Lower Price Higher Price

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Lower Price Higher Price

Lower Output Higher Output
Leftward (downward)
Shift of Demand
Leftward (upward) Shift of Supply
Rightward (downward) Shift of Supply
Rightward (upward) Shift of Demand
Breakdown all shifts into their output and price
vectors
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GENERALIZED DEMAND FUNCTION
P
f f( Price Consumption Taxes, Price of
Complements Price of Substitutes Tastes for
good/service Income, Buyer Expectations, Number
of buyers, Consumption subsidies)
Q
3
GENERALIZED SUPPLY FUNCTION
f f( Price Price of Resources, Production
Taxes Technology, Seller Expectations, Number
of Sellers, Production Subsidies)
4
MARKET GOVERNMENT GOVERNMENT FAILURE
INTERVENTION FAILURE
EXTERNALITY PUBLIC ENTERPRISE
ADMINISTRATIVE -PUBLIC GOODS-NATIONALIZATION
COST MARKET -PRIVATIZATION
COMPLIANCE POWER
REGULATION
COST INEQUITIES - OUTPUT
EFFICIENCY COST DYNAMIC
- PRICE - NEGATIVE
EXTER. MKT. FAIL. - STANDARDS
-PUBLIC BADS INDIVISIBILITY ANTITRUST
- MKT POWER INFORMATION
-STRUCTURE - INEQUITIES
ASYMMETRY -CONDUCT -
DYNAMIC FAILURE TO TAXES (SUBSIDIES)
- INDIVISIBILITY RATION
PROVISION OF - INFORMATION
INFORMATION
RATIONING (MONEY)
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COBWEB MODEL
Price
Bo
Ao
B1
A1
A3
A2
B2
B3
Such a low price provides no incentive to
produce any product at all.
CHEMICALS (millions of pounds/year)
6
FOUR FAILURES TO RATION
Not a Problem
Infeasibility
Glut
Se-vere Shor-tage
Demand
Supply
7
Tobacco Production Every pound sold builds
sound community of the U.S.A. value of moral
fiber 1 per 2 sold (50 ad valorem)
Private Demand
Private Supply
Price
3 per pound
50 above private market price Ad valorem sales
TAX
50 BELOW private market price Ad valorem sales
SUBSIDY
Pounds of tobacco
8
Tobacco Production Every pound sold builds
sound community of the U.S.A. value of moral
fiber 1 per 2 sold (50 ad valorem)
Private Demand
Private Supply
Price
3 per pound
50 above private market price Ad valorem sales
subsidy
Pounds of tobacco
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Regulation The four types (price and output)
(A) (B)
(C)
(D)
Current Price Current Price
Current Price
Current Price
P
P
Supply
P
P
Supply
Demand
Supply Supply
Minimum Price Control
Minimum Output Quota
Maximum Output Control
Maximum Price Control
Aggregate Income
Aggregate Income
Aggregate Income
Aggregate Income
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Yearly Remuneration
(thousands/year of service)
Supply
Curve
What
Sellers
are
Willing and able
To
sell
at different prices
300
200 160
Doctor Services ( of doctors/year)
12
Price
(thousands/organ transplant)
95
Supply
Curve
What
Sellers
are
Willing and able
To
sell
at different prices
60
40
36
Organ Transplants (number per year)
13
Doctor Remnueration
(thousands/service years)
300
200
Demand
Curve
160
What
Buyers
are
Willing and able
To
buy
at different
prices
Doctor Services ( of doctors/year)
14
Price
(thousands/organ transplant)
95
60
40
Demand
Curve
36
What
Buyers
are
Willing and able
To
buy
at different
prices
Organ Transplants (number per year)
15
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Markets Want to Work

• Markets the process of procuring and allocating
  a good
• The market can fail in that the resulting
  allocation of goods is either inadequate or
  viewed as inappropriate

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Supply Demand
19
Supply Demand
20
Supply Demand
21
Supply Demand
22
Quantity supplied exceeds quantity demanded
Supply Demand
Supply Demand
23
Quantity supplied exceeds quantity demanded Black
market prices below legal prices
Supply Demand
Supply Demand
24
Quantity supplied exceeds quantity demanded Black
market prices below legal prices Lines of product
(inventories) cant be sold and are dumped.
Supply Demand
Supply Demand
25
Quantity supplied exceeds quantity demanded Black
market prices below legal prices Lines of product
(inventories) cant be sold and are dumped.
Supply Demand
Supply Demand
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HOW TO BE SHERLOCK HOLMES IN READING BETWEEN THE
LINES If You Know P and Q then you know
whether demand or supply is involved as well as
the direction of the shift. If You Know the
shift in demand or supply, then you know what is
likely to happen to price and quantity If You
Know the determinant that has changed and price,
then you know what is happening to quantity
demanded. If You Know the determinant that has
changed and quantity demanded, then you know
what is happening to price.
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Figure 1. Shifts of Supply and Demand
(A) (B)
(C)
(D) SUPPLY SHIFTS
DEMAND
SHIFTS LEFTWARD (up) RIGHTWARD (down)
LEFTWARD (down) RIGHTWARD (up)
P
P
Supply
P
P
Supply
Demand
Demand
Q
Q
Q
Q
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Prices, Wages, Interest rates Exchange
rates
1 to 2 years
Government. Balance Unemploy- ment Trade
Balance Inventory Change
Prices, Wages, Interest rates Exchange
rates
GDP
6 mos.
30
Government. Balance Unemploy- ment Trade
Balance Inventory Change
Prices, Wages, Interest rates Exchange
rates
GDP
1 to 2 years
Prices, Wages, Interest rates Exchange
rates
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B A L A N C E O F P A Y M E N T S
Currrent account trade balance net exports
Real goods and services - imports
Money
Home Abroad
Real goods and services - exports
CAPITAL ACCOUNT
Titles to foreign wealth sold to Americans
Money
Titles to American wealth sold to foreigners
Unilateral transfers
Money