizontally to obtain the market demand curve.

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The Market Demand Curve

Price of Ice-Cream Cone

Price of Ice-Cream Cone

Price of Ice-Cream Cone

2.00 2.00 2.00

4 3 7

1.00 1.001.00

8 5 13

Quantity of Ice-Cream Cones Quantity of Ice-Cream Cones Quantity of Ice-Cream Cones

Catherine’s Demand Nicholas’s Demand Market Demand+ =

When the price is $2.00, Catherine will demand 4 ice-cream cones.

When the price is $2.00, Nicholas will demand 3 ice-cream cones.

The market demand at $2.00 will be 7 ice-cream cones.

When the price is $1.00, Catherine will demand 8 ice-cream cones.

When the price is $1.00, Nicholas will demand 5 ice-cream cones.

The market demand at $1.00, will be 13 ice-cream cones.

The market demand curve is the horizontal sum of the individual demand curves!

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Shifts in the Demand Curve vs. Movements along the Demand Curve

• Shift in the demand curve• When an outside factor changes the demand for a

product• Blizzard increases the demand for snow shovels

• Movement along the demand curve• Caused by a change in the price of the product

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0

D

Price of Ice-Cream Cones

Quantity of Ice-Cream Cones

A tax on sellers of ice-cream cones raises the

price of ice-cream cones and results in a movement along the

demand curve.

A

B

8

1.00

$2.00

4

Changes in Quantity Demanded

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Shifts in the Demand Curve

• A change that increases the quantity demanded at any given price shifts the demand curve to the right• A new diet fad increases the popularity of gluten

free food

• A change that decreases the quantity demanded at any given price shifts the demand curve to the left• A decline in the price of Netflix will cause a shift in

the demand for Amazon Prime

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Figure 3 Shifts in the Demand Curve

Price ofIce-Cream

Cone

Quantity ofIce-Cream Cones

Increasein demand

Decreasein demand

Demand curve, D3

Demandcurve, D1

Demandcurve, D2

0

© 2011 Thomson South-Western

What factors shift the demand curve?

• Consumer Income• As income increases the demand for a normal good

will increase.• When we get a job our demand for Martinis increases

• As income increases the demand for an inferior good will decrease.• If we are unemployed we increase our demand for PBRs

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$3.002.50

2.001.501.00

0.50

21 3 4 5 6 7 8 9 10 1211

Price of Ice-Cream Cone

Quantity of Ice-Cream Cones

0

Increasein demand

An increase in income...

D1

D2

Consumer Income, Normal Good

© 2011 Thomson South-Western

$3.002.50

2.001.501.00

0.50

21 3 4 5 6 7 8 9 10 1211

Price of Ice-Cream Cone

Quantity of Ice-Cream

Cones0

Decreasein demand

An increase in income...

D1D2

Consumer Income, Inferior Good

© 2011 Thomson South-Western

What factors shift the demand curve?

• Prices of Related Goods• When a fall in the price of one good reduces the

demand for another good, the two goods are called substitutes.• Xbox vs. Play Station

• When a fall in the price of one good increases the demand for another good, the two goods are called complements.• Lift tickets and snowboards

© 2011 Thomson South-Western

What factors shift the demand curve?

• Tastes

Michelle Obama wore a coat by Thom Browne, what do you think happened to the demand for his coats?

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What factors shift the demand curve?

• Expectations• You find out you are going to inherit your

grandfather’s fortune, how does that change your demand for Maseratis?

• You learn that Apple is going to come out with a new iPhone 6 in a few months, how will that affect the likelihood you will upgrade to an iPhone 5 now?

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What factors shift the demand curve?

• Number of buyers• If we opened the border between the US and

Mexico for a few weeks, border towns would experience large changes in population and shifts in the demand for housing (or medical services for example) in those towns.

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Table 1 Variables That Influence Buyers

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A C T I V E L E A R N I N G 1:

Demand curve

A. The price of iPods falls

B. The price of music downloads falls

C. The price of compact discs falls

Draw a demand curve for music downloads. What happens to it in each of the following scenarios? Why?

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A C T I V E L E A R N I N G 1: A. Price of iPods falls

Q2

Price of music down-loads

Quantity of music downloads

D1D2

P1

Q1

Music downloads and iPods are complements.

A fall in price of iPods shifts the demand curve for music downloads to the right.

Music downloads and iPods are complements.

A fall in price of iPods shifts the demand curve for music downloads to the right.

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A C T I V E L E A R N I N G 1:

B. Price of music downloads falls

The D curve does not shift.

Move down along curve to a point with lower P, higher Q.

The D curve does not shift.

Move down along curve to a point with lower P, higher Q.

Price of music down-loads

Quantity of music downloads

D1

P1

Q1 Q2

P2

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A C T I V E L E A R N I N G 1:

C. Price of CDs falls

P1

Q1

CDs and music downloads are substitutes.

A fall in price of CDs shifts demand for music downloads to the left.

CDs and music downloads are substitutes.

A fall in price of CDs shifts demand for music downloads to the left.

Price of music down-loads

Quantity of music downloads

D1D2

Q2

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A C T I V E L E A R N I N G 1:

Demand curve

A. Increase in the price of gasoline last summer led to what type of change for gasoline?

A. Decline in Qd, movement along demand curve

B. Lower income associated with the recession would lead to what type of change for gasoline?

B. At all prices Qd declines, so shift in demand curve to the left

C. Improvement in public transportation leads to large decline in the number of people driving in Boston

C. At all prices Qd declines, so shift in the demand curve to the left