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ECON 110 Introductory Microeconomics

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A substitute in production for a good is another good that can be produced using ... Event: The WSJ reports that the prices of PC components are expected to fall by ... – PowerPoint PPT presentation

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Title: ECON 110 Introductory Microeconomics


1
ECON 110Introductory Microeconomics
  • Lecture 5
  • Fall, 2009
  • William Chow

2
Highlight
  • Factors affecting supply
  • Market Equilibrium
  • Change in demand and supply
  • Applications

3
Prices of related goods produced
  • A substitute in production for a good is another
    good that can be produced using the same
    resources, e.g. residential flats and industrial
    complexes
  • Goods are complements in production if they must
    be produced together, e.g. beef and leather
  • The supply of a good increases and its supply
    curve shifts rightward if the price of a
    substitute in production falls or if the price of
    a complement in production rises

4
Other factors
  • Expected future prices If the price of a good is
    expected to fall in the future, current supply
    increases and the supply curve shifts rightward
  • The number of suppliers The larger the number of
    suppliers of a good, the greater is the supply of
    the good. An increase in the number of suppliers
    shifts the supply curve rightward
  • Technology Advances in technology create new
    products and lower the cost of producing existing
    products, so they increase supply and shift the
    supply curve rightward

5
Market Equilibrium
  • When demand and supply come to meet one another,
    a market equilibrium can be achieved
  • An equilibrium is a state at which things have no
    tendency to change
  • This shows the unique price (equilibrium price)
    at which QD QS

6
Market Equilibrium
  • The buying and selling plans are hence balanced
  • The equilibrium quantity is the quantity bought
    and sold at the equilibrium price
  • This indicates the prevailing market price and
    the amount of transactions dealt in the market

7
Market Equilibrium Important Note
  • Price regulates buying and selling plans
  • Price serves as signals for buyers and sellers to
    adjust their plans

8
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9
Changes in Demand and/or Supply
10
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11
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12
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13
Application
  • Event The WSJ reports that the prices of PC
    components are expected to fall by 5-8 percent
    over the next six months.
  • Scenario 1 You manage a small firm that
    manufactures PCs.
  • Scenario 2 You manage a small software company.

14
Application
  • Use Comparative Static Analysis to see the Big
    Picture.
  • Comparative static analysis shows how the
    equilibrium price and quantity will change when a
    determinant of supply or demand changes.

15
Big Picture Impact of decline in component
prices on PC market
16
Scenario 2
  • More complicated chain of reasoning to arrive at
    the Big Picture.
  • Step 1 Use analysis like that in Scenario 1 to
    deduce that lower component prices will lead to
  • a lower equilibrium price for computers.
  • a greater number of computers sold.
  • Step 2 How will these changes affect the Big
    Picture in the software market?

17
Scenario 2
Price of Software
P0
Quantity of Software
18
Conclusion
  • Scenario 1 Equilibrium price of PCs will fall,
    and equilibrium quantity of computers sold will
    increase.
  • Scenario 2 Software prices are likely to rise,
    and more software will be sold.
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