- Number of households (or population)
A Change in the Quantity Demanded vs. a Change in Demand
A Change in Supply
Change in the entire relationship between the quantity supplied and the price of a good.
Factors that lead to a change in supply
- Price of resources used to produce the good
- The prices of related goods that the firm produces
-
Related goods whose inputs are complimentary in production
-
Related goods whose inputs are substitutes in production
- Number of households (or population)
A Change in the Quantity Demanded vs. a Change in Demand
A Change in Supply
Change in the entire relationship between the quantity supplied and the price of a good.
Factors that lead to a change in supply
- Price of resources used to produce the good
- The prices of related goods that the firm produces
-
Related goods whose inputs are complimentary in production
-
Related goods whose inputs are substitutes in production
- Expected future prices
- The number of suppliers
- Technology
A Change in the Quantity Supplied vs. a Change in Supply
MARKET EQUILIBRIUM
In equilibrium, price is such that the quantity supplied equals the quantity demanded. The idea is that prices adjust so that the production of firms is compatible with the demand of households.
-
A shortage tends to force prices up.
-
A surplus tends to force prices down.
Predicting Changes in Equilibrium Quantity
Change in Demand
Change in Supply
- Combined Effect of Changes in Supply and Demand
ELASTICITY
Price elasticity of demand=
Revenue and Elasticity
Income elasticity of demand =
- negative if inferior good
Cross-price elasticity of demand =
- positive if substitutes
- negative if compliments
Price elasticity of supply =
EFFICIENCY
Efficiency in a Competitive Market
Impediments to Efficiency
- Price ceilings and price floors
- Taxes, subsidies and quotas
- Monopoly
- Public Goods
- Externalities
THE TRADEOFF BETWEEN EQUITY AND EFFICIENCY
Price Ceilings
Rent Control
Price Floors
Minimum Wages
TAXES
-
The effect of taxes on the market equilibrium.
.
Who pays the sales tax?
- The higher the elasticity of demand relative to the elasticity of supply, the more producers pay.
- The higher the elasticity of supply relative to the elasticity of demand, the more consumers pay.
Perfectly Elastic Demand: Producers pay the sales tax
CONSUMER CHOICE
How do consumers decide what to buy?
- preferences
- income
- prices
Budget Line or Budget Constraint
p1q1+p2q2=M
Preferences and Indifference Curves
Predicting Consumer Behavior
MRS=p1/p2
Change in Income
Change in Price
- The substitution effect
- The income effect
Deriving Demand from Utility Maximization
The Labor Market
FIRMS AND OUTPUT MARKETS
The Short Run and the Long Run
- Capital – Fixed in the short run
- Labor – Variable in the short run
Costs in the Short Run
Costs in the Long Run
The Shape of the Long Run Average Cost Curve
Output Decisions under Perfect Competition
Assumptions
- many firms that are small compared to the industry
- homogeneous products
- many buyers
- unrestricted entry and exit
-
The implication is that firms are price takers in both input markets and output markets.
Short Run Output Decisions
In the short run, a firm can either
- earn an economic profit
- incur an economic loss
- break even
Long-Run Decisions
In the long run, an industry can adjust in two ways
- Enter and exit a market
- Change the scale of production (adjust capital)
Long-Run Equilibrium
In the long run p*=SRAC=SRMC=LRAC.
Changing Tastes
A Permanent Decrease in Demand
A Permanent Increase in Demand
External Economies and Diseconomies
MONOPOLY
Key features of a monopoly
- No close substitutes
- Barriers to entry
Comparison of Perfect Competition and Monopoly
Price and Quantity
Efficiency
PRICE DISCRIMINATION
Key Features
- Market power
- Identify and separate different buyer types
- Sell a product that cannot be resold
Two Surprising Things Price Discrimination
- It’s profitable for firms to price discriminate.
- Price discrimination may improve efficiency.
Perfect Price Discrimination
NATURAL MONOPOLY
Natural monopolies typically arise in markets in which there are huge economies of scale.
MONOPOLISTIC COMPETITION
Key Features
- A large number of firms that compete
- Each firm produces a differentiated product
- Firms are free to enter and exit the market.
Good and Bad: Innovation vs. Wasteful Marketing
OLIGOPOLY
Game Theory
Key Features of a Game
- Rules
- Strategies
- Payoffs
Nash Equilibrium
Both players are simultaneously taking the best possible action given the action of the other.
________________________________________________
COURNOT MODEL OF OLIGOPOLY
Collusive Outcome
Nash Equilibrium Outcome
- Best response functions
- Collusion difficult to sustain
Efficient Outcome
________________________________________________________________
PUBLIC GOODS
EXTERNALITIES
- Production/Consumption
- Positive/Negative
THEMES
- People and firms make decisions at the margin
- Perfect Competition leads to efficient outcomes
- Exceptions to efficiency
- Optimality of government intervention
- Trade-off Between Efficiency and Equity
- Game theory vs. standard economic analysis
- Economics is a way of analyzing the behavior of individuals and firms
THE END