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

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

What is this course about? Sessions 1 & 2 – Demand, Supply, and Markets Slide 2 P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets

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

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

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 : Total gains from trade V − C � �� � 0 C P V � �� � � �� � Buyer’s gains Seller’s gains V − P P − C Sessions 1 & 2 – Demand, Supply, and Markets Slide 5 P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets

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

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

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

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

Let’s play AND DON’T LOOK AHEAD IN THIS HANDOUT! Sessions 1 & 2 – Demand, Supply, and Markets Slide 10 P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets

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

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

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

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

Units should go to buyers with highest valuations Valuations, from highest to lowest $ 45 40 35 30 25 20 15 10 5 5 10 15 20 25 30 Q Sessions 1 & 2 – Demand, Supply, and Markets Slide 15 P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets

Units should come from sellers with lowest costs Costs, from lowest to highest $ 45 40 35 30 25 20 15 10 5 5 10 15 20 25 30 Q Sessions 1 & 2 – Demand, Supply, and Markets Slide 16 P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets

How many units should be traded? where marginal cost = marginal value $ 45 40 35 30 25 20 15 10 5 5 10 15 20 25 30 Q Sessions 1 & 2 – Demand, Supply, and Markets Slide 17 P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets

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

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

Demand curve = Graph of the valuations Valuations, from highest to lowest $ 45 40 35 30 25 20 15 10 5 5 10 15 20 25 30 Q Sessions 1 & 2 – Demand, Supply, and Markets Slide 20 P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets

Supply curve = Graph of the costs Costs, from lowest to highest $ 45 40 35 30 25 20 15 10 5 5 10 15 20 25 30 Q Sessions 1 & 2 – Demand, Supply, and Markets Slide 21 P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets

Equilibrium: supply=demand Foj $ 45 40 35 30 25 20 15 10 5 5 10 15 20 25 30 Q Sessions 1 & 2 – Demand, Supply, and Markets Slide 22 P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets

Equilibrium: supply=demand Foj $ 45 40 35 30 25 20 15 10 5 5 10 15 20 25 30 Q Sessions 1 & 2 – Demand, Supply, and Markets Slide 22 P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets

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

Effect of an increase in cost by $8 $ 45 40 35 30 25 20 15 10 5 5 10 15 20 25 30 Q Sessions 1 & 2 – Demand, Supply, and Markets Slide 24 P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets

Effect of an increase in cost by $8 $ 45 40 35 30 25 20 15 10 5 5 10 15 20 25 30 Q Sessions 1 & 2 – Demand, Supply, and Markets Slide 24 P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets

Effect of an $8 tax $ 45 40 35 30 25 20 15 10 5 5 10 15 20 25 30 Q Sessions 1 & 2 – Demand, Supply, and Markets Slide 25 P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets

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