January 23-30 Comment Cards

January 23

   Q1: Why would a company produce a greater supply than the demand for their product just to lose money in a sale?

   A: Companies cannot always predict what sales will be. They make mistakes and over-produce or set price higher than the equilibrium price.

  Q2: Do industrialized countries or developing nations have markets closer to equilibrium?

  A: A recession is an example of a whole economy suffering from disequilibrium (supply greater than demand). Since developing countries often have much higher unemployment rates (i.e., the labor market is in disequilibriuim -- more workers want jobs than there are jobs available) then industrialized countries would enjoy greater general equilibrium. The other point here is that even if a poor nation is in general equilibrium it may be one where supply equals demand at very low levels of income and value of national product.

  Q3: How do supply and demand curves react if suppliers purposely hold back production to raise price?

  A: You have answered your own question. In order to raise equilibrium price, companies with monopoly power shift the supply curve back to the left (i.e., reduce output at every price). This raises the intersection point between the supply and demand curves. The demand curve stays in one place, but quantity-demanded falls as equilibrium price rises.

 Q4: How about more on surpluses and shortages?

  A:  surpluses are caused when the market price is set at a level where quantity-supplied exceeds quantity-demanded. This is at a price above the equilibrium price (remember, sellers can either mistakenly or stubbornly set price above the equilibrium point). Shortages are created when price is too low (below equilibrium) and quantity-demanded exceeds quantity-supplied.

Q5: What is an export subsidy?

A:  Government actually provides subsidies (government checks) for producing goods that will be shipped abroad. For example, the Washington state apple industry gets about $3 million every year just to advertise their apples overseas and Proctor and Gamble receives huge tax credits to sell abroad -- that's a subsidy too because it means they would have to pay higher taxes if they sold that output in the U.S.

Q6: Is a market in equilibrium truly a healthy market?

A: Not necessarily. See question #2. If incomes are low, equilibrium prices will be low. The sellers and buyers may all live in poverty but the market clears, i.e., all the goods produced find buyers.

Q7: Why does demand go down when price also goes down?

A:  Don't confuse a movement down a given demand curve (quantity-demanded always rises when price falls) with a shift in one or more of the curves and a resulting change in equilibrium price. For example, an increase in demand (rightward shift in the demand curve) will cause equilibrium price to rise as the intersection point of S and D slides to a higher point.

Q8: What are aggregate curves?

A: As shown in class, an aggregate demand curve is just the result of summing the amount bought at each price by all consumers and constructing a demand curve for the whole market (the aggregate demand curve). The aggregate supply curve is constructed in the same way for sellers.

Q9: I don't understand equilibrium price?

A: Equilibrium price is that price at which the amount sellers are willing to sell just equals the amount buyers are willing to buy. It occurs at the intersection point between the two curves.

January 24

Q1: How do expectations affect supply and demand?

A: Consumers act now on the basis of what they expect will happen in the future. So, they might buy more heating oil (fill their tanks) at today's prices in anticipation that the price of oil will rise. What's interesting is that oil suppliers, knowing this, will raise prices before consumers have a chance to react. The action by consumers represents a rightward shift in demand (price has yet to change, they have reacted to changed expectations).

Q2: Why, if wages go up, does the supply curve move to the left, instead of the demand curve shifting to the right because people have more money to spend?

A: By the way this is an excellent question. You have described two different situations. In the first, a given producer is faced with a rise in the wages of her workers (hence an increase in her costs of production), this causes her to insist upon selling output at a higher price (the supply curve shifts back to the left). In the second situation, you have described an increase in the wages (incomes) of all consumers of the product. This would cause the demand for the good to rise (a rightward shift in the demand curve). Now, what if this producer sold her output only to her own workers ~ a dilemma, no? By lowering her workers wages she would be cutting her own throat (i.e., her supply curve would shift to the right, while her demand curve shifted back to the left). She couldn't exploit her own workers because they were also her consumers. This is what happens in the whole economy when all employers think alike. Marx called this the internal contradiction of capitalism.

Q3: Who sets price ceilings?

 A: The government sets price ceilings. Rent control is a ceiling imposed by a city on the rent landlords can charge their tenants. The idea is to avoid landlords ripping off tenants, but it can also result in a housing shortage if developers stop building apartments and building owners let their properties deteriorate because they aren't making enough revenue from them. A seller would never set a price ceiling, instead they want to charge as high a price as possible.

Q4: If there is an increase in the wages of a producer's workers (the union wins a strike) and there is an increase in the incomes of the consumer's of the product, what happens to equilibrium price and quantity?

A: Another excellent question. Both changes cause a rise in equilibrium price (a leftward shift in supply and a rightward shift in demand), but a fall in supply usually causes equilibrium quantity to decrease and an rise in demand usually causes equilibrium quantity to increase. Together these two shifts have an indeterminate effect on equilibrium quantity ~ it depends on the relative degree of shifts in the two curves. 

January 30

Q1: I believe that preference or desire can be both a determinant to demand and supply because if a lot of desire [exists] for an item ... the supplier must increase production of the item.

A: What is true about what you say is that for a sale to occur a producer must find a buyer and the more buyers in the market (or the greater desire or preference for the product by existing buyers) the more the producer will be able to sell. Within the theory of supply and demand what you have described is a rightward shift of the demand curve. As consumers increase their purchases due to enhanced preference, the demand curve shifts to the right and quantity-supplied increases. In otherwards, the intersection between supply and demand has slid up the stationary supply curve. Supply (the willingness and ability of producers to offer commodities at particular prices) has not changed -- producers always were "willing and able" to provide the new, higher output at this new, higher price. Only now, after demand has shifted to the right, are consumers willing and able to buy the higher quantity at the higher price. Although this seems convoluted (a famous economist, Paul Samuelson, once remarked that economics suffered from "the tryanny of words") it is actually meant to simplify the process of describing production and consumption. Here is a short-hand way of imagining the supply and demand diagram:

                A.                           B.                              C.                             D.

     This is a system of categorization within the theory of supply and demand developed by Alfred Marshall. It allows us to discuss the concept of equlibrium in markets in a two-dimensional graph by temporarily holding the variables in columns B and D constant. In some sense it is an arbitrary choice of a variable to highlight as the determinant of quantity-demanded or quantity-supplied in the two-dimensional diagram. Conceivably you could throw price into column B and move Taste into column A and draw a demand curve in which Qd and Taste are the two highlighted variables, while price and everything else is held temporarily constant. But then how would you construct the Supply curve? Would you put taste in Column C (that would be the only way you could put both the supply and demand curve in the same diagram)? It seems that Marshall's approach makes sense -- that price is the one common element that both buyers and sellers respond to.

Q2: When a new product is first introduced to the market do companies usually tend to set its opening price above or below equilibrium price...?

A: This is a similar answer to Q1 on January 23rd. Companies choose the price of their products based on experience. They can make mistakes by setting price too high (above equilibrium) or too low (below equilibrium). Finding equilibrium is a process of trial and error.

Q3: I would have liked a review of the homework assignment.

A: The in-class exercises were almost exact replicas of the homework assignment. They were handed back and explained before the homework was due. Additionally, I put homework help on the website the night before. When I left class on Friday, I checked my office computer and the link was active. Lastly, when students have problems with the homework or up-coming exams they have several ways of communicating their questions to me -- questions in class, questions on comment cards, e-mail, phone calls or visits to my office (office hours on my syllabus).