Welcome to Prices and Markets Sessions 1 & 2 Demand, Supply, - - PowerPoint PPT Presentation

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Welcome to Prices and Markets Sessions 1 & 2 Demand, Supply, - - PowerPoint PPT Presentation

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Welcome to Prices and Markets Sessions 1 & 2 Demand, Supply, and Markets Slide 1 P1 SepOct 2012 Timothy Van Zandt Prices & Markets What is this course about? Sessions 1 & 2 Demand, Supply, and Markets Slide 2 P1

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SLIDE 1

Welcome to Prices and Markets

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Sessions 1 & 2 – Demand, Supply, and Markets Slide 1

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SLIDE 2

What is this course about?

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Sessions 1 & 2 – Demand, Supply, and Markets Slide 2

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SLIDE 3
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SLIDE 4

Sessions 1& 2: Demand, Supply, and Markets

1.

✓

Welcome 2.

➥

Bargaining

  • 3. Pit-market simulation
  • 4. What trade should take place?
  • 5. What trade does take place?
  • 6. Changes in costs; a tax.
  • 7. Applications: A model of entrepreneurship?
  • 8. Looking ahead in the course.

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Sessions 1 & 2 – Demand, Supply, and Markets Slide 3

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SLIDE 5

An example of trade

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Sessions 1 & 2 – Demand, Supply, and Markets Slide 4

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SLIDE 6

Valuation and cost

Buyer may purchase at a price P . Seller may sell a good at a price P . Buyer’s valuation V: Cutoff price below which she wants to trade. Seller’s cost C: Cutoff price above which he wants to trade. Gains from trade when V > C :

C P V

  • Seller’s gains

P − C Buyer’s gains V − P

  • Total gains from trade V − C

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Sessions 1 & 2 – Demand, Supply, and Markets Slide 5

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SLIDE 7

Bargaining

With equal bargaining power?

Games from trade divided equally

One person makes take-it-or-leave-it offer?

Buyer offers seller her cost (and gets all the gains from trade) — approximately.

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Sessions 1 & 2 – Demand, Supply, and Markets Slide 6

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SLIDE 8

Sessions 1& 2: Demand, Supply, and Markets

1.

✓

Welcome 2.

✓

Bargaining 3.

➥

Pit-market simulation

  • 4. What trade should take place?
  • 5. What trade does take place?
  • 6. Changes in costs; a tax.
  • 7. Applications: A model of entrepreneurship?
  • 8. Looking ahead in the course.

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Sessions 1 & 2 – Demand, Supply, and Markets Slide 7

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SLIDE 9

Markets with many traders — A simulation

  • Students on one side of class are buyers;

students on the other side are sellers.

  • Each buyer receives a card with a number: his valuation V .
  • Each seller receives a card with a number: her cost C .
  • Each trader can execute at most one trade.
  • Buyer with valuation V buys at price P

⇒

gain is V − P Seller with cost C sells at price P

⇒

gain is P − C No trade

⇒

no gain

  • New cards each round, but same distribution of numbers.

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Sessions 1 & 2 – Demand, Supply, and Markets Slide 8

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SLIDE 10

Procedures

  • When I say “go”, get up and look for someone to trade with.
  • Your cost or valuation (the number on your card) is private information;

do not reveal it during trading.

  • You can trade at prices in $0.50 increments.
  • When/if you agree on a trade, record the outcome ONE transaction
  • record. Bring to me with your cards.
  • After trading, be quiet!
  • When I announce the end of trading, those who have not traded hand

in their cards and then everyone returns to their seats.

  • Keep track of your “earnings”:

Round 1: Round 2: Round 3:

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Sessions 1 & 2 – Demand, Supply, and Markets Slide 9

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SLIDE 11

Let’s play AND DON’T LOOK AHEAD IN THIS HANDOUT!

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Sessions 1 & 2 – Demand, Supply, and Markets Slide 10

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SLIDE 12

Sessions 1& 2: Demand, Supply, and Markets

1.

✓

Welcome 2.

✓

Bargaining 3.

✓

Pit-market simulation 4.

➥

What trade should take place?

  • 5. What trade does take place?
  • 6. Changes in costs; a tax.
  • 7. Applications: A model of entrepreneurship?
  • 8. Looking ahead in the course.

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Sessions 1 & 2 – Demand, Supply, and Markets Slide 11

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SLIDE 13

Describe the outcome of trade: the essence

  • 1. How many units traded?
  • 2. Which buyers got them?
  • 3. Which sellers sold them?
  • 4. How much did each buyer pay?
  • 5. How much did each seller receive?

What trade should take place? (prices do not matter)

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Sessions 1 & 2 – Demand, Supply, and Markets Slide 12

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SLIDE 14

What trade should take place?

  • 1. Which buyers should get the traded units?
  • 2. Which sellers should give up the traded units?
  • 3. How many units should be traded?

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Sessions 1 & 2 – Demand, Supply, and Markets Slide 13

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SLIDE 15

The data

Buyer’s valuations 48, 47, 45, 44, 43, 42, 40, 40, 39, 38, 38, 36, 35, 33, 32, 31, 30, 27, 26, 24, 23, 23, 22, 21, 21, 19, 18, 18, 17, 14, 13, 13, 11, 10 Seller’s costs 1, 2, 3, 5, 5, 7, 8, 10, 10, 11, 12, 12, 13, 14, 14, 16, 17, 17, 18, 19, 19, 20, 21, 23, 25, 26, 28, 29, 29, 30, 31, 33, 33, 35

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Sessions 1 & 2 – Demand, Supply, and Markets Slide 14

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SLIDE 16

Units should go to buyers with highest valuations

Valuations, from highest to lowest

5 10 15 20 25 30 35 40 45 5 10 15 20 25 30

Q $

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Sessions 1 & 2 – Demand, Supply, and Markets Slide 15

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SLIDE 17

Units should come from sellers with lowest costs

Costs, from lowest to highest

5 10 15 20 25 30 35 40 45 5 10 15 20 25 30

Q $

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Sessions 1 & 2 – Demand, Supply, and Markets Slide 16

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SLIDE 18

How many units should be traded?

where marginal cost = marginal value

5 10 15 20 25 30 35 40 45 5 10 15 20 25 30

Q $

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Sessions 1 & 2 – Demand, Supply, and Markets Slide 17

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SLIDE 19
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SLIDE 20

Sessions 1& 2: Demand, Supply, and Markets

1.

✓

Welcome 2.

✓

Bargaining 3.

✓

Pit-market simulation 4.

✓

What trade should take place? 5.

➥

What trade does take place?

  • 6. Changes in costs; a tax.
  • 7. Applications: A model of entrepreneurship?
  • 8. Looking ahead in the course.

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Sessions 1 & 2 – Demand, Supply, and Markets Slide 18

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Emergence of a market price

Discuss the idea of a market price that emerges. What does it take?

  • 1. Everyone who wants to trade at P does trade.
  • 2. Purchases equal sales.

Define: 1.

d(P) = number of buyers who would like to

purchase at price P . 2.

s(P) = number of sellers who would like to sell at

price P . Equilibrium, d(P) = s(P) .

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Sessions 1 & 2 – Demand, Supply, and Markets Slide 19

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SLIDE 22

Demand curve = Graph of the valuations

Valuations, from highest to lowest

5 10 15 20 25 30 35 40 45 5 10 15 20 25 30

Q $

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Sessions 1 & 2 – Demand, Supply, and Markets Slide 20

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SLIDE 23

Supply curve = Graph of the costs

Costs, from lowest to highest

5 10 15 20 25 30 35 40 45 5 10 15 20 25 30

Q $

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Sessions 1 & 2 – Demand, Supply, and Markets Slide 21

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SLIDE 24

Equilibrium: supply=demand

Foj

5 10 15 20 25 30 35 40 45 5 10 15 20 25 30

Q $

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Sessions 1 & 2 – Demand, Supply, and Markets Slide 22

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SLIDE 25

Equilibrium: supply=demand

Foj

5 10 15 20 25 30 35 40 45 5 10 15 20 25 30

Q $

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Sessions 1 & 2 – Demand, Supply, and Markets Slide 22

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SLIDE 26

Sessions 1& 2: Demand, Supply, and Markets

1.

✓

Welcome 2.

✓

Bargaining 3.

✓

Pit-market simulation 4.

✓

What trade should take place? 5.

✓

What trade does take place? 6.

➥

Changes in costs; a tax.

  • 7. Applications: A model of entrepreneurship?
  • 8. Looking ahead in the course.

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Sessions 1 & 2 – Demand, Supply, and Markets Slide 23

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SLIDE 27

Effect of an increase in cost by $8

5 10 15 20 25 30 35 40 45 5 10 15 20 25 30

Q $

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Sessions 1 & 2 – Demand, Supply, and Markets Slide 24

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SLIDE 28

Effect of an increase in cost by $8

5 10 15 20 25 30 35 40 45 5 10 15 20 25 30

Q $

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Sessions 1 & 2 – Demand, Supply, and Markets Slide 24

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SLIDE 29
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SLIDE 30

Effect of an $8 tax

5 10 15 20 25 30 35 40 45 5 10 15 20 25 30

Q $

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Sessions 1 & 2 – Demand, Supply, and Markets Slide 25

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SLIDE 31

Sessions 1& 2: Demand, Supply, and Markets

1.

✓

Welcome 2.

✓

Bargaining 3.

✓

Pit-market simulation 4.

✓

What trade should take place? 5.

✓

What trade does take place? 6.

✓

Changes in costs; a tax. 7.

➥

Applications: A model of entrepreneurship?

  • 8. Looking ahead in the course.

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Sessions 1 & 2 – Demand, Supply, and Markets Slide 26

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SLIDE 32

A model of entrepreneurship?

5 10 15 20 25 30 35 40 45 5 10 15 20 25 30

Q $

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Sessions 1 & 2 – Demand, Supply, and Markets Slide 27

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SLIDE 33

Sessions 1& 2: Demand, Supply, and Markets

1.

✓

Welcome 2.

✓

Bargaining 3.

✓

Pit-market simulation 4.

✓

What trade should take place? 5.

✓

What trade does take place? 6.

✓

Changes in costs; a tax. 7.

✓

Applications: A model of entrepreneurship? 8.

➥

Looking ahead in the course.

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Sessions 1 & 2 – Demand, Supply, and Markets Slide 28

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SLIDE 34

Key structure of the rest of the course

Perfect vs. imperfect competition Individual firms vs. equilibrium Fixed firms in the market vs. entry and exit

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Sessions 1 & 2 – Demand, Supply, and Markets Slide 29

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SLIDE 35

Lessons that are extended in Sessions 3–6

Measure

  • gains from trade
  • demand/supply

… link to valuation/cost

  • equilibrium

… roughly the same way whether

  • unit demand or supply of many people or firms;
  • multiunit demand or supply of one buyer or firm;
  • multiunit demand or supply of many buyers or firms.

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Sessions 1 & 2 – Demand, Supply, and Markets Slide 30

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SLIDE 36

A few admin/logistics/etc. items

  • 1. Pay attention to the prep guides and the “deliverables”.
  • 2. Always put FULL NAME and SECTION on deliverables.
  • 3. Tutorials.
  • 4. I cold call because I love you.
  • 5. Exercises, exercises, exercises.
  • 6. Avoid exam anxiety: do more exercises.

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Sessions 1 & 2 – Demand, Supply, and Markets Slide 31

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SLIDE 37

Budget time for the simulations

And midterm quiz: Wed 29 Sep

  • Perfect competition: Starts Monday 10 Sep (lasts one week).
  • Market games: Starts approx Tue 2 Oct (lasts at least two weeks).

And prereading for classes next week!

  • 3. MON: Costs
  • 4. TUE: Supply=demand
  • 5. THU or FRI: Short-run costs, supply, equilibrium

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Sessions 1 & 2 – Demand, Supply, and Markets Slide 32

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SLIDE 38

Next class: Production and Costs

FPM reading. Chapter 3. Mini case. “Long-Run Fixed Costs in the Cellular Industry”.

  • Deliverables. Exercises 3.4 and 3.7.

Some ideas to watch for:

  • 1. Economies of scale ⇒ efficiency gains from consolidation.
  • 2. Long-run fixed costs can be a source of economies of scale.

To handle technical details: understand the parts; worry about big picture later.

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Sessions 1 & 2 – Demand, Supply, and Markets Slide 33