More Markets

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More Markets
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Relative Scarcity

• How scarce is one good or service compared to all
  other goods and services?
• Relative scarcity is the relationship between
  supply and demand.
• Price is the measurement of relative scarcity.
• What determines the price of a work of art, an
  antique, an old stamp or coin?

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What is an equilibrium price?

• The measure of relative scarcity.
• Relative scarcity is the relation between supply
  and demand.
• How scarce is one product compared to all others?
• The unit of measurement is the price in the
  domestic currency. (e.g. 43.37)

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Relative prices why?
Diamond 50,000
Insulin 5
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Price indicator of relative scarcity (Units on
the Scarcometer)
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Order these products in terms of relative scarcity

• yacht
• candy bar
• nice dinner for two in San Francisco
• mini truck
• laptop computer

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Order these products in terms of relative scarcity

• 1 yacht
• 5 candy bar
• 4 nice dinner for two in San Francisco
• 2 mini truck
• 3 laptop computer

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Equilibrium Price The measure of Relative
Scarcity

• Feet and inches measure distance.
• Pounds and ounces measure weight.
• Degrees Fahrenheit measure heat.
• Cups and pints and quarts measure volume.
• Dollars and cents measure relative scarcity in
  the U.S.

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Relative Scarcity

• Not the same as rare
• Rare tropical disease is not scarce (no demand).
• Gold is more scarce than water even though water
  is essential for life. (Supply of water is
  greater than the supply of gold.)
• Some collectors items are more scarce than
  others depending upon supply and demand. Their
  prices go up or down depending upon changes in
  supply and demand.

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Relative Scarcity

• Relative scarcity is not a subjective evaluation
  of worth or value or social contribution even
  though some of those considerations are included
  in the demand function.
• To the extent that some can manipulate supply or
  demand, they may influence relative scarcity and
  price but price remains the measurement of
  relative scarcity.
• OPEC
• Advertising
• In a market with CIIP, price is the accurate
  measure of the relative scarcity of a good or
  service.

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Relative Scarcity

• The relationship between supply and demand.
• Measured by the equilibrium price
• Not the same as rare
• Not a matter of supply alone
• Not fair or unfair

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The Law of Supply

• Once all other factors (WAGTIPS) have been
  considered, the quantity supplied of a good or
  service varies directly with the price of the
  good or service price goes up, quantity supplied
  goes up.
• The influence of price on quantity supplied is a
  short run phenomenon and assumes no change in
  WAGTIPS.
• The Principle of Exchange if the price received
  by the supplier is greater than all production
  costs, the supplier will supply the product.
• Price is an incentive to suppliers

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Diminishing Marginal Returns

• Given some fixed inputs, additions of the
  variable inputs will yield lower additional
  products.
• Since each of the variable inputs are paid the
  same, marginal costs increase as production
  increases.
• Marginal resource costs rise as production
  increases.
• Therefore, suppliers must receive a higher price
  to supply a greater quantity, assuming no change
  in WAGTIPS.

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Price Elasticity of Supply

• Measures the strength of sellers reactions to a
  price change.
• How much will quantity supplied change as a
  result of a price change?
• Depends upon suppliers ability to increase or
  decrease production in the short run.
• How flexible are resources used in production?

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The Law of Demand

• Once all other factors have been considered, the
  quantity demanded of a good or service varies
  inversely with the price of the good or service.
• Price rises, quantity demanded falls price
  falls, quantity demanded rises.
• The Principle of Exchange if the price asked is
  greater than the expected benefit, the demander
  will not buy the product if the price asked is
  less than the expected benefit, the demander
  will buy the product. Price is a disincentive to
  buyers.
• Higher prices send buyers in search of
  substitutes.

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Diminishing Marginal Utility and Demand

• Utility is the benefit that consumers get from
  consuming goods and services
• As consumers consume more of a product, the
  additional utility from additional units of the
  product decreases the law of diminishing
  marginal utility
• To entice buyers to buy more as their marginal
  utility falls, price must also fall, making the
  price lower than the expected benefit. (The
  principle of exchange)

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Price Elasticity of Demand

• Measures the strength of buyers reactions to a
  price change.
• How much will quantity demanded change as a
  result of a price change?
• Depends upon
• availability of substitutes
• Percentage of total expenditures
• time

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Allocative Efficiency

• At the equilibrium price, the marginal utility of
  consuming the product is equal to the marginal
  resource cost of producing the product.
• From societys perspective, this is the optimal
  resource allocation to this particular activity
• Attempts to change the price of a product through
  regulation will distort incentives and cause
  resource misallocation.

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A Price Above Equilibrium

• If a price is above equilibrium, a surplus
  exists. (The quantity supplied is greater than
  the quantity demanded at the higher price.)
• With no barriers, price will begin to fall
  towards equilibrium
• As price falls, quantity supplied will decrease
  and quantity demanded will increase.
• Eventually, price will fall to the equilibrium
  where quantity supplied is equal to quantity
  demanded, which is the quantity exchanged.

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A Price Below Equilibrium

• If a price is below equilibrium, a shortage
  exists. (The quantity demanded is greater than
  the quantity supplied at the lower price.)
• With no barriers, price will begin to rise
  towards equilibrium
• As price rises, quantity demanded will decrease
  and quantity supplied will increase.
• Eventually, price will rise to the equilibrium
  where quantity demanded is equal to quantity
  supplied, which is the quantity exchanged.

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Surplus and Shortage

• Surplus at a price above equilibrium, quantity
  supplied is greater than quantity demanded.
• Shortage at a price below equilibrium, quantity
  demanded is greater than quantity supplied.
• Surpluses and shortages are always in reference
  to specific non-equilibrium prices.
• They will be automatically eliminated by price
  changes if there are no barriers to price
  movements.

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Price Floors and Ceilings

• A legislated price
• A price floor is a minimum price. Prices can be
  higher, but not lower than a floor. (Minimum
  wage) If the floor is above the equilibrium, a
  surplus is created.
• A price ceiling is a maximum price. Prices can be
  lower, but not higher than a ceiling. (Rent
  controls) If the ceiling is below the
  equilibrium, a shortage is created.

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Price Floors and Price Ceilings
Price cannot fall below a floor
Price cannot rise above a ceiling
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A Price Ceiling - shortage

• Who gains?
• Politicians
• Those who get the goods and services
• Those who police the ceiling
• Who loses?
• Those who supply the good or service
• Those who cant get the good or service
• Taxpayers

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A Price Floor - surplus

• Who gains?
• Politicians
• Those who supply the goods and services
• Those who police the floor
• Those who store the surplus
• Who loses?
• Those who demand the good or service
• Taxpayers

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Price Controls - The Message

• Price controls distort market incentives
• They can not change the relative scarcity of the
  product
• They cause over allocation or under allocation of
  resources
• They cause arbitrary distributive effects
• But they are great politics!

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Markets during Disasters

• What happens to markets for wood, tools, and even
  water during a disaster?
• Cant get products in supply decreases.
• More people want these products. Demand
  increases.
• Product is relatively more scarce.

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Markets during Disasters

• What happens to markets for wood, tools, and even
  water during a disaster?
• What incentive would cause suppliers to supply
  more of the product?
• A price ceiling prevents the price from rising.
• The shortage worsens.

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Disasters usually cause shortagesPrice ceilings
make the shortages worse.

• Government price controls cant change relative
  scarcity, but they do distort incentives

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The Market in Disasters

• Considering the market, what happens to products
  like wood, tools, and even water during a
  disaster?
• Trucks cant bring products in, therefore supply
  is decreased
• More people need these products than normal-
  Demand increases.
• So why do people cry price gouging?

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Price Gouging???

• If the government felt sorry for these people and
  imposed a price floor on certain products, we, as
  economists, know that there will be a shortage.
• Other people feel that the prices are made high
  to take advantage of the affected people- simply
  not true.

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PRICE CONTROLS DISTORT MARKET INCENTIVES and
CAUSE RESOURCE MISALLOCATION
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Main Points

• Relative scarcity for a particular product is the
  relationship between supply and demand.
• With CIIP, supply and demand determines the
  relative scarcity of a product, which is
  accurately measured by the price of the product.
• The Law of Supply states that price and quantity
  move in the same direction. This assumes no
  change in WAGTIPS.
• Price elasticity of supply measures the strength
  of suppliers response to price changes.

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Main Points

• The Law of Demand states the price and quantity
  demanded move in the opposite direction. This
  assumes no change in TIPSE.
• Price elasticity of demand measures the strength
  of buyers reactions to price changes.

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Main Points

• Supply represents the marginal opportunity cost
  of producing different quantities of a product.
• Demand represents the marginal utility of
  consuming different quantities of a product.
• Allocative efficiency occurs at the equilibrium
  where the marginal opportunity cost of producing
  a quantity is just equal to the marginal utility
  of consuming that quantity.

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Main Points

• A surplus exists at a price above the equilibrium
  where the quantity supplied is greater than the
  quantity demanded.
• A shortage occurs at a price below the
  equilibrium where the quantity demanded is
  greater than the quantity supplied.
• With no price floor, a surplus will correct
  itself as the price falls.
• With no price ceiling, a shortage will correct
  itself as the price rises.