ECON 1113 1st Edition Lecture 4 Outline of Last Lecture I Production Possibilities Curve Extrapolation A Current Choices and Future Possibilities B China vs USA Example II The Circular Flow of Income in the Economy III Price Determination in Competitive Markets A Demand B Supply Outline of Current Lecture I Competitive Price Determination A Demand B Supply C Equilibrium II Legal Price Controls A Legal Price Ceilings B Legal Price Floors III Changes in Demand and or Changes in Supply Current Lecture I Competitive Price Determination A Demand 1 Summarizes buyers intentions B Supply 1 Summarizes sellers intentions C Previous Example Reference Price of Eggs Quantity of Eggs Demanded Quantity Supplied in dollars dozen in dozens week in dozens week 1 dozen 3 dozen week 1 dozen week 2 dozen 2 dozen week 2 dozen week 3 dozen 1 dozen week 3 dozen week These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute Demand and Supply Curves 3 5 price P dollar dozen 3 2 5 Demand Exponential Demand Supply Exponential Supply 2 1 5 1 0 5 0 0 5 1 1 5 2 2 5 3 3 5 physical quantities demanded Q t dozens week II 1 Supply and demand curves occur independently of one another D Equilibrium 1 Unpredictable 2 Equilibrium Price Pe a Can create excess demand or shortage or excess supply depending upon the location of this value on the price axis b At the price of 1 3 dozen eggs are demanded leaving excess demand c At the price of 3 1 dozen eggs are demanded allowing excess supply d In this example this value occurs at 2 2 on the graph 3 If there are no legal price controls then any price that is not at the equilibrium Pe will automatically be adjusted to the equilibrium level 4 Disequilibrium prices automatically reaching equilibrium or market clearing level is referred to as the operation of an invisible hand a Adam Smith The Wealth of Nations 1776 b Occurs under circumstances with natural economic order and no enacted limitations Legal Price Controls A Legal Price Ceiling price set by law above which prices cannot legally be changed B Legal Price Floor price set by law below which prices cannot legally be changed C Example Prescription Drug Market in China 1 A price ceiling is set to make prescription drugs more affordable however this action lessens quality and efficiency of drugs 2 Excess demand or shortages occur under the effects of a price ceiling III Changes in Demand and or Changes in Supply A Imply shifts in the demand schedule and or shifts in the supply schedule B Causes for increase in demand could be only one some or all of these simultaneously affecting curves 1 Increase in buyers income 2 Stronger tastes 3 More buyers in the market 4 Buyers expecting higher future prices and or higher future income 5 Higher prices of a substitute good 6 Lower prices of a compliment C All changes have the same analytical effect on the graph 1 When the demand for something increases not an increase in quantity demanded any price will remain stable but the demand curves will move to the right increasing the quantities demanded D Supply differs with one exception market price
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