Consumption - What is Microeconomics? Prices Prices have many functions in economics. Here are three 1. Information: Most importantly, prices convey information- they tell people about the relative scarcity of different goods without requiring people to know how much is being produced or how, where and when 2. Rationing: Prices prevent scarce resources from running out higher prices will prevent over-demand 3. Income: Prices determine income - in particular, labour's price(wages Prices change all the time. Can the simple model developed so far explain this? Consumption- What is Microeconomics? Comparative Statics Suppose the supply of beef falls due to an outbreak of foot and mouth disease Price New Supply Old Supply Old p Quantity lew g old q The supply curve shifts to the left. For all prices there is less beef supplied. Equilibrium quantity falls and equilibrium price rises. No surprise there This is a comparative static. Comparative statics provide testable predictionsConsumption — What is Microeconomics? 11 Prices • Prices have many functions in economics. Here are three: 1. Information: Most importantly, prices convey information — they tell people about the relative scarcity of different goods — without requiring people to know how much is being produced or how, where and when. 2. Rationing: Prices prevent scarce resources from running out — higher prices will prevent over-demand. 3. Income: Prices determine income — in particular, labour’s price (wages). • Prices change all the time. Can the simple model developed so far explain this? Consumption — What is Microeconomics? 12 Comparative Statics • Suppose the supply of beef falls due to an outbreak of foot and mouth disease. ................................................................................................................................................................................................................................................................................ . . . ....................................................................... ............... ..................... 0 Price Quantity Demand New Supply Old Supply New p New q Old p Old q . . . . . ............. ............. ............. ............. ............. ............. ............. . . . . . . . ............. ............. ............. ............. ......... • The supply curve shifts to the left. For all prices there is less beef supplied. • Equilibrium quantity falls and equilibrium price rises. No surprise there. • This is a comparative static. Comparative statics provide testable predictions