Market Economy and Public Policy

How is price made?
In competitive market

How is market demand measured?

How utility explains price?

What changes price?
Shifts in demand curve
Shifts in supply curve

Market adjustment to changes in Demand and Supply

What increases demand?
Consumers’ incomes
Consumers preferences
Prices of other goods

Higher income shifts Demand.

On the same demand curve:
Prices of other goods: fixed.
Income: fixed.
Price of clothing reduced.

What increases supply?
Technology
Input supply conditions

How a company set the price in competitive market?

Q, P, TR, TC, TVC, TP, MC, MR

Short-run profit maximization

Cost curves and structure of industry

A lower input price shifts cost curves downward

Consumer Price Index

Consumer Price Index
Year 1: I = PB1 B1+PZ1 Z1 =Σ P1 Q1
Year 2: I’ = PB2 B1+PZ2 Z1 =Σ P2 Q1
Price Index P*
P* = I’/I = Σ P2 Q1/Σ P1 Q1

How a company set price in a market, with no competitor?

Question* – taxi service in city
Bus drivers go on strike.
Bus fares increase after a strike by bus drivers.
Taxi drivers must pass a competency test, and a third fail.
Gasoline prices increase.
Half the downtown parking lots are converted to office buildings.
The population of the city increases.

Question**
Some economists get angry by the comment bellow:
Education is expensive, but nothing is more valuable.
Ukraine needs more energy.
Social Security should cover our basic needs in retirement.

Question***
Car seat-belt
Before seatbelt was not required by law, it was available as an option.
The drivers knew that seatbelts reduced the injuries from accidents.
But, the drivers did not buy them.
Are the drivers irrational?

Corner solution

Homework *
A consumer must pay $10 per unit of good X for the first 5 units, but only $5 per unit for each unit in excess of 5 units. How does the budget line look like?