KINH TẾ VI MÔ Chapter 2 microeconomics 2015

Contents Demand Supply Equilibrium Elasticity Government Policies      The Market Forces of Supply and Demand Chapter MICROECONOMICS @KieuMinh.MSc @KieuMinh.MSc Markets A group of buyers and sellers of a particular good or service    Can be highly organized Can be less organized 2.1 DEMAND Market: any institution, mechanism, or arrangement which facilitates exchange @KieuMinh.MSc Buyers determine demand @KieuMinh.MSc Demand Demand shows the willingness to pay for a good (WTP) Quantity demanded (QD)     Law of Demand   @KieuMinh.MSc Amount of a good Buyers are willing and able to purchase Other things equal, when the price (P) of the good rises, quantity demanded (QD) of a good falls @KieuMinh.MSc Catherine’s demand schedule and demand curve Demand Price of Ice-Cream Cones $3.00 Relationship between Price of a good (P) and Quantity demanded (QD) can be shown:    Demand schedule - a table: Demand curve - a graph:   Downward sloping curve Demand function:  QD= f (P) Price of Ice-cream cone Quantity of Cones demanded 2.50 $0.00 0.50 1.00 1.50 2.00 2.50 3.00 12 cones 10 2.00 @KieuMinh.MSc A decrease in price increases quantity of cones demanded 1.50 1.00 Demand curve 0.50 6 10 11 12 Quantity of Ice-Cream Cones 1.2 Individual Demand and Market Demand Market demand as the sum of individual demands (demand schedule) Individual demand:   Demand of one individual Market demand   Sum of all individual demands for a good or service Market demand curve   Sum - individual demand curves horizontally @KieuMinh.MSc DCatherine Price of Ice Cream Cones $3.00 2.00 2.00 2.00 1.50 1.50 1.50 1.00 1.00 1.00 0.50 0.50 0.50 10 11 12 Quantity of Ice-Cream Cones 11   Quantity of Ice-Cream Cones 2.50 Market = 19 16 13 10 Increase in demand       10 12 14 16 18 Any change that decreases the quantity demanded at every price Demand curve shifts left Variables that can shift the demand curve  DMarket Any change that increases the quantity demanded at every price Demand curve shifts right Decrease in demand  2.50 Nicholas + 10  $3.00 2.50 12 10 10  Price of Ice Cream Cones DNicholas Catherine $0.00 0.50 1.00 1.50 2.00 2.50 3.00 1.3 Shifts in Demand Market demand as the sum of individual demands Catherine’s Nicholas’s Market + = demand demand demand Price of Ice Cream Cones $3.00 Price of ice-cream cone Income Prices of related goods Tastes Expectations Number of buyers Quantity of Ice-Cream Cones 11 12 @KieuMinh.MSc 12 Changes in demand Shifts in the demand curve  Price of Ice-Cream Cones Increase in Demand Income (I)  Normal good: other things constant, an increase in income makes increase in demand    Decrease in Demand Demand curve, D3 Demand curve, D1 Demand curve, D2 @KieuMinh.MSc   15 Change in tastes – changes the demand Expectations - about the future (income, prices) (E)  Affect current demand Number of buyers – increase (N)  Complements – two goods  14 Tastes (T)  An increase in the price of one leads to an increase in the demand for the other   @KieuMinh.MSc Changes in demand Prices of related goods (Py) Substitutes - two goods  14 13 Changes in demand  Inferior good: Other things constant, an increase in income makes decrease in demand Quantity of Ice-Cream Cones 13  Necessary goods Luxury goods Market demand - increases An increase in the price of one leads to a decrease in the demand for the other @KieuMinh.MSc 15 16 @KieuMinh.MSc 16 Quick Review    List the determinants of the demand for bread Give an example of a demand schedule Give an example of something that would shift the demand curve 2.2 SUPPLY Sellers determine supply 17 18 Supply   Supply Supply shows the willingness to sell (WTS) of sellers for a goods Quantity supplied     Relationship between: P and QS can be shown as: Supply schedule - a table: shows the quantity supplied at each price Amount of a good that sellers are willing and able to sell Law of supply  19 @KieuMinh.MSc Other things equal, when the price (P) of the good rises quantity supplied (Qs) of a good rises @KieuMinh.MSc 19 20 Price of Ice-cream cone Quantity of Cones supplied $0.00 0.50 1.00 1.50 2.00 2.50 3.00 cones @KieuMinh.MSc 20 Supply     Ben’s supply schedule and supply curve Price of Ice-Cream Cones $3.00 Relationship between: P and QS can be shown as: Supply curve - a graph: Upward sloping curve Supply curve An increase in price 2.50 Supply function: QS = g (P) 2.00 1.50 increases quantity of cones supplied 1.00 0.50 21 @KieuMinh.MSc 21   22 Individual supply: Supply of one seller Market supply: Sum of the supplies of all sellers for a good or service Market supply curve  22 Market supply as the sum of individual supplies (supply schedule) 2.2 Individual Supply and Market Supply  10 11 12 Quantity of Ice-Cream Cones Sum - individual supply curves horizontally Price of ice-cream cone Ben $0.00 0.50 1.00 1.50 2.00 2.50 3.00 0 Jerry + 0 Market = 0 10 13 At a price of $2.00, Ben supplies ice-cream cones, and Jerry supplies icecream cones The quantity supplied in the market at this price is cones 23 @KieuMinh.MSc 23 24 24 2.3 Shifts in Supply Market supply as the sum of individual supplies Ben’s supply Price of Ice Cream Cones $3.00 Jerry’s supply + Price of Ice Cream Cones $3.00 SBen = Price of Ice Cream Cones SJerry 2.50 2.50 2.00 2.00 2.00 1.50 1.50 1.50 1.00 1.00 1.00 0.50 0.50 0.50 Increase in supply    SMarket $3.00 2.50  Market supply Decrease in supply    Any change that increases the quantity supplied at every price Supply curve shifts right Any change that decreases the quantity supplied at every price Supply curve shifts left Variables that can shift the supply curve  Input Prices (Pi)  Technology (T)   10 11 12 Quantity of Ice-Cream Cones Quantity of Ice-Cream Cones 10 12 14 16 18 Advance in technology – increase in supply  Expectations about future (E)  Number of sellers (N) – increase  Supply – negatively related to prices of inputs  Affect current supply Market supply - increase Quantity of Ice-Cream Cones 25 25 26 @KieuMinh.MSc 26 Shifts in the supply curve Price of Ice-Cream Cones Supply curve, S3 Supply curve, S1 Supply curve, S2 Decrease in supply ` Increase in Supply 2.3 Market Equilibrium Supply and Demand Together 27 Quantity of Ice-Cream Cones 27 28 @KieuMinh.MSc Equilibrium   Quantity supplied = quantity demanded 2.50 Equilibrium price - PE:   Price of Ice-Cream Cones $3.00 Market price has reached the level :   The equilibrium of supply and demand Equilibrium - a situation 1.00 @KieuMinh.MSc    (a) Excess Supply Price of Ice Cream Cones Quantity supplied > quantity demanded Excess supply Downward pressure on price   Supply 2.00 @KieuMinh.MSc Supply $2.00 Quantity demanded > quantity supplied Excess demand Upward pressure on price Demand Quantity demanded 31 Surplus (b) Excess demand Price of Ice Cream Cones $2.50 Shortage  30 Markets not in equilibrium Surplus  10 11 12 Quantity of Ice-Cream Cones 30 29 Market Surplus and Shortage Demand Equilibrium quantity 0.50  Equilibrium 1.50 Quantity supplied and the quantity demanded at the equilibrium price 29 Equilibrium price 2.00 Balances quantity supplied and quantity demanded Equilibrium quantity - QE  Supply 31 32 1.50 Demand Quantity supplied 10 Quantity of Ice-Cream Cones Quantity supplied Shortage Quantity demanded 10 Quantity of Ice-Cream Cones 32 Three steps to analyzing changes in equilibrium Quiz  Market of good A is shown as:    Decide: the event shifts the supply curve, the demand curve, or both curves Decide: curve shifts to right or to left Use supply-and-demand diagram      What are the demand and supply functions? What is the equilibrium price and quantity? What are the market quantities at the prices of P1 = VND 8500 P2= VND 11500 33 Compare initial and new equilibrium How the shift affects equilibrium price and quantity 34 How an increase in demand affects the equilibrium Price of Ice-Cream Cones Supply …resulting in a higher price Price of Ice-Cream Cones New equilibrium 2.00 Initial equilibrium Demand D2 …and a higher quantity sold 35 S2 S1 $2.50 Initial equilibrium D1 An increase in the price of sugar reduces the supply of ice cream …resulting in a higher price New equilibrium 2.00 34 How a decrease in supply affects the equilibrium Hot weather increases the demand for ice cream $2.50 @KieuMinh.MSc …and a smaller quantity sold 10 Quantity of Ice-Cream Cones 35 36 Quantity of Ice-Cream Cones 36 What happens to price and quantity when supply or demand shifts? A shift in both supply and demand Price of (a) Price Rises, Quantity Rises Ice Cream New S2 S equilibrium Cones Large increase in demand P2 Price of (b) Price Rises, Quantity Falls Ice S2 Cream Small Cones increase in demand S1 New equilibrium No change In Supply P2 Small decrease in supply P1 D2 P1 D2 Initial equilibrium Initial equilibrium D1 Q1 Q2 Quantity of Ice-Cream Cones Large decrease in supply D1 Q2 Q1 A decrease In supply No change In demand P same Q same P down Q up P up Q down An increase In demand P up Q up P ambiguous Q up P up Q ambiguous A decrease In demand P down Q down P Down Q ambiguous P ambiguous Q down Quantity of Ice-Cream Cones 37 37 38 38 Quick review Quiz  True or False Explain  A and B are substitutes.The increasing price of A leads the price of B decreased     39 An increase In Supply What are demand determinants? What are supply determinants? What is excess demand? What is excess supply? 40 10 The Price Elasticity of Demand 42  Definition: Measure of how much quantity demanded of a good responds to 1% change in the price of that good EPD  2.3 The Elasticity  %Q D %P E dp < Elasticity of Demand Elasticity of Supply Computing the price elasticity of demand  Computing the price elasticity of demand Use absolute value (drop the minus sign)   Arc-elasticity of demand: Midpoint method  Two points: (Q1, P1) and (Q2, P2) A PA E DP  (Q2  Q1 )/[(Q  Q1 )/ ] (P2  P1 )/[(P2  P1 )/ ] (Q  Q )( P  P )  2 (P2  P1 )(Q2  Q1 ) Point-elasticity of demand  P EPD  B PB QA One points (Q*, P*) QB Q  %Q dQ / Q dQ P P*     Q' ( p )  %P dP / P dP Q Q* E.g Demand curve Q = 50- 3P What is the elasticity of demand at the point of P = PA = 25, QA = 150 PB = 12, QB = 320 What is the AB arc elasticity of demand? 44 11 Determinants of price elasticity of demand Variety of demand curves      Elasticity =    Elasticity = infinity Demand curve – horizontal Necessities – inelastic demand Luxuries – elastic demand Definition of the market  Elasticity > (e) Demand is perfectly elastic    (d) Demand is elastic Goods with close substitutes: More elastic demand Necessities vs luxuries  Elasticity <  Availability of close substitutes   (c) Demand has unit elasticity   Elasticity = Demand curve: vertical (b) Demand is inelastic    (a) Demand is perfectly inelastic Narrowly defined markets – more elastic demand Time horizon The flatter the demand curve, the greater the price elasticity of demand 46 (2)Income elasticity of demand ( EDI) Elasticity of a linear demand curve (graph) Price  Elasticity is larger than $7 Measure of how much the quantity demanded of a good responds to 1% change in consumers’ income E ID  an  10 12 14 Normal goods: EDI >0  Demand Elasticity is smaller than   Quantity %QD %I Necessities: O< EDI 1 Inferior goods: EDI 0 Complements: Exy 1 Supply curve – flat Supply is perfectly elastic   51 Elasticity =1 Elastic supply   Elasticity < Supply curve – sloppy Unit elastic supply   Elasticity =0 Supply curve – vertical Inelastic supply  %QS E PS  %P %Q S %P Elasticity = infinity Supply curve – horizontal 52 13 Applications of Supply, Demand, & Elasticity Determinant of price elasticity of supply Time period    Supply is more elastic in long run Why did OPEC fail to keep the price of oil high?  Substitutions of inputs:   1970s: OPEC reduced supply of oil   Supply is more elastic when inputs have more substitutes Increase in prices 1973-1974 and 1971-1981 Short-run: supply is inelastic   Decrease in supply: large increase in price 1982-1990 – price of oil decreased  Long-run: supply is elastic  Decrease in supply: small increase in price 54 53 A reduction in supply in the world market for oil (a) The Oil Market in the Short Run Price In the short run, when supply and demand are inelastic, a shift in supply S2 (b) The Oil Market in the Long Run Price In the long run, when supply and demand are elastic, a shift in supply S1 S2 S P2 P1 an … leads to a large increase in price … leads to a small increase in price Demand Quantity 2.4 Government Policies an P2 P1 In a “free”, unregulated market system, market forces establish equilibrium prices and quantities While equilibrium conditions may be efficient it may be true that not everyone, i.e buyer or seller are satisfied Demand Quantity When the supply of oil falls, the response depends on the time horizon In the short run, supply and demand are relatively inelastic, as in panel (a) Thus, when the supply curve shifts from S1 to S2, the price rises substantially By contrast, in the long run, supply and demand are relatively elastic, as in panel (b) In this case, the same size shift in the supply curve (S1 to S2) causes a smaller increase in the price 55 56 14 (1) Controls on Prices   a Price ceiling Enacted when policy-makers believe that the market price is unfair to buyers and sellers Result in government policies,     Price ceiling: Legal maximum on the price at which a good can be sold  Examples: Not binding  Binding constraint  price ceilings and floors Tax policies Subsidies    Above the equilibrium price Below the equilibrium price Shortage: Sellers must ration the scarce goods  The rationing mechanisms – not desirable 58 b Price floor A market with a price ceiling (a) A price ceiling that is not binding Price of Ice Cream Cones (b) A price ceiling that is binding Price of Ice Cream Cones Supply  Supply Price ceiling $4  Equilibrium price  $3 Equilibrium price  Demand Shortage 100 Quantity of Ice-Cream Cones  Price ceiling Quantity supplied Equilibrium quantity Price floor: Legal minimum on the price at which a good can be sold Not binding Demand Binding constraint   Quantity demanded  125 75 Quantity of Ice-Cream Cones 59 Below the equilibrium price No effect Above the equilibrium price Surplus: Some seller are unable to sell what they want The rationing mechanisms – not desirable 60 15 The minimum wage A market with a price floor (a) A price floor that is not binding Price of Ice Cream Cone Supply Price of Ice Cream Cone $4 (b) A price floor that is binding Surplus   Price floor  $3 Equilibrium price Equilibrium price Price floor Market for labor  Supply If minimum wage – above equilibrium   Quantity demanded Quantity supplied 61 (a) A free labor market (b) A Labor Market with a Binding Minimum Wage Wage Labor supply Labor surplus (unemployment) Labor demand Labor demand Labor supply Minimum wage Equilibrium wage Equilibrium employment Quantity of Labor Quantity demanded 62 Quiz How the minimum wage affects the labor market Wage Unemployment Higher income - workers who have jobs Lower income - workers who cannot find jobs 120 80 Quantity of Ice-Cream Cones 100 Quantity of Ice-Cream Cones  Demand Demand Equilibrium quantity Workers - supply of labor Firms – demand for labor Quantity Quantity supplied of Labor 63 Market of good B has demand and supply as: P = 3Q – 12 P = 18 – 2Q (P: $/unit, Q:kg) What is the price and quantity of the free market? If the Government controls the price by a price ceiling of $4/kg and supplies shortage, what is the price and quantity on the market? Graphing out the result How much is the total surplus of this market according to aquestion? How did the total surplus change in b- question? 64 16 b Taxes  A tax on sellers P Taxes on sellers       Equilibrium with tax Immediate impact on sellers Shift in supply Supply curve shifts left Higher equilibrium price Lower equilibrium quantity The tax – reduces the size of the market Price buyers pay Price without tax S2 S1 A tax on sellers shifts the supply curve upward by the size of the tax Ptax Tax Pe Equilibrium without tax Ps Price sellers receive Demand, D1 Qtax Qe Q 66 Taxes on sellers      Taxes discourage market activity Smaller quantity sold Buyers and sellers share the burden of tax Buyers pay more:Worse off Sellers receive less    Get the higher price but pay the tax Overall: effective price fall Worse off Quiz          67 Market of good X has Demand and Supply as: P = 100 – Q and P = 15 + 2Q (P: $/unit; Q: 1000unit) What is the equilibrium price and quantity of the market? What are the price elasticities of demand and supply at the equilibrium? (after chapter 3) If the government impose a tax of $5 per unit on the sellers of X, what is the new market price and quantity? How much is the tax revenue of the government? How is the tax burden shared between sellers and buyers? Graph out the results 68 17 ... Midpoint method  Two points: (Q1, P1) and (Q2, P2) A PA E DP  (Q2  Q1 )/[(Q  Q1 )/ ] (P2  P1 )/[(P2  P1 )/ ] (Q  Q )( P  P )  2 (P2  P1 )(Q2  Q1 ) Point-elasticity of demand  P EPD... Supply curve An increase in price 2. 50 Supply function: QS = g (P) 2. 00 1.50 increases quantity of cones supplied 1.00 0.50 21 @KieuMinh.MSc 21   22 Individual supply: Supply of one seller... $3.00 SBen = Price of Ice Cream Cones SJerry 2. 50 2. 50 2. 00 2. 00 2. 00 1.50 1.50 1.50 1.00 1.00 1.00 0.50 0.50 0.50 Increase in supply    SMarket $3.00 2. 50  Market supply Decrease in supply 