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Principles of Macroeconomics Week 2 Notes

by: Nadia Choi

Principles of Macroeconomics Week 2 Notes Econ 106

Marketplace > DePaul University > Economcs > Econ 106 > Principles of Macroeconomics Week 2 Notes
Nadia Choi
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Supply and Demand, Controls on prices, and Taxes.
Principles of Macroeconomics
Sébastien Mary
Class Notes
Economics, Macroeconomics
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This 8 page Class Notes was uploaded by Nadia Choi on Monday April 11, 2016. The Class Notes belongs to Econ 106 at DePaul University taught by Sébastien Mary in Spring 2016. Since its upload, it has received 11 views. For similar materials see Principles of Macroeconomics in Economcs at DePaul University.

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Date Created: 04/11/16
Nadia Choi ECO 106 Mary Principles of Macroeconomics Theme: Introduction to Economics and Markets Week 2: Ch 3 and 4 Supply and Demand The Market Forces of Supply and Demand Objective: explore how supply and demand can be used to explain events and understand  consequences 1) The circular flow diagram illustrates that, in markets for the factors of production,  households are sellers, and firms are buyers 2) In the market for labor, households are sellers and the labor price is the salary or wage 3) Is there a market for air? Yes 4) The influence of government budget deficit on economic growth falls within the study of  Macroeconomics  1 .     Markets and competition a. A Market is a group of buyers and sellers of a particular good or service b. The terms supply and demand refer to the behavior of people… as they  interact with one another in markets. c. Buyers determine demand. d. Sellers determine supply. Is there a market for love? Yes  Tinder, and Competitive Markets  A competitive market is a market in which there are many buyers and sellers so that each  has a negligible impact on the market price. Competition: Perfect and otherwise  Perfect Competition o Products are the same. o Numerous buyers and sellers so that each has no influence over price o Buyers and sellers are price takers  Monopoly o One seller, and seller controls price  Oligopoly o Few sellers o Not always aggressive competition  Monopolistic Competition o Many sellers o Slightly differentiated products o Each seller may set price for its own product  2 .     Demand  Quantity demanded is the amount of a good that buyers are willing and able to purchase  Law of Demand o The law of demand states that, other things equal, the quantity demanded of a  good fall when the price of the good rises If you don’t want a new iPhone for free, you are NOT rational Shifts in the Demand Curve (Demand Shifters!!!)  Consumer income o Based on someone’s income, determines what they buy (low income   bargain items, high income  more luxury goods)  Prices of related goods o Decrease demand of PB  decrease demand of Jelly  Tastes o Apple vs Android vs Galaxy  Expectations o hurricanes now people expect less oil o Fear   Number of buyers o demand for land increases as the population increases o demand of college education since there were a lot of buyers from baby  bloom Shift in the Supply Curve of Ice­cream Cones 3. Supply  Quantity supplied is the amount of a good that sellers are willing and able to sell  Law of Supply o The law of supply states that, other things equal, the quantity supplied of a good rise when the price of the good rises 4. Supply and Demand together  Equilibrium refers to a situation in which the price has reached the level where  quantity supplied equals quantity demanded  Equilibrium Price o The price that balances quantity supplied and quantity demanded. o On a graph, it is the price at which the supply and demand curves  intersect.  Equilibrium Quantity o The quantity supplied and the quantity demanded at the equilibrium price. o On a graph it is the quantity at which the supply and demand curves  intersect. The equilibrium of supply and demand Markets Not in the Equilibrium  Surplus o When price > equilibrium price, then quantity supplied > quantity demanded  There is excess supply or surplus  Suppliers will lower the price to increase sales, thereby moving toward  equilibrium  Shortage o When price < equilibrium price, then quantity demanded > the quantity  supplied  There is excess demand or a shortage  Suppliers will raise the price due to too many buyers chasing too few  goods, thereby moving toward equilibrium Markets Not in the Equilibrium  Law of supply and demand o The claim that the price of any good adjusts to bring the quantity supplied and the  quantity demanded for that good to balance. Three steps to analyzing changes in equilibrium  1. Decide whether the event shifts the supply or demand curve (or both). 2. Decide whether the curve(s) shift(s) to the left or to the right 3. Use the supply­and­demand diagram to see how the shift affects equilibrium price and  quantity Example: Supply Shifters  Input prices o CPU chip price goes up, supply less computers  Technology o Machines building cars that make it more efficient, faster, and supplies more o New way to extract oil o Fracking  Expectations o If seller expect higher price, then supply decreases o If seller expect lower price, then supply increases  Number of sellers o More people selling coffee, supply will go down 1. Supply, Demand, and Government Policies  In a free, unregulated market system, market forces establish equilibrium prices  and exchange quantities  While equilibrium conditions may be efficient, it may be true that not everyone is  satisfied  One of the roles of economists is to use their theories to assist in the development  of policies Control on Prices  Are usually enacted when policymakers believe the market price is unfair to  buyers or sellers  Result in government­created price ceilings on floors 2. Controls on Prices  Price ceiling o A legal maximum on the price at which a good can be sold (e.g. rent  control in NY, LA, W.DC…)  Price Floor o A legal minimum on the price at which a good can be sold (e.g. minimum  wage, food product) How price ceiling affect market outcomes  Two outcomes are possible when the government imposes a price ceiling: o The price ceiling is not binding if set above the equilibrium price o The price ceiling is binding is set below the equilibrium rice, leading to a  shortage  Effects of price ceilings  A binding price ceiling creates o Shortages because Q D > QS  Ex: food shortages in Venezuela o Nonprice rationing o Ex: long lines, discrimination by sellers (“choose your friend/family over  others” CASE STUDY: Lines at the Gas Pump  In 1973, OPEC raised the price of crude oil in world markets. Crude oil is the  major input in gasoline, so the higher oil prices reduced the supply of gasoline  What was responsible for the long gas lines? o Economists blame government regulations that limited the price oil  companies could charge for gasoline CASE STUDY: Rent control in the short run and long run  Rent controls are ceilings placed on the rents that landlords may change their  tenants  The goal of rent control policy is to help the poor by making households more  affordable  One economist called rent control “the best way to destroy a city, other than  bombing.” How price floors affect Market outcomes  When the government imposes a price floor, two outcomes are possible  The price floor is not binding if set below the equilibrium price  The price floor is binding if set above the equilibrium price, leading to surplus  A price floor prevents supply and demand from moving toward the equilibrium  price and quantity  When the market price hits the floor, it can fall no further, and the market price  equals the floor price  A binding price floor causes… o A surplus because QD > QD* o Nonprice rationing is an alternative mechanism for rationing the good,  using discrimination criteria  Ex: the minimum wage, agricultural price supports The Minimum Wage  An important example of a price floor is the minimum wage. Minimum wage  laws dictate the lowest price possible for labor that any employer may pay. 3. Taxes  Government levy taxes to raise revenue for public projects How taxes on buyers (and sellers) affect market outcomes  Taxes discourage market activity  When a good is taxed, the quantity sold is smaller  Buyers and seller share the tax burden Elasticity and tax incidence  Tax incidence is the manner in which the burden of a tax is shared among  participants in a market  Tax incidence is the study of who bears the burden of tax  Taxes result in a change in market equilibrium  Buyers pay more and sellers receive less, regardless of whom the tax is levied on  What was the impact of tax? o Taxes discourage market activity o When a good is taxed, the quantity is sold smaller o Buyers and sellers share the tax burden  In what proportions is the burden of the tax divided?  How do the effects of taxes on sellers compare to those levied buyers?  The answers to these questions demand on the elasticity of demand and the  elasticity of supply  So how is the burden of tax divided? o The burden of a tax falls more heavily on the side of the market that is less elastic


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