macroeconomics econ 2301 fall 2009
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Macroeconomics ECON 2301 Fall 2009. Marilyn Spencer, Ph.D. Professor of Economics Chapter 4. Exam 1, September 23. Study Chapters 1 – 4, including those portions of Ch. 4 we’ve finished in class. Come to the exam prepared to use one of the following choices: Textbook & notes 3”x5” card - PowerPoint PPT PresentationTRANSCRIPT
MacroeconomicsECON 2301
Fall 2009
Marilyn Spencer, Ph.D.
Professor of Economics
Chapter 4
Exam 1, September 23Exam 1, September 23 Study Chapters 1 – 4, including those
portions of Ch. 4 we’ve finished in class. Come to the exam prepared to use one of
the following choices:1. Textbook & notes
2. 3”x5” card
3. Only your brains & a pencil
Scantron sheet will be provided.
Teaching Project OrientationTeaching Project Orientation Fill out these 2 forms ahead of time, to take with
you:Volunteer Conduct StandardsVolunteer Profile
Select a teaching partner. Attend one of these 90-minute sessions, in FC
101, Sept. 23 or Sept. 24: 3 p.m. 5 p.m.
Don’t forget to send this in: Don’t forget to send this in:
Bonus Extra Credit OpportunityBonus Extra Credit Opportunity Attend the presentation, “Is America Going
Socialist,” given by guest speaker, Dr. Daniel Mitchell of the CATO Institute, Thursday, September 17, 4:00-5:00 p.m.
Sign in with me. Send a 50-100 word summary of the economic
issues before class, Sept. 28, to [email protected].
4 points possible
Chapter 4: Extensions of Demand and Supply
Analysis
Learning Objectives1. Discuss the essential features of the price system
2. Evaluate the effects of changes in demand and supply on the market price and equilibrium quantity
3. Understand the rationing function of prices
4. Explain the effects of price ceilings
5. Explain the effects of price floors
6. Describe various types of government-imposed quantity restrictions on markets
Changes in Demand and Supply
Changes in supply and demand create a disequilibrium.
The market price and quantity adjust to a new equilibrium.
Review of The D Side of the Mkt.:
1. Price of related goods Substitutes Goods and services that can be
used for the same purpose. Complements Goods that are used together.
2. Income Normal good A good for which the demand
increases as income rises and decreases as income falls.
Inferior good A good for which the demand increases as income falls, and decreases as income rises.
Variables That SHIFT Market Demand
3. Tastes
4. Population and demographics
The Demand Side of the Market
Variables That Shift Market Demand
Demographics The characteristics of a population with respect to age, race, and gender.
5. Expectations
Estimating the Demand for Printers at Hewlett-Packard
Inaccurate forecasts in 2001 caused Hewlett-Packard to produce more printers than they could sell.
When two goods, X and Y, are complements, which of the following occurs? a. An increase in the price of good X leads to an
increase in the price of good Y.
b. An increase in the price of good X leads to a
decrease in the quantity demanded of good Y.
c. An increase in the price of good X leads to a
decrease in the quantity demanded of good Y.
d. An increase in the price of good X leads to an
increase in the quantity demanded of good Y.
The Demand Side of the Market
Variables That Shift Market DemandVariables That Shift MarketDemand Curves
3 - 1
The Demand Side of the Market
Variables That Shift Market DemandVariables That Shift MarketDemand Curves
3 - 1 (continued)
Refer to the graph below. Which of the following moves best describes what happens when a change in the price of printers affects the market demand for printers? a. A move from A to B. b. A move from A to C. c. Either move from A to B or A to C. d. None of the above.
Figure 4-1 Shifts in Demand and in Supply: Determinate Results, Panel (a)
Figure 4-1 Shifts in Demand and in Supply: Determinate Results, Panel (b)
Which of the following defines a supply curve?
a. The quantity of a good or service that a firm is willing to supply at a given price.
b. A table that shows the relationship between the price of a product and the quantity of the product supplied.
c. A curve that shows the relationship between the price of a product and the quantity of the product supplied.
d. None of the above.
The Supply Side of the Market
The Law of Supply
Law of supply Holding everything else constant, increases in price cause increases in the quantity supplied, and decreases in price cause decreases in the quantity supplied.
The Supply Side of the Market
1. Price of inputs
2. Technological change
A positive or negative change in the ability
of a firm to produce a given level of output
with a given amount of inputs.
3. Prices of substitutes in production
4. Expected future prices
5. Number of firms in the market
Variables That Shift Supply
The Supply Side of the MarketVariables That Shift Supply
Variables That Shift MarketSupply Curves
3 - 2
The Supply Side of the MarketVariables That Shift Supply
Variables That Shift MarketSupply Curves3 - 2 (continued)
The Supply Side of the Market
Variables That Shift Supply
Refer to the graphs below. Each graph refers to the supply for printers. Which best describes the impact of an increase in productivity? a. The graph on the left. b. The graph on the right. c. Both graphs. d. Neither graph.
Figure 4-1 Shifts in Demand and in Supply: Determinate Results, Panel (c)
Figure 4-1 Shifts in Demand and in Supply: Determinate Results, Panel (d)
The Falling Price of
Large Flat-Screen Televisions
Corning’s breakthrough spurred the manufacture of LCD televisions in Taiwan, South Korea, and Japan, and an eventual decline in price.
Changes in Demand and Supply Changes in supply and demand create a
disequilibrium.
The market price and quantity adjust to a new equilibrium.
Changes in Demand and Supply (cont'd)
Summary
Increases in demand increase equilibrium price and quantity.
Decreases in demand decrease equilibrium price and quantity.
Increases in supply decrease equilibrium price and increase quantity.
Decreases in supply increase equilibrium price and decrease quantity.
When BOTH Demand & Supply Are Shifting: High Demand and Low Prices in the Lobster Market:
Supply and demand for lobster both increase in summer, but the supply increase EXCEEDS the demand increase; therefore, equilibrium price falls.
Changes in Demand and Supply (cont'd)
When both demand and supply increase:
Change in price is indeterminate
Quantity will increase
When both demand and supply decrease:
Change in price is indeterminate
Quantity will decrease
Changes in Demand and Supply (cont'd) When supply decreases and demand increases:
Price will increase
Change in quantity is indeterminate
When supply increases and demand decreases:
Price will decrease
Change in quantity is indeterminate
Remember: A Change in a Good’s Price Does Not Cause the Demand or Supply Curve to Shift.
Changes in Demand and Supply (cont'd)
Price Flexibility and Adjustment Speed
Prices quite flexible in unfettered markets can be less flexible in other market scenarios.
May experience indirect adjustments such as hidden payments, quality changes
May not reach equilibrium right away
Changes in Demand and Supply (cont'd)
Adjustment speed
Market characteristics influence adjustment speed.
Markets may overshoot in the adjustment process.
Markets are subject to energy shocks, labor strikes, severe weather.
Example: Why Gasoline Prices Increased over the Past 3 Years
One factor—an increase in demand, shown by a rightward shift in the demand curve
Another factor—a reduction in supply, shown by a leftward shift in the supply curve
As a result, the equilibrium price of gasoline increased.
The Price System and Markets (cont'd)
Transaction Costs: The costs associated with exchange
Examples• Price shopping• Determining quality• Determining reliability• Service availability• Cost of contracting
The Rationing Function of Prices Methods of non-price rationing include:
Rationing by queues (waiting in line)Rationing by random assignment, and/or couponsFirst come, first served
Political powerPhysical forceRandom assignmentCoupons
The Rationing Function of Prices (cont'd)
The essential role of rationing (with scarcity rationing must occur)
We must choose the rationing mechanism: price or non-price.
• Price rationing leads to most efficient use of available resources; all gains from mutually beneficial trade are captured.
The Rationing Function of Prices (cont'd) Question
If price rationing is the most efficient is it the “best” way to ration?
AnswerEconomists cannot say which system is “best.”
They can say rationing via the price system leads to the most efficient use of available resources.
Bonus Extra CreditBonus Extra Credit Attend the lecture, “Healthcare Reform: The Good, the
Bad & the Ugly,” given by Dr. Raj Ambay, member of the Board of Directors of the American Medical Association:Tuesday, Sept. 29, 4-5 p.m.Bay Hall, Room 104
Email a 50-100 word summary before class, October 7, to [email protected].
4 points possible
Extra Credit #5Extra Credit #5 Use some credible news source to read about Ben
Bernanke’s 9/23 announcement of the decisions made by the Federal Reserve’s Open Market Committee meeting (Sept. 22-23).
Email a 50-100 word summary before class, October 7, to [email protected].
4 points possible
Wednesday, September 30Wednesday, September 30 We will not hold class on Wed., Sept. 30.
You should use those 75 minutes to work on your research project or teaching project.
One Type of Government Policy: Imposed Price Controls
Price Controls: Government-mandated minimum or maximum prices
Price Ceiling: A legal maximum price
Price Floor: A legal minimum price
Government-Imposed Price Controls (cont'd)
Price ceiling and illegal (black) markets
Price ceilings may prevent the equilibrium price from being achieved if it is above the ceiling price.
Black Market: A market in which price-controlled goods are sold at an illegally high price
Figure 4-3 Black Markets
The Policy of Controlling Rents
The functions of rental prices:
1. Promote the efficient maintenance and construction of housing
2. Allocate existing housing
3. Ration the use of housing
The Policy of Controlling Rents (cont'd) Rent controls and construction
Controls discourage construction• With a 16% vacancy rate and no controls, Dallas
recently built 11,000 new rental units.
• With a 1.6% vacancy rate and controls, San Francisco recently built 2,000 new rental units.
The Policy of Controlling Rents (cont'd) Effects on the existing supply of housing
and current use of housing
Property owners cannot recover costs
• Maintenance, repairs, capital improvements
Rations the current use of housing
• Reduces mobility, e.g., New York’s “housing gridlock”
The Policy of Controlling Rents (cont'd) Attempts to evade rent controls
Forcing tenants to leave
Tenants subletting apartments
Housing courts
The Policy of Controlling Rents (cont'd) Who gains and who loses from rent controls?
Losers• Property owners
• Some low-income individuals
Gainers• Upper-income professionals
Price Floors in Agriculture Support Price: The governmentally
established price floor • Usually associated with agricultural products
• Later we’ll study the minimum wage with this same analysis
Figure 4-4 Agricultural Price Supports
Price Floors in Agriculture (cont'd) Questions
How could the government keep the price from falling?
Who benefits from agricultural price supports?
Policy Example: King Cotton Receives Royal Government Subsidies
Every year, the federal government gives a direct payment based on the average size of the farmer’s past planting.
After the crop is planted, the farmer can borrow from the government, using the newly sown cotton as collateral.
If the world price of cotton falls below a price floor of 65 cents per pound, the grower receives a payment from the government--compensating the farmer for surplus cotton the farmer has planted—equal to 13 cents per pound.
If the world price of cotton falls below 52 cents per pound, farmers turn their cotton over to the government, which sells the cotton at the world price and absorbs loan losses. Thus the government usually provides about 80% of all revenues received by cotton farmers.
What would happen to cotton farmers’ revenues if the price floor were raised? Lowered?
Price Floors in the Labor Market Minimum Wage: A wage floor, legislated
by government, setting the lowest hourly wage rate that firms may legally pay their workers
Figure 4-5 The Effect of Minimum Wages
Quantity Restrictions Governments can impose quantity
restrictions, most obvious - banning ownership or trading of a goodHuman organs
Drugs
Hospital beds
Gold from 1933 to 1973
Quantity Restrictions (cont'd) Government Prohibitions and Licensing
Requirements
Some commodities cannot be purchased at all legally; others require a license
Import Quota: Supply restriction that prohibits the importation of more than a specified quantity of a particular good
Summary of Learning Objectives Essential features of the price system
A price system (market system) allows prices to respond to changes in supply and demand for different commodities.
The terms of exchange – prices - are communicated in markets, tending to minimize transactions costs.
Summary of Learning Objectives (cont'd) How changes in demand and supply affect market price
and equilibrium quantity
Increases in demand increase equilibrium price and quantity; decreases in demand decrease equilibrium price and quantity.
Increases in supply decrease market price and increase equilibrium quantity; decreases in supply increase market price and decrease equilibrium quantity.
When both demand and supply shift at the same time, the result is indeterminate.
Summary Discussion of Learning Objectives (cont'd)
The rationing function of prices
In a market system, prices ration scarce goods and services.
Other ways of rationing include first come, first served; political power; physical force; random assignment; and coupons.
Summary Discussion of Learning Objectives (cont'd)
The effects of price ceilingsA price ceiling set below the market (equilibrium) price
results in a shortage.
• The resulting shortage can lead to non-price rationing devices and black markets.
The effects of price floors If the price floor is set above the market price, a surplus
results.
• A price floor can take the form of a government-imposed price support or minimum wage.
Summary Discussion of Learning Objectives (cont'd)
The rationing function of prices In a market system, prices ration scarce goods and
services.
Other ways of rationing include first come, first served; political power; physical force; random assignment; and coupons.
The effects of price ceilingsA price ceiling set below the market (equilibrium) price
results in a shortage. The resulting shortage can lead to non-price rationing devices and black markets.
Summary Discussion of Learning Objectives (cont'd)
The effects of price floors If the price floor is set above the market price, a surplus
results. A price floor can take the form of a government-imposed price support or minimum wage.
Government-imposed restrictions on market quantitiesBans on sale or ownershipLicensing restrictions Import quotas
Assignment to be completed before class, September 23:
Study for Exam 1!
Assignment to be completed before class, September 28:
Pre-read Ch.6 & look over end-of-chapter questions:
14th ed: Problems 6-2, 6-4, 6-6, 6-10 & 6-12, pp. 156-158
15th ed: Problems 6-2, 6-4, 6-8, 6-12 & 6-14, pp. 156-158