More Markets. Relative Scarcity How scarce is one good or service compared to all other goods and services? How scarce is one good or service compared.

More MarketsMore Markets

Relative ScarcityRelative Scarcity

How scarce is one good or service How scarce is one good or service compared to all other goods and compared to all other goods and services?services?

Relative scarcity is the relationship Relative scarcity is the relationship between supply and demand. between supply and demand.

Price is the measurement of relative Price is the measurement of relative scarcity. scarcity.

What determines the price of a work of What determines the price of a work of art, an antique, an old stamp or coin?art, an antique, an old stamp or coin?

What is an equilibrium price?What is an equilibrium price?

The measure of relative scarcity.The measure of relative scarcity. Relative scarcity is the relation Relative scarcity is the relation

between supply and demand.between supply and demand. How scarce is one product compared How scarce is one product compared

to all others?to all others? The unit of measurement is the price The unit of measurement is the price

in the domestic currency. (e.g. in the domestic currency. (e.g. $43.37)$43.37)

Relative prices: why?Relative prices: why?

Diamond Diamond $50,000$50,000

Insulin $5Insulin $5

Price: indicator of relative Price: indicator of relative scarcity scarcity

(Units on the Scarcometer)(Units on the Scarcometer)

Order these products in terms of Order these products in terms of relative scarcityrelative scarcity

yachtyacht candy bar candy bar nice dinner for two in San Francisco nice dinner for two in San Francisco mini truck mini truck laptop computer laptop computer

Order these products in terms of Order these products in terms of relative scarcityrelative scarcity

1 yacht1 yacht

5 candy bar 5 candy bar

4 nice dinner for two in San Francisco 4 nice dinner for two in San Francisco

2 mini truck 2 mini truck

3 laptop computer 3 laptop computer

Equilibrium Price Equilibrium Price The measure of Relative ScarcityThe measure of Relative Scarcity

Feet and inches measure distance.Feet and inches measure distance.

Pounds and ounces measure weight.Pounds and ounces measure weight.

Degrees Fahrenheit measure heat.Degrees Fahrenheit measure heat.

Cups and pints and quarts measure Cups and pints and quarts measure

volume.volume.

Dollars and cents measure relative Dollars and cents measure relative

scarcity in the U.S.scarcity in the U.S.

Relative ScarcityRelative Scarcity

Not the same as rareNot the same as rare Rare tropical disease is not scarce (no Rare tropical disease is not scarce (no

demand).demand). Gold is more scarce than water even though Gold is more scarce than water even though

water is essential for life. (Supply of water is water is essential for life. (Supply of water is greater than the supply of gold.)greater than the supply of gold.)

Some collectors’ items are more scarce Some collectors’ items are more scarce than others depending upon supply than others depending upon supply and and demanddemand. . Their prices go up or down Their prices go up or down depending upon changes in supply depending upon changes in supply and and demanddemand. .

Relative ScarcityRelative Scarcity Relative scarcity is not a subjective evaluation of Relative scarcity is not a subjective evaluation of

worth or value or social contribution even though worth or value or social contribution even though some of those considerations are included in the some of those considerations are included in the demand function. demand function.

To the extent that some can manipulate supply or To the extent that some can manipulate supply or demand, they may influence relative scarcity and demand, they may influence relative scarcity and price but price remains the measurement of price but price remains the measurement of relative scarcity. relative scarcity. OPECOPEC AdvertisingAdvertising

In a market with CIIP, price is the accurate In a market with CIIP, price is the accurate measure of the relative scarcity of a good or measure of the relative scarcity of a good or service. service.

Relative ScarcityRelative Scarcity The relationship between supply and The relationship between supply and

demand.demand. Measured by the equilibrium priceMeasured by the equilibrium price Not the same as rareNot the same as rare Not a matter of supply aloneNot a matter of supply alone Not fair or unfairNot fair or unfair

The Law of SupplyThe Law of Supply Once all other factors (WAGTIPS) have been Once all other factors (WAGTIPS) have been

considered, the quantity supplied of a good or considered, the quantity supplied of a good or service varies directly with the price of the good service varies directly with the price of the good or service; price goes up, quantity supplied goes or service; price goes up, quantity supplied goes up.up.

The influence of price on quantity supplied is a The influence of price on quantity supplied is a short run phenomenon and assumes no change short run phenomenon and assumes no change in WAGTIPS. in WAGTIPS.

The Principle of Exchange – if the price received The Principle of Exchange – if the price received by the supplier is greater than all production by the supplier is greater than all production costs, the supplier will supply the product. costs, the supplier will supply the product.

Price is an incentive to suppliersPrice is an incentive to suppliers

Diminishing Marginal ReturnsDiminishing Marginal Returns Given some fixed inputs, additions of the Given some fixed inputs, additions of the

variable inputs will yield lower additional variable inputs will yield lower additional products.products.

Since each of the variable inputs are paid Since each of the variable inputs are paid the same, marginal costs increase as the same, marginal costs increase as production increases.production increases.

Marginal resource costs rise as production Marginal resource costs rise as production increases. increases.

Therefore, suppliers must receive a higher Therefore, suppliers must receive a higher price to supply a greater quantity, price to supply a greater quantity, assuming no change in WAGTIPS. assuming no change in WAGTIPS.

Price Elasticity of SupplyPrice Elasticity of Supply

Measures the Measures the strength strength of sellers’ of sellers’ reactions to a price change.reactions to a price change.

How much will quantity supplied How much will quantity supplied change as a result of a price change?change as a result of a price change?

Depends upon suppliers’ ability to Depends upon suppliers’ ability to increase or decrease production in the increase or decrease production in the short run.short run.

How flexible are resources used in How flexible are resources used in production?production?

The Law of DemandThe Law of Demand Once all other factors have been considered, the Once all other factors have been considered, the

quantity demanded of a good or service varies quantity demanded of a good or service varies inversely with the price of the good or service. inversely with the price of the good or service.

Price rises, quantity demanded falls; price falls, Price rises, quantity demanded falls; price falls, quantity demanded rises. quantity demanded rises.

The Principle of Exchange – if the price asked is The Principle of Exchange – if the price asked is greater than the expected benefit, the demander greater than the expected benefit, the demander will not buy the product; if the price asked is less will not buy the product; if the price asked is less than the expected benefit, the demander will buy than the expected benefit, the demander will buy the product. Price is a disincentive to buyers. the product. Price is a disincentive to buyers.

Higher prices send buyers in search of substitutes. Higher prices send buyers in search of substitutes.

Diminishing Marginal Utility and Diminishing Marginal Utility and DemandDemand

Utility is the benefit that consumers get Utility is the benefit that consumers get from consuming goods and servicesfrom consuming goods and services

As consumers consume more of a As consumers consume more of a product, the additional utility from product, the additional utility from additional units of the product decreases additional units of the product decreases – the law of diminishing marginal utility– the law of diminishing marginal utility

To entice buyers to buy more as their To entice buyers to buy more as their marginal utility falls, price must also fall, marginal utility falls, price must also fall, making the price lower than the expected making the price lower than the expected benefit. (The principle of exchange)benefit. (The principle of exchange)

Price Elasticity of DemandPrice Elasticity of Demand

Measures the Measures the strength strength of buyers’ of buyers’ reactions to a price change.reactions to a price change.

How much will quantity demanded How much will quantity demanded change as a result of a price change?change as a result of a price change?

Depends uponDepends upon availability of substitutesavailability of substitutes Percentage of total expendituresPercentage of total expenditures timetime

Allocative EfficiencyAllocative Efficiency

At the equilibrium price, the marginal At the equilibrium price, the marginal utility of consuming the product is equal to utility of consuming the product is equal to the marginal resource cost of producing the marginal resource cost of producing the product.the product.

From society’s perspective, this is the From society’s perspective, this is the optimal resource allocation to this optimal resource allocation to this particular activityparticular activity

Attempts to change the price of a product Attempts to change the price of a product through regulation will distort incentives through regulation will distort incentives and cause resource misallocation. and cause resource misallocation.

A Price Above EquilibriumA Price Above Equilibrium

If a price is above equilibrium, a surplus exists. If a price is above equilibrium, a surplus exists. (The quantity supplied is greater than the (The quantity supplied is greater than the quantity demanded at the higher price.)quantity demanded at the higher price.)

With no barriers, price will begin to fall With no barriers, price will begin to fall towards equilibriumtowards equilibrium

As price falls, quantity supplied will decrease As price falls, quantity supplied will decrease and quantity demanded will increase.and quantity demanded will increase.

Eventually, price will fall to the equilibrium Eventually, price will fall to the equilibrium where quantity supplied is equal to quantity where quantity supplied is equal to quantity demanded, which is the quantity exchanged. demanded, which is the quantity exchanged.

A Price Below EquilibriumA Price Below Equilibrium

If a price is below equilibrium, a shortage If a price is below equilibrium, a shortage exists. (The quantity demanded is greater than exists. (The quantity demanded is greater than the quantity supplied at the lower price.)the quantity supplied at the lower price.)

With no barriers, price will begin to rise With no barriers, price will begin to rise towards equilibriumtowards equilibrium

As price rises, quantity demanded will As price rises, quantity demanded will decrease and quantity supplied will increase.decrease and quantity supplied will increase.

Eventually, price will rise to the equilibrium Eventually, price will rise to the equilibrium where quantity demanded is equal to quantity where quantity demanded is equal to quantity supplied, which is the quantity exchanged. supplied, which is the quantity exchanged.

Surplus and ShortageSurplus and Shortage

Surplus: at a price above equilibrium, quantity Surplus: at a price above equilibrium, quantity supplied is greater than quantity demanded.supplied is greater than quantity demanded.

Shortage: at a price below equilibrium, Shortage: at a price below equilibrium, quantity demanded is greater than quantity quantity demanded is greater than quantity supplied.supplied.

Surpluses and shortages are always in Surpluses and shortages are always in reference to specific non-equilibrium prices.reference to specific non-equilibrium prices.

They will be automatically eliminated by price They will be automatically eliminated by price changes if there are no barriers to price changes if there are no barriers to price movements. movements.

Price Floors and CeilingsPrice Floors and Ceilings

A legislated priceA legislated price A price floor is a minimum price. Prices can A price floor is a minimum price. Prices can

be higher, but not lower than a floor. be higher, but not lower than a floor. (Minimum wage) If the floor is above the (Minimum wage) If the floor is above the equilibrium, a surplus is created.equilibrium, a surplus is created.

A price ceiling is a maximum price. Prices A price ceiling is a maximum price. Prices can be lower, but not higher than a ceiling. can be lower, but not higher than a ceiling. (Rent controls) If the ceiling is below the (Rent controls) If the ceiling is below the equilibrium, a shortage is created. equilibrium, a shortage is created.

Price Floors and Price Price Floors and Price CeilingsCeilings

Price cannot rise above a ceiling

Price cannot fall below a floor

A Price Ceiling - shortageA Price Ceiling - shortage

Who gains?Who gains? PoliticiansPoliticians Those who get the goods and servicesThose who get the goods and services Those who police the ceilingThose who police the ceiling

Who loses?Who loses? Those who supply the good or serviceThose who supply the good or service Those who can’t get the good or Those who can’t get the good or

serviceservice TaxpayersTaxpayers

A Price Floor - surplusA Price Floor - surplus

Who gains?Who gains? PoliticiansPoliticians Those who supply the goods and Those who supply the goods and

servicesservices Those who police the floorThose who police the floor Those who store the surplusThose who store the surplus

Who loses?Who loses? Those who demand the good or serviceThose who demand the good or service TaxpayersTaxpayers

Price Controls - The MessagePrice Controls - The Message

Price controls distort market incentivesPrice controls distort market incentives They can not change the relative They can not change the relative

scarcity of the productscarcity of the product They cause over allocation or under They cause over allocation or under

allocation of resourcesallocation of resources They cause arbitrary distributive They cause arbitrary distributive

effectseffects But they are great politics!But they are great politics!

Markets during DisastersMarkets during Disasters

What happens to markets for wood, What happens to markets for wood, tools, and even water during a tools, and even water during a disaster?disaster? Can’t get products in; supply decreases. Can’t get products in; supply decreases. More people want these products. More people want these products.

Demand increases.Demand increases. Product is relatively more scarce.Product is relatively more scarce.

Markets during DisastersMarkets during Disasters

What happens to markets for wood, What happens to markets for wood, tools, and even water during a tools, and even water during a disaster?disaster? What incentive would cause suppliers to What incentive would cause suppliers to

supply more of the product?supply more of the product? A price ceiling prevents the price from A price ceiling prevents the price from

rising.rising. The shortage worsens. The shortage worsens.

Disasters usually cause shortagesDisasters usually cause shortagesPrice ceilings make the shortages Price ceilings make the shortages

worse.worse.

Government price controls can’t change Government price controls can’t change relative scarcity, but they do distort relative scarcity, but they do distort incentivesincentives

The Market in DisastersThe Market in Disasters

Considering the market, what Considering the market, what happens to products like wood, tools, happens to products like wood, tools, and even water during a disaster?and even water during a disaster? Trucks can’t bring products in, therefore Trucks can’t bring products in, therefore

supply is decreasedsupply is decreased More people need these products than More people need these products than

normal- Demand increases.normal- Demand increases. So why do people cry price gouging?So why do people cry price gouging?

Price Gouging???Price Gouging???

If the government felt sorry for these If the government felt sorry for these people and imposed a price floor on people and imposed a price floor on certain products, we, as economists, certain products, we, as economists, know that there will be a shortage.know that there will be a shortage.

Other people feel that the prices are Other people feel that the prices are “made high” to take advantage of “made high” to take advantage of the affected people- simply not true.the affected people- simply not true.

PRICE CONTROLS PRICE CONTROLS DISTORT MARKET DISTORT MARKET INCENTIVES and INCENTIVES and

CAUSE RESOURCE CAUSE RESOURCE MISALLOCATIONMISALLOCATION

Main PointsMain Points

Relative scarcity for a particular product is the Relative scarcity for a particular product is the relationship between supply and demand. relationship between supply and demand.

With CIIP, supply and demand determines the With CIIP, supply and demand determines the relative scarcity of a product, which is relative scarcity of a product, which is accurately measured by the price of the accurately measured by the price of the product. product.

The Law of Supply states that price and The Law of Supply states that price and quantity move in the same direction. This quantity move in the same direction. This assumes no change in WAGTIPS. assumes no change in WAGTIPS.

Price elasticity of supply measures the Price elasticity of supply measures the strength of suppliers’ response to price strength of suppliers’ response to price changes.changes.

Main PointsMain Points

The Law of Demand states the price The Law of Demand states the price and quantity demanded move in the and quantity demanded move in the opposite direction. This assumes no opposite direction. This assumes no change in TIPSE. change in TIPSE.

Price elasticity of demand measures Price elasticity of demand measures the strength of buyers’ reactions to the strength of buyers’ reactions to price changes. price changes.

Main PointsMain Points

Supply represents the marginal opportunity Supply represents the marginal opportunity cost of producing different quantities of a cost of producing different quantities of a product.product.

Demand represents the marginal utility of Demand represents the marginal utility of consuming different quantities of a product.consuming different quantities of a product.

Allocative efficiency occurs at the Allocative efficiency occurs at the equilibrium where the marginal opportunity equilibrium where the marginal opportunity cost of producing a quantity is just equal to cost of producing a quantity is just equal to the marginal utility of consuming that the marginal utility of consuming that quantity. quantity.

Main PointsMain Points

A surplus exists at a price above the A surplus exists at a price above the equilibrium where the quantity supplied is equilibrium where the quantity supplied is greater than the quantity demanded.greater than the quantity demanded.

A shortage occurs at a price below the A shortage occurs at a price below the equilibrium where the quantity demanded equilibrium where the quantity demanded is greater than the quantity supplied. is greater than the quantity supplied.

With no price floor, a surplus will correct With no price floor, a surplus will correct itself as the price falls.itself as the price falls.

With no price ceiling, a shortage will With no price ceiling, a shortage will correct itself as the price rises. correct itself as the price rises.