Apecon Lecture 4 - ap econ lec 4 notes PDF

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[email protected] LECTURE 4 MARKET PRICE SIGNALS WHAT IS A MARKET ?  

Connects competition between buyers, sellers and cooperation between buyers and sellers. Gov guarantees of property rights allow markets to function

MIRACLE OF MARKETS – occurs bc prices serve as signals to consumers and businesses for smart choices MARKET- Interactions between buyers and sellers 

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Market are a mix of : COMPETETION – BETWEEN BUYERS , BETWEEN SELLERS COOPERATION- BETWEEN BUYERS AND SELLERS( both make an exchange , ones providing a product and the other usually providing money ) Voluntary exchanges b/t buyers and sellers happen when both sided end up better off Voluntary exchange occurs in a market so long as the marginal opportunities cost is below the price for the seller

PROPERTY RIGHTS – Legally enforceable guarantees of ownership of psychical. Financial. And intellectual property Ex. You are selling headphones c/x walks into the shop tries them on and walks out w/o paying. If you have no legal recourse as a shop owner than you are going to go out of business. Property right are essential for markets to function 

GOV SETS RULES OF GAME, defining and enforcing property rights necessary for free voluntary exchange

PRICE SIGNALS FROM DEMAND AND CHANGE When there are shortages , competition b/t buyers drive price up. When their surpluses, competition between sellers drives price down  

Prices are the outcome of a market process of competing bids( from buyers) and officers ( from sellers) Frustrated buyers- market price too LOW

STORTAGE, or EXCESS DEMAND – quantity demanded exceeds quantity supplied 

Shortages create pressure for process to rise

RISING PRICES provide signals and incentives for business to INCREASE QUANTITY SUPPLIED and for consumers to DECREASE QUNTITY DEMANDED. Eliminating the shortage -

For businesses rising prices are a good thing , they’re going to increase their quantity supplied which alleviates the shortage

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For consumers, its not a good thing , some drop out which decrease the quantity demanded . helps eliminate shortage Frustrated sellers – market price too HIGH

SURPLES OR EXCESS SUPPLY - Quantity supplied exceeds quantity demanded  

Surpluses create pressure for process to fall Whenever there is a surplus , this creates downward pressure on price

FALLING PRICES provide signals and incentives for business to DECREASE QUANTITY SUPPLIED and for consumers to INCREASE QUANTITY DEMANDED, eliminating the surplus

MARKET CLEARINF OR EQUALIBRIUM PRICES Market clearing or equilibrium prices balance QD AND QS coordinating smart choices of consumers and business 

The process that coordinates that smart choices of consumer and business has 2 names 1. MARKETPRICE CLEARING – The price that equalizes QD AND QS. When price is above rising inventories will cause the price to fall , when below , falling inventories will cause price to rise ( MC price will FALL when SUPPLY INCREASE OR DEMAND INCREASE) (( MC price will RISE when SUPPLY DECREASE OR DEMAND INCREASE 2. EQULIBRUM PRICE- the price that balances forces of competition and cooperation, so that there is NO TENDANCY FOR CHANGE

Price signals in markets create incentives, so that while each person acts only in own self-interest  

Interaction coordinated through Adam smiths INVISIBLE HAND of competition Result is the miracle of markets – continuous , ever changing production of products and services we want

ADA SMITH INVISIBLE HAND  

When an individual makes choices The invisible hand pushes these independent decisions in a direction to equilibrium or to market clearing that turns out to be a good outcome for everybody

“…he intends only his own gain, and he is in this... led by an invisible hand to promote an end which was no part of his intention.... By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it.” Adam Smith, The Wealth of Nations, 1776 ** WHEN THERE ARE IMBLANECES B/T QD AND QS, PRICES ADJUST ** ** WHEN PRICES ADJUST, THIS CHANGES THE INCENTIVES FOR INDIVIDUALS SELF INTRESTED DECISIONS **

WHAT HAPPENS WHEN DEMAND AND SUPPLY CHANGE?

When demand or supply change, equilibrium prices and quantities change. The price changes cause businesses and consumers to adjust their smart choices. Well functioning markets supply the changed products and services demanded ECONOMIST DO IT WITH MODELS  

Price and quantity changes are the RESULT, not the cause , OF ECONOMIC EVENTS Thinking like an economist means analyzing a situation using COMPARTAIVE STATICS

*COMPARATIVE – comparing 2 situations * *STATICS – ASSCOIATED W/ THE NOTION OF EQUILIBRIUM * 

Start w/ one equilibrium situation ( intersection of demand and supply , other things the same ) -Change one other thing/arable -Compare resulting equilibrium situation ( intersection of demand and supply after the change ) in terms of price and quantity

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Demand changes due to a change in (5 FACTORS) - Preferences - Prices of related products ( SUBSITUTES AND COMPLIMENTS ) - Income - Expected future prices - Number of consumers

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INCREASES IN DEMANDED CAUSES -Rise in equilibrium price - Increase in quantity supplied

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DECREASE IN DEMANDED CAUSES -Fall in equilibrium price -Decrease in quantity supplied

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SUPPLY CHANGES DUE TO A CHANGE IN -Tech -Enviro -Prices of input - Prices of related products produced - expected future prices - Number of business

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INCREASE IN SUPPLY CAUSES -Fall in equilibrium price -increase in quantity demanded

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DECREASE IN SUPPLY CAUSES -Rise in equilibrium price -Decrease in quantity demanded ** HIGER EXPECTED FUTURE PRIICES INDRAESE DEMAND TODAY, CAUSING PRICES TO RISE AND A MOVEMENT UP ALONG THE UNCHANGED SUPPLY CURVE**

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When BOTH DEMAND AND SUPPLY CHANGE at the same time -Can predict change in equalib price or equalib quantity -But w/o info about relative size of shifts of demand and supply curves; cannot predict the other equalib outcome

CONSUMER SYRPLUS, PRODUCER SURPLUS AND EFFIECENY

An efficient market outcome has the largest total surplus, prices just cover all opportunity costs of production and consumers’ marginal benefit equals businesses’ marginal cost.

READING DEMAN AND SUPPLY CURVES AS AMRGINAL BEBEFITS AND MRGINAL COST CURVES revels concept of : consumer surplus – Difference b/t amount a consumer is willing and able to pay, and the Price actually paid.  

Area under marginal benefit curve but above market price (30$-15) x20/2 =150 (the tp )

Producer surplus- difference b/t amount a producer is willing to accept, and the price received. -

Area below market price but above marginal cost curve ( parallel concept )

Efficient market outcome – Coordinates smart choices of business and consumers so    -

Total surplus is the largest Prices just cover all opp cost of production Consumers marginal benefits equal business marginal cost Consumers by only products and services where marginal benefits is greater than price Product and services produce at lowest cost; prices just cover all opportunities cost of production PRODUCTS AND SERVICES GOT O CONSUMERS MOST WILLING AND ABLE TO PAY If the quan produced is more than the efficient market outcome, total surplus is les efficient market outcome bc of subtracting deadweight loss. Pick any quan greater than the equilibrium quan, and read up the marginal cost and marginal befit curve

Total surplus- (consumer surplus plus Producer surplus) Is at maximum Inefficient outcomes Deadweight loss – Decrease in total surplus compared to an economically outcome 

For an inefficient outcome, subtract dead weight loss, so TOTAL SURPLUS IS LESS THAN FOR AN ECONOMICALLY EFFIECNT OUTCOME...