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UNC-Chapel Hill ECON 101 - Introduction to Demand and Supply

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1Econ 101 M. SalemiIntroduction to Demand and SupplyReviewReservation prices are the building blocks of demand and supply.In a market economy, price acts as a rationing mechanism.Demand Schedule summarizes buyer behavior.Supply Schedule summarizes seller behavior.The market equilibrium is the price and quantity such that demand equals supply. What have we learned? Econ 101 M. SalemiEcon 101 M. SalemiTo Take Advantage of the Benefits of Specialization, People Must Trade.Both Kansas and California can produce beef cattle and grapes. Assume the value of labor and other needed inputs is the same per acre in each state and for each product.In Kansas an acre of land can be used to produce 300 pounds of beef or 100 pounds of grapes.In California, and acre of land can be used to produce 150 pounds of beef or 200 pounds of grapesEcon 101 M. SalemiSuppose the price of a lb. of grapes is 1.5 lbs. of beef…The Effects of Specialization on Kansas0501001502000 50 100 150 200 250 300Lbs. of Beef per AcreLbs. of GrapesKansas Production PossibilitiesKansas Opportunities if it Specializes in Beef and Trades for Grapes2Econ 101 M. SalemiDespite the benefits, Free Trade is Controversial.Reducing barriers to international trade increases the total value of goods and services produced in each nation.ButIt does not guarantee that each individual citizen does better when the barriers are reduced.Econ 101 M. SalemiWho wins and who loses when the U.S. Imports T Shirts from Vietnam?Importing T Shirts from Vietnam will likely lower the price of T Shirts in the U.S.Consumers win!U.S. producers of T Shirts now receive a lower price for their product.The lower T Shirt price can translate into a lower wage for T Shirt workers.US Companies and their workers lose!Econ 101 M. SalemiReservation PricesA buyer’s reservation price is the largest dollar amount that the buyer would be willing and able to pay for a unit of a well-defined good.A seller’s reservation price is the smallest dollar amount for which the seller would be willing able to provide a unit of a well-defined good.Econ 101 M. SalemiWhat is a well-defined good?To define a good properly and completely, we must specify:Quantity (Pound, Kilogram, Slice, etc.)QualityTime Frame (Per Week, Per Month, etc.)Locale (The size of a market)3Econ 101 M. SalemiReservation Prices on EBayEBay allows prospective buyers to enter a maximum bid. EBay keeps a prospective buyer in the auction until the current bid exceeds his maximum.EBay allows prospective sellers to enter a minimum bid. Although the bidding may start below the minimum, the seller is not obliged to sell unless the final bid exceeds her minimum.Econ 101 M. SalemiEcon 101 M. SalemiUC-Santa Cruz T Shirt AuctionEcon 101 M. SalemiUC-Santa Cruz T Shirt AuctionUse clickers to bid.All bids are binding.Bid only in multiples of ten cents.The winner is the highest bidder. In case of ties, the winner will be chosen by random draw.The winner will pay the second highest bid.You should bid your reservation price.4What Do You Bid For The UC-SD T Shirt?Enter your Bid with Your Clicker……………………………...And the Winning Bid Is……Econ 101 M. SalemiReservation Prices and DemandNext Class, I will use your bids to derive the class demand schedule for a UCSD T ShirtFor now, I will use some made up data to illustrate the concept of demand.Econ 101 M. SalemiDemand ScheduleA Demand Schedule shows the quantity of a well-defined good that buyers are willing and able to purchase at each possible price.Consider the following demand schedule for slices of Pepperoni Pizza on Franklin Street on a typical weekday when UNC is in session.Econ 101 M. SalemiDemand Schedule for a 10 ounce slice of pepperoni pizza on a September weekday in Chapel HillDemand For Pizza $0.00$0.50$1.00$1.50$2.00$2.50$3.00$3.50$4.00$4.50$5.00$5.500 200 400 600 800 1000 1200 1400 1600Slices of Pepperoni PizzaDollars per Slice5Econ 101 M. SalemiDemand Schedule for PizzaSuppose 800 slices are available. What price rations the availableslices?Demand For Pizza $0.00$0.50$1.00$1.50$2.00$2.50$3.00$3.50$4.00$4.50$5.00$5.500 200 400 600 800 1000 1200 1400 1600Slices of Pepperoni PizzaDollars per SliceEcon 101 M. SalemiUse Your Clickers To Answer The Following Graded QuestionEcon 101 M. SalemiWhich of the following best explains why the quantity demanded of a slice of pepperoni pizza falls as the price of the slice rises? It falls because…A. The opportunity cost of the slice grows smaller.B. The opportunity cost of the slice grows larger.C. Buyers have smaller effective incomes when the price of pizza rises.D. Sellers have larger effective incomes when the price of pizza rises.Econ 101 M. SalemiSupply ScheduleA Supply Schedule shows the quantity of a well-defined good that sellers are willing and able to sell at each possible price.Consider the following supply schedule for slices of Pepperoni Pizza on Franklin Street on a typical weekday when UNC is in session.6Econ 101 M. SalemiSupply Schedule for a 10 ounce slice of pepperoni pizza on a September weekday in Chapel HillSupply Schedule for Pizza$0.00$0.50$1.00$1.50$2.00$2.50$3.00$3.50$4.00$4.50$5.00$5.500 200 400 600 800 1000 1200 1400 1600Slices of Pepperoni PizzaDollars per SliceEcon 101 M. SalemiSupply Schedule for PizzaHow much pizza will suppliers supply at a price of $2.75 per slice?Supply Schedule for Pizza$0.00$0.50$1.00$1.50$2.00$2.50$3.00$3.50$4.00$4.50$5.00$5.500 200 400 600 800 1000 1200 1400 1600Slices of Pepperoni PizzaDollars per SliceEcon 101 M. SalemiMarket Price is a Rationing MechanismA good is scarce when there is an insufficient supply of it relative to the desires of a group of prospective consumers.Some mechanism is required to allocate scarce goods among prospective consumers.In a market economy, price is the allocation mechanism.Price separates prospective buyers into two groups: those who get the good and those who do not.Econ 101 M. SalemiMarket EquilibriumA system is in equilibrium when there is no tendency for it to change.Can our pizza market be in equilibrium at a price per slice of $2.00? At a price of $2.00, pizza buyers want 800 slices.At a price of $2.00, pizza sellers will sell only 400 slices.What change do you predict will occur?7Econ 101 M. SalemiAt a price of $2.00, Consumers Want 800 slices.Demand For Pizza $0.00$0.50$1.00$1.50$2.00$2.50$3.00$3.50$4.00$4.50$5.00$5.500 200 400 600 800 1000 1200 1400 1600Slices of Pepperoni PizzaDollars per SliceEcon 101


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