Opportunity Cost Question

• You won a free ticket to see an Eric Clapton concert (which has no resale value). Bob Dylan is performing on the same night and is your next-best alternative activity. Tickets to see Dylan cost $40. On any given day, you would be willing to pay up to $50 to see Dylan. Assume there are no other costs of seeing either performer. Based on this information, what is the opportunity cost of seeing Eric Clapton?

• (a)$0, (b) $10, (c) $40, or (d) $50.

Supply and Demand

Chapter 3

Competitive Market

Lots of buyers and sellers dealing in identical goods.

Catherine’s Demand Curve

Market Demand as the Sum of Individual Demands

Shifts in the Demand Curve

Shift Factors for Demand

1. Income.

2. Prices of related goods (substitutes and complements).

3. Tastes/Preferences.

4. Expectations.

5. Number of buyers.

Shifts in the Demand Curve versus Movements along the Demand Curve

Market Supply as the Sum of Individual Supplies

Market Supply as the Sum of Individual Supplies

Shifts in the Supply Curve

Shift Factors for Supply

1. Input prices.

2. Technology.

3. Weather.

4. Expectations.

5. Number of sellers.

The Equilibrium of Supply and Demand

Markets Not in Equilibrium

A Three-Step Program for Analyzing Changes in Equilibrium

1. Decide whether the event shifts the supply or demand curve (or perhaps both).

2. Decide in which direction the curve shifts.

3. Use the supply-and-demand to see how the shift changes the equilibrium price and quantity.

How an Increase in Demand Affects the Equilibrium

How a Decrease in Supply Affects the Equilibrium

A Shift in Both Supply and Demand