The big picture marcoeconomics 12e parkin chapter 03

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W H AT I S E C O N O M I C S ? 23 C h a p t e r DEMAND AND SUPPLY The Big Picture Where we have been: In Chapter 3, the students have their first encounter with demand and supply and the powerful forces that determine price and quantity in a competitive market Chapter builds on Chapter 2, which provides the simplest rigorous description of the economic problem and the implications of the pursuit of an efficient use of resources If you have time, it is worth forging links between Chapters and Chapter explains why we trade in markets Chapter shows how trade in markets determines where on the PPF the economy operates Where we are going: Demand and supply lie at the heart of the principles course Eventually in the microeconomics class we derive the demand curve and the supply curve from deeper views of the choices that people and firms make And in the macroeconomic class, the lessons learned here apply, albeit with subtle differences, to the aggregate supply-aggregate demand model N e w i n t h e Tw e l f t h E d i t i o n The content of this chapter is largely the same except for the Economics in the News sections, which are now replaced with new current topics of coffee and bananas The banana article is at the end of the chapter along with the extended Economic Analysis of the end-of-chapter articles There is a reduction in the section covering all possible shifts of demand and supply The content now focuses on situations where both curves shift, which allows for two simpler figures to be used to illustrate shifts The single shifts of curves are already covered earlier so there is no loss of content There is a new Worked Problem at the end of the chapter The Worked Problem gives demand and supply schedules for roses and then asks the students how the market adjusts if the price is lower and higher than the equilibrium price It follows up by asking the students to determine the equilibrium price and quantity Then the Worked Problem asks the students to calculate new equilibrium prices and quantities when the supply changes and when the demand and supply both change The Worked Problem shows the students how to make these calculations In particular, it demonstrates how to calculate the new equilibrium when the demand and supply change using the new 23 24 demand and supply schedules and using a supply and demand diagram To include the new Worked Problem without lengthening the chapter, some problems have been removed from the Study Plan Problem and Applications These problems are in the MyEconLab and are called Extra Problems 24 Lecture Notes Demand and Supply     In our market-based economy, the interaction of demand and supply in markets determines the prices of goods and services and the quantity produced and consumed Changes in demand and/or supply lead to changes in the price of the good or service and in the quantity produced and consumed Markets vary in the intensity of competition This chapter studies a competitive market, which is a market that has many buyers and sellers, so no single buyer or seller can influence price The money price of a good or service is the number of dollars that must be given up for it The ratio of one (money) price to another is called a relative price A relative price is an opportunity cost The theory of demand and supply determines relative prices and so when we use the word “price” we mean “relative price.” To point out the importance of relative prices, ask your students if turkey at 40¢ a pound is a good buy Tell them that is all they know—turkey is 40¢ a pound Generally most students respond that turkey at this price is cheap and a good buy Then tell them that steak is 8¢ a pound Now is turkey such a good buy? Students realize that the relative price of turkey is pounds of steak per pound of turkey and so turkey is actually expensive Point out to them that these money prices are actual prices from circa 1800 At that time, turkey was relatively quite expensive because turkeys could fly and needed to be hunted rather than harvested! Also point out to them the unimportance of the money price and the crucial importance of the relative price I Demand   The price of a good or service affects the quantity people plan to buy The quantity demanded of a good or service is the amount that consumers plan to buy during a given time period at a particular price The law of demand states that other things remaining the same, the higher the price of a good, the smaller is the quantity demanded; and the lower the price of a good, the greater the quantity demanded The law of demand occurs for two reasons:  Substitution Effect: When the relative price of good changes, the opportunity cost of the good changes An increase in the price increases the opportunity cost of buying the good and people respond by buying less of the good and buying more of its substitutes  Income Effect: A change the price of a good changes the amount that a person can afford to buy When the price of a good rises, people cannot afford to buy the same quantities that they purchased before, so the quantities bought of some goods and services must decrease Normally the good whose price rises is one of the goods for which less is purchased Demand Curve and Demand Schedule  The demand for a Price Quantity good refers to the (dollar demande entire relationship s per d between the price of unit) (units) 50 40 30 20 10 [Type text] 22 CHAPTER   the good and the quantity demanded of the good The table gives a demand schedule A demand curve shows the relationship between the quantity demanded of a good and its price when all other influences on consumers’ planned purchases remain the same The figure illustrates the demand curve resulting from the demand schedule The demand curve is a willingness-to-pay curve—for each quantity, the price along the demand curve is the highest price a consumer is willing to pay for that unit of output which means that a demand curve is a marginal benefit curve Of the hundreds of classroom experiments that are available today, very few are worth the time they take to conduct The classic demand-revealing experiment is one of the most productive and worthwhile ones Bring to class two bottles of ice-cold, ready-to-drink Mt Dew, bottled water, or sports drink (If your class is very large, bring six bottles) Tell the students that you have these drinks and ask them to indicate if they would like one Most hands will go up Tell the class that you are going to sell them to the high bidder Tell them that this auction is real The winner will get the drink and will pay Ask for a show of hands of those who have some cash and can afford to buy a drink Explain that these indicate an ability to buy but not a definite plan to buy Now begin the auction Appoint a student to count hands (more than one for a big class) Begin at a low price: say 10¢ a bottle and count the number willing to buy Raise the price in 10¢ increments and keep the tally of the number who are willing to buy at each price When the number willing to buy equals the number of bottles you have for sale, the transactions (If you make a profit, and you might so, tell the students that the profit, small though it is, will go the department fund for undergraduate activities—and deliver on that promise.) Now use the data to make a demand curve for Mt Dew (or other drink) in your classroom today You can easily emphasize the law of demand And, now that you have a demand curve, you can some thought experiments that will shift it Ask: How would this demand curve have been different if the temperature in the classroom was 10 degrees higher/lower? How would this demand curve have been different if half the class was sick and absent today? How would this demand curve have been different if there was a Coke machine right in the classroom? A Change in Demand (Demand Shifters)  When any factor that influences buying plans other than the price of the good changes, there is a change in demand and the demand curve shifts An increase in demand shifts the demand curve rightward and a decrease in demand shifts the demand curve leftward Six factors change demand:  Prices of Related Goods: A substitute is a good that can be used in place of another good (tea and coffee) and a complement is a good that is used in conjunction with another good (sugar and coffee) A rise in the price of a substitute or a fall in the price of a complement increases the demand for the good  Expected Future Prices: If the price of a good is expected to rise in the future, the demand for the good today increases  Income: A normal good is one for which demand increases as income increases; an inferior good is one for which demand decreases as income increases  Expected Future Income and Credit: When expected future income increases, demand today increases When credit becomes easier to obtain, demand increases  Population: The larger the (relevant) population, the greater the demand D E M A N D A N D S U P P LY  Preferences: Preferences are an individual’s attitudes toward goods and services If people “like” a good more, the demand for it increases A Change in the Quantity Demanded Versus a Change in Demand   A change in price results in a movement along the demand curve, which is change in the quantity demanded A change in other factors shifts the demand curve, which is a change in demand In the figure, the movement along demand curve D0 from point a to point b as a result of the price rising from $2 to $4 is a change in the quantity demanded The shift of the demand curve from D0 to the new demand curve D1 is a change in demand 23 24 CHAPTER II Supply   The price of a good or service affects the quantity firms plan to sell The quantity supplied of a good or service is the amount that firms plan to sell during a given time period at a particular price The law of supply states that other things remaining the same, the higher the price of a good, the greater is the quantity supplied; and the lower the price of a good, the smaller the quantity supplied The law of supply occurs because an increase in the quantity of a good produced results in an increase in its marginal cost So the price must rise in order to induce firms to increase the quantity they produce Supply Curve and Supply Schedule    The supply of a good Price Quantit refers to the entire (dollar y relationship s per supplie between the price unit) d of the good and (units) the quantity 10 supplied of the 20 good The table 30 gives a supply 40 schedule 50 A supply curve shows the relationship between the quantity supplied of a good and its price when all other influences on producers’ planned sales remain the same The figure illustrates the supply curve resulting from the supply schedule The supply curve is a minimum-supply-price curve—for each quantity, the price along the supply curve is the lowest price a producer must receive in order to produce that unit of output which means that a supply curve is a marginal cost curve A Change in Supply (Supply Shifters)  When any factor that influences selling plans other than the price of the good changes, there is a change in supply and the supply curve shifts An increase in supply shifts the supply curve rightward and a decrease in supply shifts the supply curve leftward Six factors change supply:  Prices of Productive Resources: If the price of a resource used to produce the good rises, the supply of the good decreases  Prices of Related Goods Produced: A substitute in production is a good that can be produced using the same resources and a complement in production is a good that must be produced with the initial good A fall in the price of a substitute in production or a rise in the price of a complement in production increases the supply of the good  Expected Future Prices: If the price of a good is expected to rise in the future, the supply of the good today decreases  Number of Suppliers: If the number of suppliers increases, the supply increases  Technology: Technology refers to the ways in which factors of production are used to produce a good A technological advance increases the supply of a good  The State of Nature: The state of nature includes all natural forces that influence supply Bad weather or an earthquake decreases the supply of a good D E M A N D A N D S U P P LY 25 A Change in the Quantity Supplied Versus a Change in Supply   A change in price results in a movement along the supply curve, which is change the quantity supplied A change in other factors shifts the supply curve, which is a change in supply In the top figure, the movement along supply curve S0 from point a to point b as result of the price rising from $2 to $4 is change in the quantity supplied The shift the supply curve from S0 to the new supply curve S1 is a change in supply in a a of III Market Equilibrium   An equilibrium is a situation in which opposing forces balance The equilibrium price is the price at which the quantity demanded equals the quantity supplied The equilibrium quantity is the quantity bought and sold the equilibrium price In the figure, the equilibrium price is $3 and the equilibrium quantity is 30 per week at Price as a Regulator and Price Adjustments     The price of a good regulates the quantities demanded and supplied Shortage: If the price is below the equilibrium price, consumers plan to buy more than firms plan to sell A shortage results, which forces the price higher, toward the equilibrium price In the figure, there is a shortage at any price below $3 and so the price is forced higher, toward the equilibrium price Surplus: If price is above the equilibrium, firms plan to sell more than consumers plan to buy A surplus results, which forces the price lower, toward the equilibrium price In the figure, there is a surplus at any price above $3 and so the price is forced lower, toward the equilibrium price The price continues to adjust until the quantity supplied equals quantity demanded To help students have a base of knowledge from which build tell them to memorize “Home Base”—the basic Supply and Demand curves showing an initial starting position with proper labels on the axis’ and an initial equilibrium, P0 and Q0 on the axis at the intersection of the two curves “Home Base” provides them a starting place for every story problem they face Then as you work through examples, be sure to ask them what “shifter” is changing This procedure will keep them using the economic tool rather than just going with a gut feeling The magic of market equilibrium and the forces that bring it about and keep the market there need to be demonstrated with the basic diagram, with intuition, and, if you’ve already used the demand experiment outlined above, with hard evidence in the form of the class 26 CHAPTER activity Using the experiment is straightforward Start by explaining that in that market, the supply was fixed (vertical supply curve) at the quantity of bottles that you brought to class The equilibrium occurred where the market demand curve (demand by the students) intersected your supply curve Point out that the trades you made in your little economy made both buyers and sellers better off Back in the dim mists of time, circa 1870 or so, economists struggled to understand if it was the supply or the demand that determined the price and quantity of a good Nowadays we know that these efforts were misguided To borrow from the great economist Alfred Marshall, demand and supply curves are like the blades on a pair of scissors It does not make sense to ask which blade does the cutting because the cutting takes both blades and occurs at the intersection of the two blades Likewise, it takes both the demand and supply to determine the price and quantity and the price and quantity are determined at the intersection of the demand and supply curves IV Predicting Changes in Price and Quantity The demand and supply model can be used to determine how changes in factors affect a good’s price and quantity A Change In Demand     If the demand for a good or service increases, the demand curve shifts rightward As a result, the equilibrium price rises and the equilibrium quantity increases If the demand for a good or service decreases, the demand curve shifts leftward As a result, the equilibrium price falls and the equilibrium quantity decreases Supply does not change and the supply curve does not shift Instead there is a change in the quantity supplied and a movement along the supply curve The figure illustrates an increase in demand In the figure the demand curve shifts from D0 to D1 As a result, the equilibrium price rises from $3 to $4 and the equilibrium quantity increases from 30 to 40 The supply curve does not shift; there is, however, a movement along the supply curve An Economic in the News feature discusses the factors that have led to higher college tuition Because enrollment has also increased, the analysis concludes that increases in demand are the factor that has created the higher tuition A Change In Supply  If the supply of a good or service increases, the supply curve shifts rightward As a result, the equilibrium price falls and the equilibrium quantity increases  If the supply of a good or service decreases, the supply curve shifts D E M A N D A N D S U P P LY   leftward As a result, the equilibrium price rises and the equilibrium quantity decreases Demand does not change and the demand curve does not shift Instead there is a change in the quantity demanded and a movement along the demand curve The figure illustrates an increase in supply In the figure the supply curve shifts from S0 to S1 As a result, the equilibrium price falls from $3 to $2 and the equilibrium quantity increases from 30 to 40 The demand curve does not shift; there is, however, a movement along the demand curve An Economic in the News explores the factors that led to a fall in the price of coffee The analysis concludes that a bumper crop of coffee lies behind the fall in price The whole chapter builds up to this section, which now brings all the elements of demand, supply, and equilibrium together to make predictions Students are remarkably ready to guess the consequences of some event that changes either demand or supply or both They must be encouraged to work out the answer and draw the diagram Explain that the way to answer any question that seeks a prediction about the effects of some event(s) on a market has five steps Once you have already worked an example or two, walk them through the steps and have one or two students work some examples in front of the class The five steps are: Draw a demand-supply diagram and label the axes with the price and quantity of the good or service in question Think about the event(s) that you are told occur and decide whether they change demand, supply, or both demand and supply Determine if the events that change demand or supply bring an increase or a decrease Draw the new demand curve and supply curve on the diagram Be sure to shift the curve(s) in the correct direction—leftward for decrease and rightward for increase (Lots of students want to move the curves upward for increase and downward for decrease— this view works ok for demand but is exactly wrong for supply So emphasize the leftright shift.) Find the new equilibrium and compare it with the original one It is critical at this stage to return to the distinction between a change in demand (supply) and a change in the quantity demanded (supplied) You can now use these distinctions to describe the effects of events that change market outcomes At this point, the students know enough for it to be worthwhile emphasizing the magic of the market’s ability to coordinate plans and reallocate resources Demand and Supply Change in the Same Direction   If both the demand and the supply of a good or service increase, both the demand and supply curves shift rightward The quantity unambiguously increases but the effect on the price is ambiguous  If the increase in demand is greater than the increase in supply, the price rises  If the increase in demand is the same size as the increase in supply, the price does not change  If the increase in demand is less than the increase in supply, the price falls If both the demand and the supply of a good or service decrease, both the demand and 27 28 CHAPTER  supply curves shift leftward The quantity unambiguously decreases but the effect on the price is ambiguous  If the decrease in demand is greater than the decrease in supply, the price falls  If the decrease in demand is the same size as the decrease in supply, the price does not change  If the decrease in demand is less than the decrease in supply, the price rises The figure illustrates an increase in both demand and supply In the figure the demand curve shifts from D0 to D1 and the supply curve shifts from S0 to S1 The shifts are the same size, so the equilibrium price does not change and the equilibrium quantity increases from 30 to 50 D E M A N D A N D S U P P LY Demand and Supply Change in the Opposite Directions    If the demand increases and the supply decreases, the demand curve shifts rightward and the supply curve shifts leftward The price unambiguously rises but the effect on the quantity is ambiguous  If the increase in demand is greater than the decrease in supply, the quantity increases  If the increase in demand is the same size as the decrease in supply, the quantity does not change  If the increase in demand is less than the decrease in supply, the quantity decreases If the demand decreases and the supply increases, the demand curve shifts leftward and the supply curves shifts rightward The price unambiguously falls but the effect on the quantity is ambiguous  If the decrease in demand is greater than the increase in supply, the quantity decreases  If the decrease in demand is the same size as the increase in supply, the quantity does not change  If the decrease in demand is less than the increase in supply, the quantity increases The figure illustrates an increase in demand and a decrease in supply In the figure the demand curve shifts from D0 to D1 and the supply curve shifts from S0 to S1 The shifts are the same size, so the equilibrium quantity does not change and the equilibrium price rises from $3 to $5 The Economic in the News explores the market for bananas A disease that damages banana crops has spread from Southeast Asia to the Middle East The disease has decreased the supply of bananas, resulting in the price rising and quantity decreasing 29 30 CHAPTER Additional Problems What is the effect on the price of hotdogs and the quantity of hotdogs sold if a The price of a hamburger rises? b The price of a hotdog bun rises? c The supply of hotdog sausages increases? d Consumers’ incomes increase if hot dogs are a normal good? e The wage rate of a hotdog seller increases? f If the wage rate of the hotdog seller rises and at the same time prices of ketchup, mustard, and relish fall? Suppose that one of the following events occurs: (i) The price of wool rises (ii) The price of sweaters falls (iii) A close substitute for wool is invented (iv) A new high-speed loom is invented a b c d Which of the above events increases or decreases (state which) The demand for wool? The supply of wool? The quantity of wool demanded? The quantity of wool supplied? Figure 3.1 illustrates the market for bread a Label the curves in the figure b What are the equilibrium price of bread and the equilibrium quantity of bread? D E M A N D A N D S U P P LY The demand and supply schedules for potato chips are in the table a What are the equilibrium price and equilibrium quantity of potato chips? b If chips were 60 cents a bag, describe the situation in the market for potato chips and explain what would happen to the price of a bag of chips Price (cents per bag) 40 50 60 70 80 90 100 110 Quantity Quantity demand supplied ed (millions of bags a week) 170 90 160 100 150 110 140 120 130 130 120 140 110 150 100 160 In problem 4, suppose a new snack food comes onto the market and as a result the demand for potato chips decreases by 40 million bags per week a Has there been a shift in or a movement along the supply curve of chips? b Has there been a shift in or a movement along the demand curve for chips? c What is the new equilibrium price and quantity of chips? In problem 5, suppose that a flood destroys several potato farms and as a result supply decreases by 20 million bags a week at the same time as the new snack food comes onto the market What is the new equilibrium price and quantity of chips? Solutions to Additional Problems a The price of a hot dog rises, and the quantity of hot dogs sold increases Hot dogs and hamburgers are substitutes If the price of a hamburger rises, people buy more hot dogs and fewer hamburgers The demand for hot dogs increases The price of a hot dog rises, and more hot dogs are sold b The price of a hot dog falls, and fewer hot dogs are sold Hot dog buns and hot dogs are complements If the price of a hot dog bun rises, fewer hot dog buns are bought The demand for hot dogs decreases The price of a hot dog falls, and people buy fewer hot dogs c The price of a hot dog falls and more hot dogs are sold The increase in the supply of hot dog sausages lowers the price of hot dog sausages Hot dog sausages are a factor used in the production of hot dogs With the lower priced factor, the supply of hot dogs increases The price of a hot dog falls and people buy more hot dogs d The price of a hot dog rises, and the quantity sold increases An increase in consumers' income increases the demand for hot dogs As a result, the price of a hot dog rises and the quantity bought increases e The price of a hot dog rises, and the quantity sold decreases If the wage of the hot dog seller increases, the cost of producing a hot dog increases and the supply of hot dogs decreases The price rises, and people buy fewer hotdogs f The price of a hot dog rises, but the quantity might increase, decrease, or remain the same Ketchup, mustard, and relish are complements of hot dogs If the price of ketchup, mustard, and relish fall, more ketchup, mustard, and relish are bought and the demand for hot dogs increases The price of a hot dog rises, and people buy more hot dogs If the wage of the hot dog seller increases, the cost of producing a hot dog increases and the supply of hot dogs decreases The price rises, and people 31 32 CHAPTER buy fewer hotdogs Taking the two events together, the price of a hot dog rises, but the quantity might increase, decrease, or remain the same a (ii) and (iii) Wool is used in the production of sweaters If the price of a sweater falls because the supply of sweaters has increased, then the equilibrium quantity of sweaters increases and the demand for wool increases If the price of a sweater falls because the demand for sweaters has decreased, then the equilibrium quantity of sweaters decreases and the demand for wool decreases If a close substitute for wool is invented, some sweater producers will switch from wool to the substitute When they do, the demand for wool decreases b (iv) If a new high-speed loom is invented, the cost of making wool will fall and the supply of wool will increase c (i) and (iv) If the price of wool rises there is a movement up along the demand curve The quantity demanded of wool decreases If a new high-speed loom is invented, the cost of producing wool will fall So the supply of wool increases With no change in the demand for wool, the price of wool will fall and there is a movement down along the demand curve for wool The quantity demanded of wool increases d (i), (ii), and (iii) If the price of wool rises there is a movement up along the supply curve The quantity supplied of wool increases If the price of a sweater falls because the supply of sweaters has increased, then the equilibrium quantity of sweaters increases and the demand for wool increases With no change in the supply of wool, the price of wool rises and the quantity of wool supplied increases If the price of a sweater falls because the demand for sweaters has decreased, then the equilibrium quantity of sweaters decreases and the demand for wool decreases With no change in the supply of wool, the price of wool falls and the quantity of wool supplied decreases If some sweater producers switch to using the new close substitute for wool, the demand for wool will decrease With no change in the supply of wool, the price of wool falls and the quantity of wool supplied decreases a The demand curve is the curve that slopes down toward to the right The supply curve is the curve that slopes up toward to the right b The equilibrium price is $3 a loaf, and the equilibrium quantity is 100 loaves a day Market equilibrium is determined at the intersection of the demand curve and supply curve a The equilibrium price is 80 cents a bag, and the equilibrium quantity is 130 million bags a week The price of a bag adjusts until the quantity demanded equals the quantity supplied At 80 cents a bag, the quantity demanded is 130 million bags a week and the quantity supplied is 130 million bags a week b At 60 cents a bag, there will be a shortage of potato chips and the price will rise At 60 cents a bag, the quantity demanded is 150 million bags a week and the quantity supplied is 110 million bags a week There is a shortage of 40 million bags a week The price will rise until market equilibrium is restored—80 cents a bag a There has been a movement along the supply curve The demand for potato chips decreases, and the demand curve shifts leftward Supply does not change, so the price falls along the supply curve b The demand curve has shifted leftward As the new snack food comes onto the market, the demand for potato chips decreases There is a new demand schedule, and the demand curve shifts leftward c The equilibrium price is 60 cents, and the equilibrium quantity is 110 million bags a week Demand decreases by 40 million bags a week That is, the quantity demanded at each price decreases by 40 million bags The quantity demanded at 80 cents is now 90 million bags, and there is a surplus of potato chips The price falls to 60 D E M A N D A N D S U P P LY cents a bag, at which the quantity supplied equals the quantity demanded (110 million bags a week) The new price is 70 cents a bag, and the quantity is 100 million bags a week The supply of potato chips decreases, and the supply curve shifts leftward The quantity supplied at each price decreases by 20 million bags The result of the new snack food entering the market is a price of 60 cents a bag At this price, there is now a shortage of potato chips The price of potato chips will rise until the shortage is eliminated Additional Discussion Questions John Q: Could a legal market for human organ donations have saved his dying son? An opinion piece written by Richard Epstein in The Wall Street Journal (2/21/02) discusses the donation of human organs for transplant operations He raises the issue that if a market for human donor organs were legal, the dilemma of a lack of organs, as raised by Denzel Washington’s character in the movie “John Q,” might be closer to fiction rather than fact You can use this movie and the motive of the main character as an intriguing basis for getting students to construct and interpret the demand and supply model Can we illustrate a market for something as vital as organ donations? Begin by asking the students to graph a demand and supply model for the market for human organ donations, making sure that their model reflects the real-life characteristics of this unique market: i) the federal government does not allow individuals or businesses to engage in the buying and selling of human organs, unless the organs are donated and received for free, ii) a small number of organs are donated by living volunteers (like kidney donations) or by the families of the recently deceased (especially after an otherwise healthy individual suffers an accidental death), meaning that the positively sloped supply curve for human organ donations intercepts the quantity axis at some positive value, iii) the demand curve for organs must intercept the supply curve at a positive price Are there unintended consequences when market forces are ignored? The government wants to assure that poor people have the same access to available organ transplants as rich people, so it imposes a zero-price restriction on the market However, this creates a shortage of organs available for transplant, where the quantity of organs demanded at a zero price far exceeds the quantity supplied If the market for organ donations were unregulated, then the equilibrium price for an organ would surely increase, but so would the total number of people receiving an organ transplant, and presumably, the total number of people who would survive to live another day Should society institute a policy that maximizes the numbers of lives saved or manipulates the characteristics of those fewer lives that get saved? Conclude this discussion with a great set-up for the efficiency versus equity issues developed later in chapter five Our command of the demand and supply model for human organ donations allows us to discover an important insight into one aspect of health care policy: the government places a lower priority for maximizing the total number of people saved regardless of income, and a higher priority on achieving a “proper” income mix among the smaller number of people that are saved by being one of the few receiving organ transplants What are some goods that college students might buy today but will give up when they enter the workforce after graduation? College 33 34 CHAPTER students usually recognize that they will change their consumption patterns when they are employed after college graduation Use this to get the students to appreciate inferior goods When you were an undergraduate, you probably complained about having to eat mostly canned soup or beans as a cheap staple to fill your hungry stomach on a small budget You swore that when you finally entered the workforce you wouldn’t eat soup or beans again, unless under extreme duress Today the single food item most frequently cited by students as an inferior good is the Raman style noodles—those dry, thin, near flavorless oriental style noodles that are reconstituted with boiling water Get the students to create a list other such inferior goods they will avoid when their incomes increase This gets them to carefully consider how income changes can cause demand curves to shift in an unintuitive manner for an inferior good Because computers are cheaper and more abundantly available now than a decade ago, doesn’t this mean the supply curve for computers is downward sloping? This is a real world example for illustrating the confusion between changes in supply and changes in the quantity supplied (It is easier to analyze this example if the students assume that consumer demand for computer software applications has not changed over the last decade.) Has anything in the world of computer manufacturing changed over the last decade? Point out that the observation about falling computer prices with rising quantities sold assumes that nothing significant has changed in the computer industry Emphasize how such statements reflect how the ceteris paribus condition of careful economic analysis has been violated Over the years, advances in technology have allowed computer makers to: i) offer greater computer power and versatility for contemporary software applications at the same opportunity cost of resources (market price) as before, or ii) to provide the same level of computer power and versatility for contemporary software applications at lower opportunity costs (market prices) as before Either way, this represents a rightward shift in the supply curve for computers The students should recognize that the two prices and two quantities that give the appearance of more computers offered for less are actually from two separate supply curves Because the average price of a car has increased substantially over the last 30 years, and the number of cars owned has risen faster than the population, doesn’t this mean that the demand curve for cars is upward sloping? This is a real world example for illustrating the confusion between changes in demand and changes in the quantity demanded (It is easier to analyze this example if the students assume that automobile production technology has not changed over these last three decades.) Has anything in the world of consumers changed over the last decade? Point out that this real world observation of car prices and rising quantities sold over time assumes that nothing significant has changed in the consumers’ environment Emphasize how statements such as these reflect how the ceteris paribus condition of careful economic analysis has been violated Consumer incomes have increased significantly over the last three decades, allowing them to: i) consume greater personal transportation opportunities for more family members while giving up the same amount of other goods as before, or ii) consume the same level of personal transportation opportunities while giving up less of all other goods as before Either way, this represents a rightward shift in the demand curve for automobiles The D E M A N D A N D S U P P LY students should recognize that the two prices and quantities that give the appearance of more automobiles demanded at higher prices are actually from two separate demand curves If the status of the family automobile has increased in recent decades, what affect would this have on consumer demand? There is evidence that the proportion of income that typical families spend on automobiles (versus all other goods) has increased substantially over the last 30 years This means that the percent increase in automobile purchases has been higher than the percent increase in family incomes This makes for a great lead into the measures of the income elasticity of demand discussed in Chapter 35 ... same, the higher the price of a good, the greater is the quantity supplied; and the lower the price of a good, the smaller the quantity supplied The law of supply occurs because an increase in the. .. things remaining the same, the higher the price of a good, the smaller is the quantity demanded; and the lower the price of a good, the greater the quantity demanded The law of demand occurs for... on the quantity is ambiguous  If the increase in demand is greater than the decrease in supply, the quantity increases  If the increase in demand is the same size as the decrease in supply, the
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