### Prices of related goods

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A relationship between price and quantity
demanded in a given time period, ceteris
paribus.
Quantity demanded - the quantity that a
◦ willing
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An inverse relationship exists between the
price of a good and the quantity demanded in
a given time period, ceteris paribus.
Reasons:
◦ We want to buy goods as cheap as possible
◦ We have limited amount of money.
Change in quantity demanded
Demand shocks
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Market demand is the horizontal summation
of individual consumer demand curves
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tastes and preferences
prices of related goods and services
income
number of consumers
expectations of future prices and income
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substitute goods – an increase in the price of
one results in an increase in the demand for
the other.
◦ Example: tea and coffee
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complementary goods – an increase in the
price of one results in a decrease in the
demand for the other.
◦ Example: car and fuel
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Price of coffee rises:
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Price of DVDs rises:
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A good is a normal good if an increase in
income results in an increase in the demand
for the good.
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A good is an inferior good if an increase in
income results in a reduction in the demand for
the good.
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An increase in the number of buyers
results in an increase in demand.
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A higher expected future price will increase
current demand.
A lower expected future price will decrease
current demand.
A higher expected future income will
increase the demand for all normal goods.
A lower expected future income will reduce
the demand for all normal goods.
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the relationship that exists between the price of
a good and the quantity supplied in a given time
period, ceteris paribus.
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A direct relationship exists between the price
of a good and the quantity supplied in a given
time period, ceteris paribus.
Supply shock
Change in quantity supplied
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The market supply curve is the horizontal
summation of the supply curves of individual
firms.
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the price of resources,
technology and productivity,
the expectations of producers,
the number of producers,
the prices of related goods and services
◦ note that this involves a relationship in production,
not in consumption
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As the price of a resource rises, profitability
declines, leading to a reduction in the
quantity supplied at any price.
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Technological improvements (and any changes that
raise the productivity of labour) lower production
costs and increase profitability.
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An increase in the expected future price of a
good or service results in a reduction in
current supply.
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Firms produce and sell more than one
commodity.
Firms respond to the relative profitability of
the different items that they sell.
The supply decision for a particular good is
affected not only by the good’s own price
but also by the prices of other goods and
services the firm may produce.
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Firms import raw materials (and often the
final product) from foreign countries. The
cost of these imports varies with the
exchange rate.
When the exchange value of PLN rises, the
domestic price of imported inputs will fall
and the domestic supply of the final
commodity will increase.
A decline in the exchange value of the PLN
raises the price of imported inputs and
reduce the supply of domestic products that
rely on these inputs.
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If the price exceeds the equilibrium price,
a surplus occurs:
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If the price is below the equilibrium a
shortage occurs:
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Price ceiling - legally mandated maximum
price
Purpose:
◦ to keep price below the market equilibrium price
◦ to protect the poor consumers – they can buy
products at lower prices than at the free market
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Examples:
◦ rent controls
◦ price controls during wartime
◦ price controls during socialism time
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Binding and non-binding price ceiling
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The demand exceeds the supply
Long queues in shops
Black market grows
Rationing of goods – ration coupons
Double currencies system
Domestic currency loses its value – inflation
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No innovations
Mass production
The quality of goods falls
Standstill of economy development
Vertical price control
Horizontal price control
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(film)
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price floor - legally mandated minimum price
designed to maintain a price above the
equilibrium level
A price floor must be set above the freemarket equilibrium price, otherwise it has no
effect
examples:
◦ agricultural price supports
◦ minimum wage laws
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The supply exceeds the demand
What to do with production surplus?
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To Export – no countries want to buy
Intervention purchase – for taxpayers money
To store – for taxpayers money
To destroy – for taxpayers money
Producers who can’t sell by means of intervention
purchase must sell at the black market (illegally)
Problems with abolishing of the price floor –
huge reserves
The quality of goods goes down
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(film)
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Examples of floor prices
Examples of ceiling prices
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Czarny B. „Podstawy Ekonomii”
Begg D., „Economics”
http://www.oswego.edu/~kane/eco101.htm