DEMAND AND SUPPLY ANALYSIS 1. Markets a. Factor: Factors of Production b. Goods/Product: Services and Finished Goods c.

Capital: firms raise $ for investment by selling debt/equity, and subsequent trading of debt/equity, d. Intermediate Goods used in production of final good 2. Demand Function a. Law of Demand quantity demanded increase at lower price. b. Independent variable on y-axis and dependent variable (quantity) on x-axis.

3. Supply Function a. Law of Supply greater quantity supplied at higher prices b. Quantity willing to supply depends on selling price and costs of production, which depends on inputs (technology, labour, etc).

4. Movement vs Shifts a. Movement change in market price that increase or decrease quantity supplied or demanded b. Shift change in independent variable causes change in demand or supply

5. Market Equilibrium a. Sum supply function of firms comprising market to obtain market supply function. b. With market supply and market demand, solve to obtain equilibrium price where quantity supplied = quantity demanded (equilibrium quantity) c. Based on assumption that buyers and suppliers consider only price.

6. Unstable Equilibria a. Stable when forces move price and quantity towards equilibrium should they deviate b. Unstable when move further away from equilibrium

7. Auction a. Alternative to markets for determining equilibrium price

b. Common value Value of item same to any bidder but bidders do not know value at time of auction. Bidder who most overestimate will win (winners curse). Eg. Oil lease. c. Private value Will not bid more than value worth to bidder. Eg. Art, Collectibles. d. Ascending price (English) bidder can bid greater than previous high bid. Bidder that offers highest bid wins item. e. Sealed bid bids are unknown to other bidders. The highest bid wins the item. Reservation price is highest that bidder willing to pay but since optimal bid is slightly above second-most highly, not necessarily equal. f. Second price sealed bid (Vickrey) highest bid wins item but pays amount of second highest. No reason to bid less than reservation price. g. Descending price (Dutch) begins with price greater than what any bidder will pay, then reduced until bidder agrees. Modified version where winning bidders all pay same price of bid for the remaining items. 8. Auction for Securities a. Eg. $35 billion face value of T-Bills to auction off. Non-competitive bids submitted for $5 billion face value. Competitive bids shown in table. b. Select min yield (max price) for $30 billion face value for competitive bids At 0.1104% discount, $28 billion; At 0.1117%, $30 billion. c. Single price is 0.1117% where competitive bidders will get $28 billion and noncompetitive bidders get $5 billion. Remaining $2 billion go to 0.1117% with each bidder getting 2/8 of face amount.

9. Surplus a. Consumer surplus difference between total value bought and paid (shaded triangle). Willing to pay higher prices at lower quantities but end up paying lower equilibrium price for earlier units. Calculated as area of triangle using intercept and equilibrium. b. Producer surplus excess of market price above opportunity cost of production. Total revenue total variable cost of producing units. c. Under perfect market assumption, industry supply curve also marginal societal opportunity cost curve while demand curve is marginal social benefit curve. d. Efficient quantity (MC=Marginal Benefit) and efficient allocation of resources is where total consumer and producer surplus are maximised. e. Deadweight loss reduction in surplus due to under/overproduction.

10. Causes of demand/supply imbalance a. Price Controls price ceilings (rent control), price floors (min wage). Distort incentives of supply and demand, lead to production levels different from unregulated market. b. Tax and Trade Restrictions i. Tax: increase price buyers pay and decrease amount sellers receive. ii. Subsidies: govt payments to producers that increase amount seller receive and decrease price buyers pay, leading to more than efficient quantity of good. iii. Quotas: govt-imposed production limits leading to less than efficient quantity of good.

c. External Costs imposed on others by production of goods not taken into account in production decision. Societal costs greater than direct costs of production producer bears over-allocation of resources. d. External Benefits benefits of consumption enjoyed by others not taken into account in buyers consumption decision. Result in demand curve that dont represent societal benefit of G&S, equilibrium quantity produced & consumed less than efficient. e. Public Goods and Common Resources i. Public Goods G&S consumed by people regardless of paid or not. Eg. National Defense. Free Rider problem where benefit w/o paying for production. Competitive markets produce less than efficient quantity. ii. Common Resource all may use. Eg. Unrestricted ocean fishery. Competitive market sees over-usage and production of G&S greater than efficient. 11. Price Ceiling a. Upper limit on price seller can charge. No effect if above equilibrium price. b. Result in shortage (excess demand) deadweight loss in efficiency