· Example for supply and demand analysis:
o Market for Acoustic Guitars
(graph that wasn't able to show up)
o ^Quantity demanded equals the quantity supplied^
o Demand curve: plot of people’s marginal values
o Supply curve: How much is available to the people
o Rather than ration goods in the ways identified in the previous class, we ration by price
o At equilibrium, the amount demanders are willing to buy and suppliers are willing to sell is equal
o Note: Demand is willingness at that price, not how many people actually want the good
o Price changes:
§ When price increases: Quantity demanded would fall, while quantity supplied would increase because the marginal cost of making more is offset by greater marginal benefit
§ When prices decrease: Quantity demand increase, quantity supplied decreases
· Surplus
o “At a particular price, when the quantity supplied exceeds the quantity demanded” (Rizzo made me quote this)
o Unstable outcome (producers and consumers are not satisfied)
o In America:
§ Producers who can’t sell their goods at the higher price either increase incentives to buy the goods…or receive a government subsidy in order to keep the prices that high
§ Tariffs on foreign goods are used in good markets in order to decrease the supply of the good in order to artificially change the equilibrium to a higher price
· Example: The tariff on sugar meant to keep domestic sugar and corn producers selling at higher prices
o Usually leads to price cuts in order to sell the surplus in guitars
§ As you cut the price, it causes other companies to drop their prices too, getting rid of the surplus in the market as the number of consumers demanding guitars increases (though the demand or supply curve never shifts on the graph)
· Shortages
o When the market price falls below equilibrium, the quantity demanded will increase, while quantity supplied will decrease
§ Quantity demand increases due to the greater marginal benefit for consumer for buying good at lower price
§ Quantity supplied decreases because producers can’t profit as much from producing so many guitars (i.e. marginal cost does not equal marginal benefit)
o Examples:
§ Apartments in NYC
No comments:
Post a Comment