Decision-making and Demand and Supply AnalysisThinking Economically: Marginal AnalysisMaximizing Total Net BenefitsMarginal Way in ActionBoxesPowerPoint PresentationMarkets: The power of Demand and SupplyDemandCatherine’s Demand ScheduleFigure 1 Catherine’s Demand Schedule and Demand CurveSlide 11Slide 12Figure 3 Shifts in the Demand CurveSupplyBen’s Supply ScheduleFigure 5 Ben’s Supply Schedule and Supply CurveSlide 17Figure 7 Shifts in the Supply CurveMarket EquilibriumFigure 8 The Equilibrium of Supply and DemandFigure 9 Markets Not in EquilibriumSlide 22Slide 23Slide 24Figure 10 How an Increase in Demand Affects the EquilibriumFigure 11 How a Decrease in Supply Affects the EquilibriumThe Invisible HandDecision-making and Demand and Supply AnalysisThinking Economically: Marginal Analysis•Optimization Assumption: an assumption that suggests that the person in question is trying to maximize some objective•Marginal Benefit: the increase in the benefit that results from an action•Marginal Cost: the increase in the cost that results from an action•Total Net Benefits: the difference between all benefits and all costsMaximizing Total Net Benefits•Total Way – select the level of the activity that maximizes the difference between total benefits and total costs•Marginal Way – set the marginal benefit of to the marginal cost of an extra unit•Economist prefer the later because many decisions are not all or nothing. Most times people are deciding to increase or decrease the amount of something that they are doing.Marginal Way in Action•The example of the boxes•If the marginal benefit of an extra unity of the activity is greater than its marginal cost, increasing the activity will increase total net benefits.•If the marginal cost of an extra unit of the activity is greater than its marginal cost, increasing the activity will decrease total net benefits.•Therefore, to maximize total net benefits the level of an activity that maximizes total net benefits is where the marginal benefit equals the marginal cost of an extra unit of the activity.Boxes•If an extra unit of the activity (trades) results in getting more boxes (MB) than are being given up (MC) the stack of boxes grows (TNB).•If an extra unit of the activity (trades) results in getting less boxes (MB) than are being given up (MC) the stack of boxes shrinks (TNB).•If an extra unit of the activity (trades) results in getting the same amount of boxes (MB) that are being given up (MC) the stack of boxes is at its tallest ( maximum TNB).Activity MB MC TB TC TNB1 5 1 5 1 42 4 2 9 3 63 3 3 12 6 64 2 4 14 10 45 1 5 15 15 0Markets: The power of Demand and Supply•Competitive Markets–identical or homogeneous goods–many sellers and buyers–perfect Information–free entry and exit•Non-Competitive Markets–Monopoly – one seller–Oligopoly – few sellers–Monopolistically Competitive – differentiated productsDemand•The demand curve–Price and the quantity demanded•Rational behavior–Utility maximization (MB=MC all over again)•Law of diminishing marginal utility –Jelly bean example–MB fall as activity level increases•Income and substitution effects–Demand schedule–Individual demand curve–Market demand curveCatherine’s Demand ScheduleFigure 1 Catherine’s Demand Schedule and Demand CurveCopyright © 2004 South-WesternPrice ofIce-Cream Cone02.502.001.501.000.501 2 3 4 5 6 7 8 9 10 11Quantity ofIce-Cream Cones$3.00121. A decrease in price ...2. ... increases quantity of cones demanded.•The demand function–Income–Price of related goods•Complements•Substitutes–Tastes–Expectations–Number of Buyers•Movement along and shifts of the demand curve–Curve versus function–Schedules–GraphsFigure 3 Shifts in the Demand CurveCopyright©2003 Southwestern/Thomson LearningPrice ofIce-CreamConeQuantity ofIce-Cream ConesIncreasein demandDecreasein demandDemand curve, D3Demandcurve, D1Demandcurve, D20Supply•Price and the quantity supplied–Rational behavior an the profit motive–Law of diminishing returns•The production example•MC rise as production increases in the short-run•Supply schedule•Individual supply curve•Market supply curveBen’s Supply ScheduleFigure 5 Ben’s Supply Schedule and Supply CurveCopyright©2003 Southwestern/Thomson LearningPrice ofIce-CreamCone02.502.001.501.001 2 3 4 5 6 7 8 9 10 11Quantity ofIce-Cream Cones$3.00120.501. Anincrease in price ...2. ... increases quantity of cones supplied.•The supply function–Input prices–technology–expectations–number of sellersFigure 7 Shifts in the Supply CurveCopyright©2003 Southwestern/Thomson LearningPrice ofIce-CreamConeQuantity ofIce-Cream Cones0Increasein supplyDecreasein supplySupply curve, S3curve, SupplyS1Supplycurve, S2Market Equilibrium•Equilibrium price and quantity = market clearing price and quantity•Disequilibrium prices and quantities–Shortage – Excess Demand–Surplus – Excess Supply•Comparative static analysis: changes in equilibrium prices and quantities•Shifts in curves versus movement along revisited•Changes in demand and supplyFigure 8 The Equilibrium of Supply and DemandCopyright©2003 Southwestern/Thomson LearningPrice ofIce-CreamCone0 1 2 3 4 5 6 7 8 9 10 11 12Quantity of Ice-Cream Cones13EquilibriumquantityEquilibrium priceEquilibriumSupplyDemand$2.00Figure 9 Markets Not in EquilibriumCopyright©2003 Southwestern/Thomson LearningPrice ofIce-CreamCone0SupplyDemand(a) Excess SupplyQuantitydemandedQuantitysuppliedSurplusQuantity ofIce-CreamCones4$2.50102.007Figure 8 The Equilibrium of Supply and DemandCopyright©2003 Southwestern/Thomson LearningPrice ofIce-CreamCone0 1 2 3 4 5 6 7 8 9 10 11 12Quantity of Ice-Cream Cones13EquilibriumquantityEquilibrium priceEquilibriumSupplyDemand$2.00Figure 9 Markets Not in EquilibriumCopyright©2003 Southwestern/Thomson LearningPrice ofIce-CreamCone0SupplyDemand(a) Excess SupplyQuantitydemandedQuantitysuppliedSurplusQuantity ofIce-CreamCones4$2.50102.007Figure 9 Markets Not in EquilibriumCopyright©2003 Southwestern/Thomson LearningPrice ofIce-CreamCone0Quantity ofIce-CreamConesSupplyDemand(b) Excess DemandQuantitysuppliedQuantitydemanded1.5010$2.0074ShortageFigure 10 How an Increase in Demand Affects the EquilibriumCopyright©2003 Southwestern/Thomson LearningPrice ofIce-CreamCone0Quantity of Ice-Cream ConesSupplyInitialequilibriumDD3. . . . and a higherquantity sold.2. . . . resultingin a