Chapter 2,Markets
Chapter 2,Markets
2.1 INTRODUCTION
2.2 DEMAND
2.3 SUPPLY
2.4 SUPPLY AND DEMAND TOGETHER
2.1 INTRODUCTION
Market
a group of buyers and sellers of a particular good or service
Partitioners
buyers,sellers
Price vs Amount
price – independent variable
amount – induced variable
Competitive market
a market in which there are many buyers and many sellers so
that each has a negligible impact on the market price
Characteristics:
1,the goods being offered for sale are all the same
2,the buyers and sellers are so numerous that no single buyer or
seller can influence the market price.
MARKET PRODUCTION
Market production
involves sale in a market before consumption
occurs
Non-market production
does not involve sale in market before
consumption
Marketing
Human activity directed at satisfying
needs and wants through exchange
processes.
Look at the list of examples of production and indicate
which are non-market production and which are market
production,Also indicate that are mixture of both.
1,Sewing a dress using a sewing machine at home and using
materials and a pattern bought from a fabric shop
2,Catching fish using a home-made lure
3,Watching at home with a group of friends a new-release video
rented from the local video library
4,Flying to America to go to Disneyland
5,Swimming in your neighbor’s pool
6,Buying a ticket for a rock concert
7,Babysitting your neighbor’s children for $5 per hour
8,Having a backyard barbecue using meat from the local butcher
and salad vegetables from your own garden
9,Buying Coke or Pepsi from a dispensing machine at the local
mixed business and drinking it while walking home from school
10,Going for a walk along a beach
PRICE IN MARKETS
ADAM SMITH AND
THE INVISIBLE HAND
1776,The Wealth of
Nations
invisible hand
Participants in economy are
motivated by self-interest and
that the,invisible hand” of the
marketplace guides this self-
interest into promoting general
economic well-being.
2.2 DEMAND
Demand
People have almost unlimited wants but limited
resources,Wants become demands when backed by
purchasing power.
quantity demanded
the amount of a good that buyers are willing and able
to purchase
law of demand
Ceteris paribus (other things equal),the quantity
demanded of a good falls when the price of the good
rises
demand vs price - negatively related
2.2.1 DEMAND SCHEDULE AND CURVE
Demand Schedule
a table that shows the relationship between
the price of a good and the quantity
demanded
Demand Curve
a graph of the relationship between the price
of a good and the quantity demanded
The demand schedule
Price of
Ice-cream Cone
Price of
Ice-cream Cone
Quantity of
Cones Demand
$0.00
0.50
1.00
1.50
2.00
2.50
3.00
12
10
8
6
4
2
0 Quantity of
Ice-cream Cones2....increases quantity of
cones demanded
1,A decrease
in price…
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
0 2 4 6 8 10 12
The demand schedule shows the quantity demanded at each price,the
demand curve,which graphs the demand schedule,shows how the
quantity demanded of the good changes as its price varies,Because a
lower price increases the quantity demanded,the demand curve slopes
downward.
FIGURE 1
2.2.2 Market Demand versus Individual Demand
The market demand at each price is the sum of all the
individual demands.
=+12
10
8
6
4
2
0
Catherine
7
6
5
4
3
2
1
Nicholas
19
16
13
10
7
4
1
$0.00
0.50
1.00
1.50
2.00
2.50
3.00
MarketPrice of Ice-Cream Cone
The quantity demanded in a market is the sum of the quantities demanded
by all the buyers at each price,Thus,the market demand curve is found by
adding horizontally the individual demand curves,At a price of $2,
Catherine demands 4 ice-cream cones,and Nicholas demands 3 ice-cream
cones,The quantity demanded in the market at this price is 7 cones.
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
0 2 4 6 8 10 12
Quantity of Ice-cream Cones
Price of
Ice-cream
Cone
Catherine’s Demand
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
1 2 3 4 5 6 7
Quantity of Ice-cream Cones
Price of
Ice-cream
Cone
Nicholas’s Demand
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
1 4 7 10 13 16 19
Quantity of Ice-cream Cones
Price of
Ice-cream
Cone
FIGURE 2
Market Demand
FIGURE 3
Price of
Ice-Cream
Cone
Quantity of
Ice-cream Cones
Increase in
demand
Decrease in
demand D1
D2
D3
Any change that raises
the quantity that buyers
wish to purchase at a
given price shifts the
demand curve to the
right,
Any change that lowers
the quantity that buyers
wish to purchase at a
given price shifts the
demand curve to the left.
2.2.3 Shifts in the Demand Curve
Variables that Influence Buyers
1,Income
2,Prices of Related Goods
3,Tastes or Preference
4,Expectations
5,Numbers of Buyers
1,Income
normal good
a good for which,other things equal,an
increase in income leads to an increase in
demand
inferior good
a good for which,other things equal,an
increase in income leads to a decrease in
demand.
2,Price of Related Goods
Substitutes
two goods for which an increase in the price
of one leads to an increase in the demand for
the other
Complements
two goods for which an increase in the price
of one leads to a decrease in the demand for
the other
Variables That Influence Buyers
Variable A Change in This Variable…
Price Represents a movement along the demand curve
Income?
Price of related goods
Substitutes
complements
Tastes
Expectations
Numbers of buyers
positive?
positive
negative
positive
positive
TABLE 1
2.3 SUPPLY
quantity supplied
the amount of a good that sellers are willing and able
to sell
law of supply
other things equal,the quantity supplied of a good
rises when the price of the good rises
supply schedule
a table that shows the relationship between the price
of a good and the quantity supplied
supply curve
a graph of the relationship between the price of a
good and the quantity supplied
Price of
Ice-Cream
Cone
Quantity of
Cones
Demanded
$0.00
0.50
1.00
1.50
2.00
2.50
3.00
0
0
1
2
3
4
5
FIGURE 5
0
0.5
1
1.5
2
2.5
3
3.5
0 1 2 3 4 5
Price of
Ice-Cream
Cone
Quantity of
Ice-cream Cones
2…increase quantity of cones supplied.
1.An
increase
in price…
2.3.1 Market supply versus Individual Supply
Price of Ice-Cream Cone Ben Jerry Market
$0.00
0.50
1.00
1.50
2.00
2.50
3.00
0
0
1
2
3
4
5
+ 0
0
0
2
4
6
8
= 0
0
1
4
7
10
13
The quantity supplied in a market is the sum of the quantities supplied
by all the sellers at each price,Thus,the market supply curve is found
by adding horizontally the individual supply curves,At a price of $2,Ben
supplies 3 ice-cream cones,and Jerry supplies 4 ice-cream cones,The
quantity supplied in the market at this price is 7 cones.
Market Supply is the Sum of Individual Supplies.
0
0.5
1
1.5
2
2.5
3
3.5
0 1 2 3 4 5
Ben’s Supply
Jerry’s Supply
Market Supply
0
0.5
1
1.5
2
2.5
3
3.5
0 2 4 6 8
0
0.5
1
1.5
2
2.5
3
3.5
1 4 7 10 13
FIGURE 6
2.3.2 Shifts in the Supply Curve
Decrease
in Supply
Increase in
Supply
S3
S1
S2
Price of
Ice-Cream
Cone
Quantity of
Ice-cream Cones
0
Any change that
raises the quantity that
sellers wish to
produce at a given
price shifts the supply
curve to the right,
Any change that
lowers the quantity
that sellers wish to
produce at a given
price shifts the supply
curve to the left.
FIGURE 7
Variables That Influence Sellers
TABLE 2
Variable A Change in This Variable…
Price Represents a movement along the supply curve
Input prices
Technology
Expectations
Number of sellers
negative
positive
negative
positive
2.4 SUPPLY AND DEMAND TOGETHER
Equilibrium
a situation in which the price has reached the level
where quantity supplied equals quantity demanded
Equilibrium price (market-clearing price)
the price that balances quantity supplied and quantity
demanded
Equilibrium quantity
the quantity supplied and the quantity demanded at
the equilibrium price
2.4.1The Equilibrium of Supply and Demand
Price of
Ice-Cream
Cone
Quantity of Ice-Cream Cones
$2.00
Equilibrium
quantity
Demand
Supply
EquilibriumEquilibrium price
The equilibrium is found where the supply and demand curves
intersect,At the equilibrium price,the quantity supplied equals the
quantity demanded,Here the equilibrium price is $2,At this price,7
ice-cream cones are supplied,and 7 ice-cream cones are demanded.
FIGURE 8 7
Market Not in Equilibrium
FIGURE 9
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream
Cones
Supply
DemandShortage
4 7 10
2.00
$2.50
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream
Cones
Supply
Demand
Surplus
4 7 10
2.00
$2.50
(a) Excess Supply (b) Excess Demand
Surplus
a situation in which quantity supplied is grater
than quantity demanded
Shortage
a situation in which quantity demanded is
greater than quantity supplied
In panel (a),there is a surplus,Because the market price
of $2.50 is above the equilibrium price,the quantity
supplied (10 cones) exceeds the quantity demanded
(4cones),Suppliers try to increase sales by cutting the
price of a cone,and this moves the price toward its
equilibrium level.
In panel (b),there is a shortage,Because the market
price of $1.50 is below the equilibrium price,the
quantity demanded (10 cones) exceeds the quantity
supplied (4 cones),With too many buyers chasing too
few goods,suppliers can take advantage of the shortage
by raising the price.
Hence,in both cases,the price adjustment moves the
market toward the equilibrium of supply and demand.
2.4.2 Three Steps to Analyzing
Changes in Equilibrium
1,Decide whether the event shifts the
supply or demand curve (or perhaps
both).
2,Decide in which direction the curve shifts.
3,Use he supply-and-demand diagram to
see how the shift changes the
equilibrium price and quantity.
Example,A Change in Demand
1,The hot weather affects the demand curve by
changing people’s taste for ice cream,The
supply curve is unchanged.
2,The demand curve shifts to the right,From D1
to D2,the quantity of ice cream demanded is
higher at every price.
3,Increase in demand raises the equilibrium
price from $2 to $2.5 and the equilibrium
quantity from 7 to 10 cones,That is,the hot
weather increase the price of ice cream and
the quantity of ice cream sold.
Price of
Ice-Cream
Cone
1,Hot weather
increases the demand
for ice cream…
2….resulting
in a higher
price…
How an Increase in Demand Affects the Equilibrium
An event that raises
quantity demanded at
any given price shifts
the demand curve to
the right,The
equilibrium quantity
both rise,
Here,an abnormally
hot summer causes
buyers to demand
more ice cream,The
demand curve shifts
from D1 to D2,which
causes the
equilibrium price to
rise from $2 to $2.5
and the equilibrium
quantity to rise from 7
to 10 cones.
Quantity of
Ice-Cream Cones
D1
D2
Supply
New equilibrium
7 10
3….and a higher
quantity sold.
2.00
$2.50
FIGURE 10
Shift in Curves vs Movements along Curves
A shift in the supply curve is called a
“change in supply”,and a shift in the
demand curve is called a,change in
demand”,A movement along a fixed
supply curve is called a,change in the
quantity supplied”,and a movement along
a fixed demand curve is called a,change
in the quantity demanded”.
Example,A Change in Supply
1,The change in the price of sugar,an input into
making ice cream,affects the supply curve.
2,The supply curve shifts to the left,The supply
decreases from S1 to S2.
3,The shift in supply curve raises the equilibrium
rice from $2 to $2.5 and lowers the equilibrium
quantity from 7 to 4 cones,That is,the price
of ice cream rises,and the quantity of ice
cream sold falls.
How a Decrease in Supply Affects the Equilibrium
Quantity of
Ice-Cream Cones
D1
D2
S1New
equilibrium
4 7
3….and a lower
quantity sold.
2.00
$2.50
FIGURE 10
1.An increase in the
price of sugar
reduces the supply
of ice cream…
S2
2….resulting
in a lower
price…
An event that reduces
quantity supplied at
any given price shifts
the supply curve to the
left,The equilibrium
price rises,and the
equilibrium quantity
falls,
Here,an increase in
the price of sugar (an
input) causes sellers
to supply less ice cram,
The supply curve
shifts from S1 to S2,
which causes the
equilibrium price of ice
cream to rise from $2
to $2.5 and the
equilibrium quantity to
fall from 7 to 4 cones.
Price of
Ice-Cream
Cone
Example,
A Change in Both Supply and Demand
1,Both curves must shift,The hot weather affects the
demand curve because it alter the amount of ice
cream that household want to buy at any given price,
At the same time,when the hurricane drives up sugar
prices,it alter the supply curve for ice cream because
it changes the amount of ice cream that firms want to
sell at any given price.
2,The curves shifts in the same directions as they did in
our previous analysis,The demand curves shifts to the
right,and the supply curve shifts to the left.
3,In both cases,the equilibrium price rises,Thus,these
events certainly raise the price of ice cream,but their
impact on the amount of ice cream sold is ambiguous.
A Shift in Both Supply and Demand
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream ConesQ1 Q2
P1
P2
D1
D2
S1
S2 Price of
Ice-Cream
Cone
Quantity of
Ice-Cream ConesQ1 Q2
P1
P2
D1
D2
S1
S2
Large
increase in
demand
Small
increase in
demand
Initial equilibrium
New
equilibrium
Small
decrease
in supply
Large
decrease
in supply
Initial equilibrium
Here we observe a simultaneous increase in demand and decrease
in supply,Two outcomes are possible,In panel (a),the equilibrium
price rises from P1 to P2,and the equilibrium quantity rises from Q1
to Q2,In panel (b),the equilibrium price again rises from P1 to P2,
but the equilibrium quantity falls from Q1 to Q2.
(a) Price Rises,Quantity Rises (b) Price Rises,Quantity Falls
KEYS
MARKET
DEMAND
SUPPLY
EQUILIBRIUM
In market economies,prices are the mechanism for
allocate scarce resources.
Prices determine who produces each good and how
much is produced.
If market economies are guided by an invisible hand,as
Adam Smith famously suggested,then the price system
is the baton that the invisible hand uses to conduct the
economic orchestra.
2.5 ELASTICITY
Demand for a good is said to be elastic if
the quantity demanded responds
substantially to changes in the price,
Demand is said to be inelastic if the
quantity demanded responds only slightly
to changes in the price.
2.5.1 Price Elasticity of Demand
Elasticity
A measure of the responsiveness of quantity
demanded or quantity supplied to one of its
determinants.
Price Elasticity of Demand
A measure of how much the quantity demanded of a
good responds to a change in the price of that good,
computed as the percentage change in quantity
demanded divided by the percentage change in price
Determinants
Availability of Close Substitutes
butter vs margarine,eggs
Necessities versus Luxuries
sugar vs chocolate
Definition of the Market
E (narrowly defined market) ≥E (broadly defined market)
food vs icecream
Time Horizon
gas
Computing the Price Elasticity of Demand
E.G.,a 10 percent increase in the price of
a chocolate causes the amount of
chocolate you buy to fall by 20 percent,
We can calculate your elasticity of demand
as:
Price elasticity of demand= =2
Price elasticity of demand =
Percentage change in quantity demanded
Percentage change in price
20%
10%
E= (⊿ Q/Q) / (⊿ P/P) = ⊿ Q/⊿ P * P/Q = dQ/dP * P/Q
The Midpoint Method,A Better Way to
Calculate Percentage Change and Elasticity
Assumption
Point A,P=$4,Q=120
Point B,P=$6,Q=80
A B,P 50%,Q 33%,E=0.66
B A,P 33%,Q 50%,E=1.5
Midpoint,P=$5,Q=100 (arc elasticity)
Price elasticity of demand= (Q2-Q1)/[(Q1+Q 2)2/](P
2-P1)/[(P1+P 2)/2]
The Variety of Demand Curves
E＞ 1,elastic
E＜ 1,inelastic
E=1,unit elasticity
Guided Rule:
the flatter the demand curve that passes through a
given point,the greater the price elasticity of demand.
the steeper the demand curve that passes through a
given point,the smaller the price elasticity of demand.
The Price Elasticity of Demand
P
Q0
$5
4
$5
1.An
increase in
price…
2… leaves the quantity
demanded unchanged
(a) Perfectly Inelastic Demand,
Elasticity=0 P
Q0
$5
4
$5
1.An 22%
increase in
price…
2… leads to an 11% decrease in quantity demanded.
90 100
(b) Inelastic Demand,
Elasticity ＜ 1
P
Q0
4
$5
1.An 22%
increase in
price…
2… leads to a 22% decrease in quantity demanded.
80 100
(c) Unit Elastic Demand,
Elasticity =1
100
D
D
D
P
Q0
$5
4
$5
1.An 22%
increase in
price…
2… leads to a 67% decrease in
quantity demanded
P
Q0
$5
$4
1,At any price
above $4,quantity
demanded is zero
2,At exactly $4,consumers
will buy any quantity
D
50 100
D
(d) Elastic Demand,
Elasticity ＞ 1
(e) Perfectly elastic Demand,
Elasticity=infinity
PRODUCT PRICE ELASTICITY
INELASTIC
Water 0.14
Food 0.21
Lively arts (theater,etc.) (0.07,0.29)
Cigarettes (0.3,0.4)
Legal services 0.50
Stationery 0.57
Jewelry,Watches 0.67
APPROXIMATELY UNIT-ELASTIC (0.8-1.20)
Beer 1.13
Electricity 1.14
Mass transit,Bus 1.20
New cars 1.20
ELASTIC
Charitable giving 1.29
Marijuana 1.50
Air travel 2.40
Toilet articles 3.04
Motion pictures 3.70
Some of Price Elasticity of Demand
2.5.2 Other Demand Elasticities
Income Elasticity of Demand
a measure of how much the quantity demanded of
a good responds to a change in consumers’
income.
Income elasticity of demand= Percentage change in quantity demandedPercentage change in income
II
QQE
i /
/
Q
I
Q
I
Q
Im
(a) Ei＞ 1 (b) 0＜ Ei＜ 1
(c) Ei＜ 1,Ei ＜ 0
normal goods,Ei>0
luxury,Ei>1
necessity,0＜ Ei＜ 1
inferior goods,Ei ＜ 0
Some of Income Elasticity of Demand
PRODUCT INCOME ELASTICITY
INFERIOR
Flour -0.36
Margarine -0.20
NECESSITIES
Lively arts (theater,etc.) (0.06,0.26)
Electricity (0.07,0.74)
Physicians 0.75
APPROXIMATELY UNIT-ELASTIC
Liquors 1.00
Tobacco 1.02
Clothing 1.02
LUXURIES
Books 1.44
New cars 2.45
Private Education 2.46
Durable Goods (appliances,etc.) 2.90
Cross-Price Elasticity of Demand
Cross-price elasticity of demand
a measure of how much the quantity demanded of
one good responds to a change in the price of
another good.
Substitute,positive
Complement,negative
Cross-price elasticity of demand=
Percentage change in quantity demanded of good 1
Percentage change in price of good 2
yy
xx
PP
QQEc
/
/
Quantity of
oil
Price of
coal
Quantity of
car
Price of
oil
(a) Substitutes (b) Complements
Some Cross-Price Elasticity of Demand
PRODUCT SUBSTITUTE PRODUCT CROSS-PRICE
ELASTICITY
BEEF Pork 0.28
BUTTER Margarine 0.67
ELECTRICITY Natural Gas 0.20
NATURAL GAS Fuel Oil 0.44
THEATER All other lively arts 0.12
SYMPHONY All other lively arts 0.53
Summary
Classification Elasticity
Price elasticity (E)
Perfectly elastic
Elastic
Unit elastic
Inelastic
Perfectly inelastic
Infinite
＞ 1
--
0＜ E＜ 1
0
Income elasticity (Ei)
Elastic (normal goods - luxury)
Inelastic (normal goods – necessity)
Negatively elastic (inferior good)
＞ 1
0＜ Ei＜ 1
＜ 0
Cross-price elasticity (Ec)
Perfectly substitutable
Substitutable
Irrespective
Complement
Infinite
＞ 0
0
＜ 0
2.5.3 THE ELASTICITY OF SUPPLY
price elasticity of supply
a measure of how much the quantity supplied
of a good responds to a change in the price of
that good.
Computing the Price Elasticity of Supply
E.G.,an increase in the price of milk from $2.85 to $3.15
a gallon raises the amount that dairy farmers produce
from 9,000 to 11,000 gallons per month.
Percentage change in price = (3.15-2.85)/3=10%
Percentage change in quantity supplied
=(11,000-9,000)/10,000=20%
Price elasticity of supply (Es) =20%/10%=2.0
In this example,the elasticity of 2 reflect the fact that
the quantity supplied moves proportionately twice as
much as the price.
Price elasticity of supply= Percentage change in quantity supplied
Percentage change in price
Es= ⊿ Q/Q⊿ P/P
Price Elasticity of Supply (1)
P
Q0
$5
4
$5
1.An
increase in
price…
2… leaves the quantity
supplied unchanged
S
100
P
Q0
$5
4
$5
1.An 22%
increase in
price…
2… leads to a 10% increase
in quantity supplied
S
100 110
P
Q0
$5
4
$5
1.An 22%
increase in
price…
2… leads to a 22% increase in
quantity supplied
S
100 125
(a) Perfectly Inelastic Supply,
Elasticity=0
(b) Inelastic Supply,
Elasticity <1
(c) Unit Elastic Supply,
Elasticity = 1
$5P
Q0
$5
4
$5
1.An 22%
increase in
price…
2… leads to a 67% increase
in quantity supplied
S
100 200
(d) Elastic Supply,
Elasticity >1
P
Q0
4
1.At any price
above $4,quantity
supplied is infinite.
2… At exactly $4,
producers will supply
any quantity,
S
100
(e) Perfectly elastic Supply,
Elasticity = infinite
Price Elasticity of Supply (2)
How the Price Elasticity of Supply Can Vary
Because firms often have a
maximum capacity for production,
the elasticity of supply may be very
high at low levels of quantity
supplied and very low at high levels
of quantity supplied,
Here,an increase price from $3 to
$4 increase the quantity supplied
from 100 to 200,Because the
increase in quantity supplied of 67%
is larger than the increase in price of
29%,the supply curve is elastic in
this range.
By contrast,when the price rises
from $12 to $15,the quantity
supplied rises only from 500 to 525,
Because the increase in quantity
supplied of 5% is smaller than the
increase in price of 22%,the supply
curve is inelastic in this rage.
3
4
12
$15
P
Q0 100 200 500 525
Elasticity is small (<1)
Elasticity is
large (>1)
Discussion1:
What happens to wheat farmers and the
market for wheat when university
agronomists discover a new wheat hybrid
that is more productive than existing
varieties?
Can good news for farming be bad news
for farmers?
Total Revenue and the Price
Elasticity of Demand
total revenue
the amount paid by buyers and received by sellers of
a good,computed as the price of the good times the
quantity sold.
P× Q
Rule:
when demand is inelastic,price and total revenue
move in the same direction.
When demand is elastic,price and total revenue
move in the opposite direction.
If demand is unit elastic,total revenue remains
constant when the price changes.
Total Revenue
Price
Quantity
Demand
$4
0 100
P
Q
P× Q=$400
revenue
1.How total Revenue Changes
When Price Changes,
Inelastic Demand
2.How total Revenue Changes
When Price Changes,
Elastic Demand
Elasticity and Total Revenue along
a linear Demand Curve
Price Quantity Total
Revenue
(P× Q)
Percent
Change in
Price
Percent
Change in
Quantity
Elasticity Description
$7 0 $0
15 200 13.0 Elastic6 2 12
18 67 3.7 Elastic5 4 20
22 40 1.8 Elastic4 6 24
29 29 1.0 Unit Elastic3 8 24
40 22 0.6 Inelastic2 10 20
67 18 0.3 Inelastic1 12 12
200 15 0.1 Inelastic0 14 0
Discussion 2
In the 1970s members of the Organization of Petroleum
Exporting Countries (OPEC) decided to raise the world
price of oil in order to increase their incomes,
From 1973 to 1974,the price of oil rose more than 50%.
1979:14%,1980:34%,1981:34%,
From 1982 to 1985,the price of oil steadily declined at
about 10% per year,
And in 1986 cooperation among OPEC members
completely broke down,the price of oil plunged 45%,In
1990 the price of oil was back to where it began in 1970.
Why did OPEC fail to keep the price of oil high?
Discussion 3
Drug use has several adverse effects,Drug dependency
can ruin the lives of drug users and their families,Drug
addicts often turn to robbery and other violent crimes to
obtain the money needed to support their habit.
To discourage the use of illegal drugs,the government
devotes billions of dollars each year to reduce the flow of
drugs into the country.
Does drug interdiction increase or decrease drug-related
crime?
Rather than trying to reduce the supply of drugs,
policymakers might try to reduce the demand by
pursuing a policy of drug education.
Effects of this policy are different in the long run than in
the short run.
Chapter 2,Markets
2.1 INTRODUCTION
2.2 DEMAND
2.3 SUPPLY
2.4 SUPPLY AND DEMAND TOGETHER
2.1 INTRODUCTION
Market
a group of buyers and sellers of a particular good or service
Partitioners
buyers,sellers
Price vs Amount
price – independent variable
amount – induced variable
Competitive market
a market in which there are many buyers and many sellers so
that each has a negligible impact on the market price
Characteristics:
1,the goods being offered for sale are all the same
2,the buyers and sellers are so numerous that no single buyer or
seller can influence the market price.
MARKET PRODUCTION
Market production
involves sale in a market before consumption
occurs
Non-market production
does not involve sale in market before
consumption
Marketing
Human activity directed at satisfying
needs and wants through exchange
processes.
Look at the list of examples of production and indicate
which are non-market production and which are market
production,Also indicate that are mixture of both.
1,Sewing a dress using a sewing machine at home and using
materials and a pattern bought from a fabric shop
2,Catching fish using a home-made lure
3,Watching at home with a group of friends a new-release video
rented from the local video library
4,Flying to America to go to Disneyland
5,Swimming in your neighbor’s pool
6,Buying a ticket for a rock concert
7,Babysitting your neighbor’s children for $5 per hour
8,Having a backyard barbecue using meat from the local butcher
and salad vegetables from your own garden
9,Buying Coke or Pepsi from a dispensing machine at the local
mixed business and drinking it while walking home from school
10,Going for a walk along a beach
PRICE IN MARKETS
ADAM SMITH AND
THE INVISIBLE HAND
1776,The Wealth of
Nations
invisible hand
Participants in economy are
motivated by self-interest and
that the,invisible hand” of the
marketplace guides this self-
interest into promoting general
economic well-being.
2.2 DEMAND
Demand
People have almost unlimited wants but limited
resources,Wants become demands when backed by
purchasing power.
quantity demanded
the amount of a good that buyers are willing and able
to purchase
law of demand
Ceteris paribus (other things equal),the quantity
demanded of a good falls when the price of the good
rises
demand vs price - negatively related
2.2.1 DEMAND SCHEDULE AND CURVE
Demand Schedule
a table that shows the relationship between
the price of a good and the quantity
demanded
Demand Curve
a graph of the relationship between the price
of a good and the quantity demanded
The demand schedule
Price of
Ice-cream Cone
Price of
Ice-cream Cone
Quantity of
Cones Demand
$0.00
0.50
1.00
1.50
2.00
2.50
3.00
12
10
8
6
4
2
0 Quantity of
Ice-cream Cones2....increases quantity of
cones demanded
1,A decrease
in price…
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
0 2 4 6 8 10 12
The demand schedule shows the quantity demanded at each price,the
demand curve,which graphs the demand schedule,shows how the
quantity demanded of the good changes as its price varies,Because a
lower price increases the quantity demanded,the demand curve slopes
downward.
FIGURE 1
2.2.2 Market Demand versus Individual Demand
The market demand at each price is the sum of all the
individual demands.
=+12
10
8
6
4
2
0
Catherine
7
6
5
4
3
2
1
Nicholas
19
16
13
10
7
4
1
$0.00
0.50
1.00
1.50
2.00
2.50
3.00
MarketPrice of Ice-Cream Cone
The quantity demanded in a market is the sum of the quantities demanded
by all the buyers at each price,Thus,the market demand curve is found by
adding horizontally the individual demand curves,At a price of $2,
Catherine demands 4 ice-cream cones,and Nicholas demands 3 ice-cream
cones,The quantity demanded in the market at this price is 7 cones.
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
0 2 4 6 8 10 12
Quantity of Ice-cream Cones
Price of
Ice-cream
Cone
Catherine’s Demand
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
1 2 3 4 5 6 7
Quantity of Ice-cream Cones
Price of
Ice-cream
Cone
Nicholas’s Demand
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
1 4 7 10 13 16 19
Quantity of Ice-cream Cones
Price of
Ice-cream
Cone
FIGURE 2
Market Demand
FIGURE 3
Price of
Ice-Cream
Cone
Quantity of
Ice-cream Cones
Increase in
demand
Decrease in
demand D1
D2
D3
Any change that raises
the quantity that buyers
wish to purchase at a
given price shifts the
demand curve to the
right,
Any change that lowers
the quantity that buyers
wish to purchase at a
given price shifts the
demand curve to the left.
2.2.3 Shifts in the Demand Curve
Variables that Influence Buyers
1,Income
2,Prices of Related Goods
3,Tastes or Preference
4,Expectations
5,Numbers of Buyers
1,Income
normal good
a good for which,other things equal,an
increase in income leads to an increase in
demand
inferior good
a good for which,other things equal,an
increase in income leads to a decrease in
demand.
2,Price of Related Goods
Substitutes
two goods for which an increase in the price
of one leads to an increase in the demand for
the other
Complements
two goods for which an increase in the price
of one leads to a decrease in the demand for
the other
Variables That Influence Buyers
Variable A Change in This Variable…
Price Represents a movement along the demand curve
Income?
Price of related goods
Substitutes
complements
Tastes
Expectations
Numbers of buyers
positive?
positive
negative
positive
positive
TABLE 1
2.3 SUPPLY
quantity supplied
the amount of a good that sellers are willing and able
to sell
law of supply
other things equal,the quantity supplied of a good
rises when the price of the good rises
supply schedule
a table that shows the relationship between the price
of a good and the quantity supplied
supply curve
a graph of the relationship between the price of a
good and the quantity supplied
Price of
Ice-Cream
Cone
Quantity of
Cones
Demanded
$0.00
0.50
1.00
1.50
2.00
2.50
3.00
0
0
1
2
3
4
5
FIGURE 5
0
0.5
1
1.5
2
2.5
3
3.5
0 1 2 3 4 5
Price of
Ice-Cream
Cone
Quantity of
Ice-cream Cones
2…increase quantity of cones supplied.
1.An
increase
in price…
2.3.1 Market supply versus Individual Supply
Price of Ice-Cream Cone Ben Jerry Market
$0.00
0.50
1.00
1.50
2.00
2.50
3.00
0
0
1
2
3
4
5
+ 0
0
0
2
4
6
8
= 0
0
1
4
7
10
13
The quantity supplied in a market is the sum of the quantities supplied
by all the sellers at each price,Thus,the market supply curve is found
by adding horizontally the individual supply curves,At a price of $2,Ben
supplies 3 ice-cream cones,and Jerry supplies 4 ice-cream cones,The
quantity supplied in the market at this price is 7 cones.
Market Supply is the Sum of Individual Supplies.
0
0.5
1
1.5
2
2.5
3
3.5
0 1 2 3 4 5
Ben’s Supply
Jerry’s Supply
Market Supply
0
0.5
1
1.5
2
2.5
3
3.5
0 2 4 6 8
0
0.5
1
1.5
2
2.5
3
3.5
1 4 7 10 13
FIGURE 6
2.3.2 Shifts in the Supply Curve
Decrease
in Supply
Increase in
Supply
S3
S1
S2
Price of
Ice-Cream
Cone
Quantity of
Ice-cream Cones
0
Any change that
raises the quantity that
sellers wish to
produce at a given
price shifts the supply
curve to the right,
Any change that
lowers the quantity
that sellers wish to
produce at a given
price shifts the supply
curve to the left.
FIGURE 7
Variables That Influence Sellers
TABLE 2
Variable A Change in This Variable…
Price Represents a movement along the supply curve
Input prices
Technology
Expectations
Number of sellers
negative
positive
negative
positive
2.4 SUPPLY AND DEMAND TOGETHER
Equilibrium
a situation in which the price has reached the level
where quantity supplied equals quantity demanded
Equilibrium price (market-clearing price)
the price that balances quantity supplied and quantity
demanded
Equilibrium quantity
the quantity supplied and the quantity demanded at
the equilibrium price
2.4.1The Equilibrium of Supply and Demand
Price of
Ice-Cream
Cone
Quantity of Ice-Cream Cones
$2.00
Equilibrium
quantity
Demand
Supply
EquilibriumEquilibrium price
The equilibrium is found where the supply and demand curves
intersect,At the equilibrium price,the quantity supplied equals the
quantity demanded,Here the equilibrium price is $2,At this price,7
ice-cream cones are supplied,and 7 ice-cream cones are demanded.
FIGURE 8 7
Market Not in Equilibrium
FIGURE 9
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream
Cones
Supply
DemandShortage
4 7 10
2.00
$2.50
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream
Cones
Supply
Demand
Surplus
4 7 10
2.00
$2.50
(a) Excess Supply (b) Excess Demand
Surplus
a situation in which quantity supplied is grater
than quantity demanded
Shortage
a situation in which quantity demanded is
greater than quantity supplied
In panel (a),there is a surplus,Because the market price
of $2.50 is above the equilibrium price,the quantity
supplied (10 cones) exceeds the quantity demanded
(4cones),Suppliers try to increase sales by cutting the
price of a cone,and this moves the price toward its
equilibrium level.
In panel (b),there is a shortage,Because the market
price of $1.50 is below the equilibrium price,the
quantity demanded (10 cones) exceeds the quantity
supplied (4 cones),With too many buyers chasing too
few goods,suppliers can take advantage of the shortage
by raising the price.
Hence,in both cases,the price adjustment moves the
market toward the equilibrium of supply and demand.
2.4.2 Three Steps to Analyzing
Changes in Equilibrium
1,Decide whether the event shifts the
supply or demand curve (or perhaps
both).
2,Decide in which direction the curve shifts.
3,Use he supply-and-demand diagram to
see how the shift changes the
equilibrium price and quantity.
Example,A Change in Demand
1,The hot weather affects the demand curve by
changing people’s taste for ice cream,The
supply curve is unchanged.
2,The demand curve shifts to the right,From D1
to D2,the quantity of ice cream demanded is
higher at every price.
3,Increase in demand raises the equilibrium
price from $2 to $2.5 and the equilibrium
quantity from 7 to 10 cones,That is,the hot
weather increase the price of ice cream and
the quantity of ice cream sold.
Price of
Ice-Cream
Cone
1,Hot weather
increases the demand
for ice cream…
2….resulting
in a higher
price…
How an Increase in Demand Affects the Equilibrium
An event that raises
quantity demanded at
any given price shifts
the demand curve to
the right,The
equilibrium quantity
both rise,
Here,an abnormally
hot summer causes
buyers to demand
more ice cream,The
demand curve shifts
from D1 to D2,which
causes the
equilibrium price to
rise from $2 to $2.5
and the equilibrium
quantity to rise from 7
to 10 cones.
Quantity of
Ice-Cream Cones
D1
D2
Supply
New equilibrium
7 10
3….and a higher
quantity sold.
2.00
$2.50
FIGURE 10
Shift in Curves vs Movements along Curves
A shift in the supply curve is called a
“change in supply”,and a shift in the
demand curve is called a,change in
demand”,A movement along a fixed
supply curve is called a,change in the
quantity supplied”,and a movement along
a fixed demand curve is called a,change
in the quantity demanded”.
Example,A Change in Supply
1,The change in the price of sugar,an input into
making ice cream,affects the supply curve.
2,The supply curve shifts to the left,The supply
decreases from S1 to S2.
3,The shift in supply curve raises the equilibrium
rice from $2 to $2.5 and lowers the equilibrium
quantity from 7 to 4 cones,That is,the price
of ice cream rises,and the quantity of ice
cream sold falls.
How a Decrease in Supply Affects the Equilibrium
Quantity of
Ice-Cream Cones
D1
D2
S1New
equilibrium
4 7
3….and a lower
quantity sold.
2.00
$2.50
FIGURE 10
1.An increase in the
price of sugar
reduces the supply
of ice cream…
S2
2….resulting
in a lower
price…
An event that reduces
quantity supplied at
any given price shifts
the supply curve to the
left,The equilibrium
price rises,and the
equilibrium quantity
falls,
Here,an increase in
the price of sugar (an
input) causes sellers
to supply less ice cram,
The supply curve
shifts from S1 to S2,
which causes the
equilibrium price of ice
cream to rise from $2
to $2.5 and the
equilibrium quantity to
fall from 7 to 4 cones.
Price of
Ice-Cream
Cone
Example,
A Change in Both Supply and Demand
1,Both curves must shift,The hot weather affects the
demand curve because it alter the amount of ice
cream that household want to buy at any given price,
At the same time,when the hurricane drives up sugar
prices,it alter the supply curve for ice cream because
it changes the amount of ice cream that firms want to
sell at any given price.
2,The curves shifts in the same directions as they did in
our previous analysis,The demand curves shifts to the
right,and the supply curve shifts to the left.
3,In both cases,the equilibrium price rises,Thus,these
events certainly raise the price of ice cream,but their
impact on the amount of ice cream sold is ambiguous.
A Shift in Both Supply and Demand
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream ConesQ1 Q2
P1
P2
D1
D2
S1
S2 Price of
Ice-Cream
Cone
Quantity of
Ice-Cream ConesQ1 Q2
P1
P2
D1
D2
S1
S2
Large
increase in
demand
Small
increase in
demand
Initial equilibrium
New
equilibrium
Small
decrease
in supply
Large
decrease
in supply
Initial equilibrium
Here we observe a simultaneous increase in demand and decrease
in supply,Two outcomes are possible,In panel (a),the equilibrium
price rises from P1 to P2,and the equilibrium quantity rises from Q1
to Q2,In panel (b),the equilibrium price again rises from P1 to P2,
but the equilibrium quantity falls from Q1 to Q2.
(a) Price Rises,Quantity Rises (b) Price Rises,Quantity Falls
KEYS
MARKET
DEMAND
SUPPLY
EQUILIBRIUM
In market economies,prices are the mechanism for
allocate scarce resources.
Prices determine who produces each good and how
much is produced.
If market economies are guided by an invisible hand,as
Adam Smith famously suggested,then the price system
is the baton that the invisible hand uses to conduct the
economic orchestra.
2.5 ELASTICITY
Demand for a good is said to be elastic if
the quantity demanded responds
substantially to changes in the price,
Demand is said to be inelastic if the
quantity demanded responds only slightly
to changes in the price.
2.5.1 Price Elasticity of Demand
Elasticity
A measure of the responsiveness of quantity
demanded or quantity supplied to one of its
determinants.
Price Elasticity of Demand
A measure of how much the quantity demanded of a
good responds to a change in the price of that good,
computed as the percentage change in quantity
demanded divided by the percentage change in price
Determinants
Availability of Close Substitutes
butter vs margarine,eggs
Necessities versus Luxuries
sugar vs chocolate
Definition of the Market
E (narrowly defined market) ≥E (broadly defined market)
food vs icecream
Time Horizon
gas
Computing the Price Elasticity of Demand
E.G.,a 10 percent increase in the price of
a chocolate causes the amount of
chocolate you buy to fall by 20 percent,
We can calculate your elasticity of demand
as:
Price elasticity of demand= =2
Price elasticity of demand =
Percentage change in quantity demanded
Percentage change in price
20%
10%
E= (⊿ Q/Q) / (⊿ P/P) = ⊿ Q/⊿ P * P/Q = dQ/dP * P/Q
The Midpoint Method,A Better Way to
Calculate Percentage Change and Elasticity
Assumption
Point A,P=$4,Q=120
Point B,P=$6,Q=80
A B,P 50%,Q 33%,E=0.66
B A,P 33%,Q 50%,E=1.5
Midpoint,P=$5,Q=100 (arc elasticity)
Price elasticity of demand= (Q2-Q1)/[(Q1+Q 2)2/](P
2-P1)/[(P1+P 2)/2]
The Variety of Demand Curves
E＞ 1,elastic
E＜ 1,inelastic
E=1,unit elasticity
Guided Rule:
the flatter the demand curve that passes through a
given point,the greater the price elasticity of demand.
the steeper the demand curve that passes through a
given point,the smaller the price elasticity of demand.
The Price Elasticity of Demand
P
Q0
$5
4
$5
1.An
increase in
price…
2… leaves the quantity
demanded unchanged
(a) Perfectly Inelastic Demand,
Elasticity=0 P
Q0
$5
4
$5
1.An 22%
increase in
price…
2… leads to an 11% decrease in quantity demanded.
90 100
(b) Inelastic Demand,
Elasticity ＜ 1
P
Q0
4
$5
1.An 22%
increase in
price…
2… leads to a 22% decrease in quantity demanded.
80 100
(c) Unit Elastic Demand,
Elasticity =1
100
D
D
D
P
Q0
$5
4
$5
1.An 22%
increase in
price…
2… leads to a 67% decrease in
quantity demanded
P
Q0
$5
$4
1,At any price
above $4,quantity
demanded is zero
2,At exactly $4,consumers
will buy any quantity
D
50 100
D
(d) Elastic Demand,
Elasticity ＞ 1
(e) Perfectly elastic Demand,
Elasticity=infinity
PRODUCT PRICE ELASTICITY
INELASTIC
Water 0.14
Food 0.21
Lively arts (theater,etc.) (0.07,0.29)
Cigarettes (0.3,0.4)
Legal services 0.50
Stationery 0.57
Jewelry,Watches 0.67
APPROXIMATELY UNIT-ELASTIC (0.8-1.20)
Beer 1.13
Electricity 1.14
Mass transit,Bus 1.20
New cars 1.20
ELASTIC
Charitable giving 1.29
Marijuana 1.50
Air travel 2.40
Toilet articles 3.04
Motion pictures 3.70
Some of Price Elasticity of Demand
2.5.2 Other Demand Elasticities
Income Elasticity of Demand
a measure of how much the quantity demanded of
a good responds to a change in consumers’
income.
Income elasticity of demand= Percentage change in quantity demandedPercentage change in income
II
QQE
i /
/
Q
I
Q
I
Q
Im
(a) Ei＞ 1 (b) 0＜ Ei＜ 1
(c) Ei＜ 1,Ei ＜ 0
normal goods,Ei>0
luxury,Ei>1
necessity,0＜ Ei＜ 1
inferior goods,Ei ＜ 0
Some of Income Elasticity of Demand
PRODUCT INCOME ELASTICITY
INFERIOR
Flour -0.36
Margarine -0.20
NECESSITIES
Lively arts (theater,etc.) (0.06,0.26)
Electricity (0.07,0.74)
Physicians 0.75
APPROXIMATELY UNIT-ELASTIC
Liquors 1.00
Tobacco 1.02
Clothing 1.02
LUXURIES
Books 1.44
New cars 2.45
Private Education 2.46
Durable Goods (appliances,etc.) 2.90
Cross-Price Elasticity of Demand
Cross-price elasticity of demand
a measure of how much the quantity demanded of
one good responds to a change in the price of
another good.
Substitute,positive
Complement,negative
Cross-price elasticity of demand=
Percentage change in quantity demanded of good 1
Percentage change in price of good 2
yy
xx
PP
QQEc
/
/
Quantity of
oil
Price of
coal
Quantity of
car
Price of
oil
(a) Substitutes (b) Complements
Some Cross-Price Elasticity of Demand
PRODUCT SUBSTITUTE PRODUCT CROSS-PRICE
ELASTICITY
BEEF Pork 0.28
BUTTER Margarine 0.67
ELECTRICITY Natural Gas 0.20
NATURAL GAS Fuel Oil 0.44
THEATER All other lively arts 0.12
SYMPHONY All other lively arts 0.53
Summary
Classification Elasticity
Price elasticity (E)
Perfectly elastic
Elastic
Unit elastic
Inelastic
Perfectly inelastic
Infinite
＞ 1
--
0＜ E＜ 1
0
Income elasticity (Ei)
Elastic (normal goods - luxury)
Inelastic (normal goods – necessity)
Negatively elastic (inferior good)
＞ 1
0＜ Ei＜ 1
＜ 0
Cross-price elasticity (Ec)
Perfectly substitutable
Substitutable
Irrespective
Complement
Infinite
＞ 0
0
＜ 0
2.5.3 THE ELASTICITY OF SUPPLY
price elasticity of supply
a measure of how much the quantity supplied
of a good responds to a change in the price of
that good.
Computing the Price Elasticity of Supply
E.G.,an increase in the price of milk from $2.85 to $3.15
a gallon raises the amount that dairy farmers produce
from 9,000 to 11,000 gallons per month.
Percentage change in price = (3.15-2.85)/3=10%
Percentage change in quantity supplied
=(11,000-9,000)/10,000=20%
Price elasticity of supply (Es) =20%/10%=2.0
In this example,the elasticity of 2 reflect the fact that
the quantity supplied moves proportionately twice as
much as the price.
Price elasticity of supply= Percentage change in quantity supplied
Percentage change in price
Es= ⊿ Q/Q⊿ P/P
Price Elasticity of Supply (1)
P
Q0
$5
4
$5
1.An
increase in
price…
2… leaves the quantity
supplied unchanged
S
100
P
Q0
$5
4
$5
1.An 22%
increase in
price…
2… leads to a 10% increase
in quantity supplied
S
100 110
P
Q0
$5
4
$5
1.An 22%
increase in
price…
2… leads to a 22% increase in
quantity supplied
S
100 125
(a) Perfectly Inelastic Supply,
Elasticity=0
(b) Inelastic Supply,
Elasticity <1
(c) Unit Elastic Supply,
Elasticity = 1
$5P
Q0
$5
4
$5
1.An 22%
increase in
price…
2… leads to a 67% increase
in quantity supplied
S
100 200
(d) Elastic Supply,
Elasticity >1
P
Q0
4
1.At any price
above $4,quantity
supplied is infinite.
2… At exactly $4,
producers will supply
any quantity,
S
100
(e) Perfectly elastic Supply,
Elasticity = infinite
Price Elasticity of Supply (2)
How the Price Elasticity of Supply Can Vary
Because firms often have a
maximum capacity for production,
the elasticity of supply may be very
high at low levels of quantity
supplied and very low at high levels
of quantity supplied,
Here,an increase price from $3 to
$4 increase the quantity supplied
from 100 to 200,Because the
increase in quantity supplied of 67%
is larger than the increase in price of
29%,the supply curve is elastic in
this range.
By contrast,when the price rises
from $12 to $15,the quantity
supplied rises only from 500 to 525,
Because the increase in quantity
supplied of 5% is smaller than the
increase in price of 22%,the supply
curve is inelastic in this rage.
3
4
12
$15
P
Q0 100 200 500 525
Elasticity is small (<1)
Elasticity is
large (>1)
Discussion1:
What happens to wheat farmers and the
market for wheat when university
agronomists discover a new wheat hybrid
that is more productive than existing
varieties?
Can good news for farming be bad news
for farmers?
Total Revenue and the Price
Elasticity of Demand
total revenue
the amount paid by buyers and received by sellers of
a good,computed as the price of the good times the
quantity sold.
P× Q
Rule:
when demand is inelastic,price and total revenue
move in the same direction.
When demand is elastic,price and total revenue
move in the opposite direction.
If demand is unit elastic,total revenue remains
constant when the price changes.
Total Revenue
Price
Quantity
Demand
$4
0 100
P
Q
P× Q=$400
revenue
1.How total Revenue Changes
When Price Changes,
Inelastic Demand
2.How total Revenue Changes
When Price Changes,
Elastic Demand
Elasticity and Total Revenue along
a linear Demand Curve
Price Quantity Total
Revenue
(P× Q)
Percent
Change in
Price
Percent
Change in
Quantity
Elasticity Description
$7 0 $0
15 200 13.0 Elastic6 2 12
18 67 3.7 Elastic5 4 20
22 40 1.8 Elastic4 6 24
29 29 1.0 Unit Elastic3 8 24
40 22 0.6 Inelastic2 10 20
67 18 0.3 Inelastic1 12 12
200 15 0.1 Inelastic0 14 0
Discussion 2
In the 1970s members of the Organization of Petroleum
Exporting Countries (OPEC) decided to raise the world
price of oil in order to increase their incomes,
From 1973 to 1974,the price of oil rose more than 50%.
1979:14%,1980:34%,1981:34%,
From 1982 to 1985,the price of oil steadily declined at
about 10% per year,
And in 1986 cooperation among OPEC members
completely broke down,the price of oil plunged 45%,In
1990 the price of oil was back to where it began in 1970.
Why did OPEC fail to keep the price of oil high?
Discussion 3
Drug use has several adverse effects,Drug dependency
can ruin the lives of drug users and their families,Drug
addicts often turn to robbery and other violent crimes to
obtain the money needed to support their habit.
To discourage the use of illegal drugs,the government
devotes billions of dollars each year to reduce the flow of
drugs into the country.
Does drug interdiction increase or decrease drug-related
crime?
Rather than trying to reduce the supply of drugs,
policymakers might try to reduce the demand by
pursuing a policy of drug education.
Effects of this policy are different in the long run than in
the short run.
