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OU ECON 1113 - Competitive Price Determinations and Legal Price Controls

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ECON 1113 1st Edition Lecture 4Outline of Last Lecture I. Production Possibilities Curve ExtrapolationA. Current Choices and Future PossibilitiesB. China vs. USA ExampleII. The Circular Flow of Income in the EconomyIII. Price Determination in Competitive MarketsA. DemandB. SupplyOutline of Current Lecture I. Competitive Price DeterminationA. DemandB. SupplyC. EquilibriumII. Legal Price ControlsA. Legal Price CeilingsB. Legal Price FloorsIII. Changes in Demand and/or Changes in SupplyCurrent LectureI. Competitive Price DeterminationA. Demand1. Summarizes buyers’ intentionsB. Supply1. Summarizes sellers’ intentionsC. Previous Example ReferencePrice of Eggs(in dollars/dozen)Quantity of Eggs Demanded(in dozens/week)Quantity Supplied(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/weekThese 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.0.5 1 1.5 2 2.5 3 3.500.511.522.533.5Demand and Supply CurvesDemand Exponential (Demand )SupplyExponential (Supply)physical quantities demanded (Q/t): dozens/weekprice (P): dollar/dozen1. Supply and demand curves occur independently of one anotherD. Equilibrium1. Unpredictable2. Equilibrium Price = Pea. Can create excess demand (or shortage) or excess supply depending upon the location of this value on the price axisb. At the price of $1, 3 dozen eggs are demanded, leaving excess demandc. At the price of $3, 1 dozen eggs are demanded, allowing excess supplyd. In this example, this value occurs at (2, 2) on the graph3. If there are no legal price controls, then any price that is not at the equilibrium (Pe) will automatically be adjusted to the equilibrium level4. 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, 1776b. Occurs under circumstances with natural economic order and no enacted limitationsII. Legal Price ControlsA. Legal Price Ceiling: price set by law above which prices cannot legally be changedB. Legal Price Floor: price set by law below which prices cannot legally be changedC. Example: Prescription Drug Market in China1. A price ceiling is set to make prescription drugs more affordable; however,this action lessens quality and efficiency of drugs2. Excess demand, or shortages, occur under the effects of a price ceilingIII. Changes in Demand and/or Changes in SupplyA. Imply shifts in the demand schedule and/or shifts in the supply scheduleB. Causes for increase in demand (could be only one, some, or all of these simultaneously affecting curves1. Increase in buyers’ income2. Stronger tastes3. More buyers’ in the market4. Buyers’ expecting higher future prices and/or higher future income5. Higher prices of a substitute good6. Lower prices of a complimentC. All changes have the same analytical effect on the graph1. 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 demandedD. Supply differs with one exception: market


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OU ECON 1113 - Competitive Price Determinations and Legal Price Controls

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