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Lecture 3
1970
1980
.40
.65
38.8
82.4
.40=38.8/38.8x .40
.31=38.8/82.4x .65
1999
1.05
167.0
.24=38.8/167.0x 1.05
Nominal Prices
Grade A Large Eggs College Education $0.61 $0.77 $0.84 $2,530 $3,403 $4,912 $0.80 $0.98 $1.04 $8,156 $12,800 $19,213
Qs QS ( P )
Horizontal axis measures quantity (Q) supplied in number of units per time period
Quantity
P2 P1
The supply curve slopes upward demonstrating that at higher prices firms will increase output
Q1
Q2
Quantity
Raw Materials
P1
P2
Q0
Q1
Q2
QD QD(P)
Horizontal axis measures quantity (Q) demanded in number of units per time period
Quantity
D Quantity
Income Increases P At P1, produce Q2 At P2, produce Q1 P Demand Curve shifts right More purchased at any price on D than on D
Q0
Q1
Q2
P0
Q0
Quantity
A Surplus
Surplus
P1 P0
If price is above equilibrium:
1) Price is above the market clearing price 2) Qs > Qd 3) Price falls to the market-clearing price
Q0
Quantity
Surplus - Review:
Surplus
P1 P2
Assume the price is P1 , then: 1) Qs : Q1 > Qd : Q2 2) Excess supply is Q1:Q2. 3) Producers lower price. 4) Quantity supplied decreases and quantity demanded increases. 5) Equilibrium at P2Q3
D Q1 Q3 Q2 Quantity
Shortage
P3
P2
Assume the price is P2 , then: 1) Qd : Q2 > Qs : Q1 2) Shortage is Q1:Q2. 3) Producers raise price. 4) Quantity supplied increases and quantity demanded decreases. 5) Equilibrium at P3, Q3
Shortage
Q1 Q3
D
Q2 Quantity
Summary
Real Prices vs. Nominal Prices Supply and Demand: Basic Concepts Market Mechanism
Upcoming Topics
Changes in Market Equilibrium Elasticities of Supply and Demand Short Run vs. Long Run Elasticities
Microeconomics
Lecture 3