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FTE by jizhen1947

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									  Supply and Demand - A
Process of Social Cooperation
        Raymond P. H. Fishe

      Foundation for Teaching Economics
        Marginal Analysis

• Do all costs matter?
• Sunk costs
• Waterworld (bad movie)
  – Movie total cost $130 million
  – At $80 million a hurricane hit the set
  – Producers needed more $$$ from investors to
    finish production
  – Would you invest $50 million?
               Who Wants to be an
               ―Econ‖ Millionaire?
Do seat belt laws and air bags in cars lead
to more reckless driving habits?
(a) YES.

(b) NO.
(c) MAYBE.

(d) I need to poll the audience.
                  The Market

• A Market is a Network of Buyers and Sellers
  Exchanging Goods and/or Services
• Terms of Trade
  –   Price
  –   Quantity
  –   Quality (product characteristics)
  –   Delivery Time, Warranty, etc.
   Advantages of Using Price
• Anonymous - Participants May Not Know
  Each Other Characteristics
  – Note that in personal relationships, you need to
    know about individual characteristics
  – Do you give money for your brother or sister’s
    birthday?
• Market provides variety
• Allows us to compare relative prices (i.e.,
  opportunity cost)
• Common Currency - No Question of How to
  Measure Value
• Individual Choice to Participate
  Market Equilibrium for Towels

Price                  Market Supply Curve
Per                      5 Firms Produce
Towel


                         Market Equilibrium:
  $15                    P = $15 & Q = 1.0m




                          Market Demand Curve
                             500,000 Buyers

                                      Quantity
                1.0m                  Per Month
      What is Equilibrium?

• We know buyers and sellers can Both
  Gain When They Trade With Each
  Other
• In Equilibrium, the gains from
  voluntary trade are exhausted
• The marginal cost (MC) of additional
  trade exceeds the marginal benefit (MB)
  MB vs. MC of Extra Towels

Price
Per                      Supply (MC)
Towel


                            MC > MB
  $15



                         Demand (MB)

                               Quantity
             1.0m 1.1m         Per Month
How Did Napster Affect the ―Legal‖
         CD Market?

 • What is (or was) Napster?
 • Why did record companies sue
   Napster?
 • Who has the property rights?
 • How does Napster affect demand in the
   ―legal‖ CD market?
 • What happens to price?
    Price Effects of Napster on
         Legal CD Market

Price                           S
Per
CD
                                    Demand
                                    Changes
  $15                                Cause
                                    Prices to
  $10                               Change

                                    D
                         Dnew
                                        Quantity
             Qnew 1.0m                  Per Month
                Who Wants to be an
                ―Econ‖ Millionaire?
Why is it difficult to secure a hotel room in
New Orleans on the first Friday night in July?
 (a) Hotel owners are on vacation, so no one
     answers the phones
(b) There is a new hotel tax that is reducing tourism

 (c) FTE has booked all of the rooms
(d) There is an internationally famous music festival
    scheduled for that weekend
Price Effects of Music Festival
   on New Orleans Hotel Rooms

Price            Supply
Per
Room

$195                           Demand
                               Changes
                                Cause
                               Prices to
$120                           Change

                              Dnew

                          D
                                 Quantity
           10K Qnew              Per Month
               Who Wants to be an
               ―Econ‖ Millionaire?
What do Japanese Sumo Wrestlers and U.S.
Taxpayers have in common?
 (a) They carry around big burdens

 (b) It depends…
 (c) They both feel like they’ve been put through the
     “ringer”
 (d) At the margin, many taxpayers and sumo wrestlers
     have an incentive to cheat
 Taxpayers & Sumo Wrestlers
• Determining taxes owed is partly a self-
  reporting exercise
  – In 1987, rules on deductions for dependents
    changed—requiring a SSN for each child
  – On April 15th, 7 million children disappeared
• Sumo wrestlers face 15 matches in a tournament
  – Compensation and rank depends on > 50% success
  – What incentive does a 7-7 record face in the last
    match? What about a 8-6 record?
  – Based on past efforts, a 7-7 should win about 50% of
    8-6 matches.
  – Actual win percentage is about 80%.
                Who Wants to be an
                ―Econ‖ Millionaire?
I buy a flower every month for my wife. In
February prices are higher, but surprisingly Iris’s
prices rose this past September. Why?
 (a) Farm labor costs in South America fell
 (b) Oprah said that month that Iris’s were her favorite
     flower
(c) A freeze wipes out the majority of the Iris crop

(d) The FDA announces that Iris’s may cause health
    problems

How would you tell the difference between (b) & (c)?
 Price Effects Observed in the
    IRIS Market - OPRAH

Price            Supply
Per
IRIS

 $1.95                         OPRAH
                               Causes
                              Demand to
                               Change
 $1.20

                              Dnew

                          D
                                 Quantity
          1.0m Qnew              Per Month
 Price Effects Observed in the
  IRIS Market – The FREEZE
            Snew
Price                Supply
Per
IRIS

 $1.95                                  FREEZE
                                        Causes
                                       Supply to
 $1.20                                  Change




                              Demand
                                         Quantity
         Qnew 1.0m                       Per Month
           Comparing (b) and (c)?

(b) Oprah said that month that Iris’s were her
   favorite flower
    Did OPRAH take demand away from other
    flowers? If so, prices of “substitutes” (like
    roses) will decrease.
(c) A freeze wipes out the majority of the Iris crop

   A freeze raises the relative price of IRISES, so
   customers buy more of the less (relatively)
   expensive substitutes. Now, the price of
   substitutes rises!
 Price Controls—What if Trade is
           Restricted?

Price                   Market Supply
Per                        Curve
CD

                              Price Ceilings Can
  $15                        Cause Excess Demand
                                 -- A Shortage
  $10

                              Market
                              Demand
                               Curve
                                        Quantity
            Qs   1.0m   Qd              Per Month
           Market Power

• What happened in the ―CHIPs‖ game with
  only TWO sellers?
• Buyer or Seller can Affect Market Price
• A Monopoly Raises Price to Consumers
• P > MC Over Time Usually Indicates Market
  Power
• Entry Restrictions Create Market Power
• Government Actions Create Market Power
      Price Discrimination

• Charging Different Prices for a Good or
  Service with equal costs
• Examples--Airline Tickets, Hotel Rooms,
  Movies, Software Bundles
• Market Arbitrage (Resale) Must Be
  Limited
• Disney World Techniques
               Marketing Movies
                   Weekly Rental Rates
                                           Same
                 NORTH           SOUTH     Price

 Gone With                                 $2,000
 the Wind         $2,000          $3,000


  Getting         $1,000           $500    $500
Gerties Garter

      Bundle     $3,000           $3,500
       Price
          Think Some More

• What Do Quantity Controls Do?
• Why Limit Season Ticket Holders to 4 Playoff
  Tickets?
• Why Do We Have Quantity Limits on Some
  Imports (e.g., Sugar)?
• Problems
  – Asymmetric Information - Need Facts to Define
    Individual Benefits (Car Repair)
  – External Benefits and Costs are Ignored

								
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