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Slide 1:Chapter 4
Extensions of Demand and Supply Analysis
Slide 2:Introduction
Slide 3:Learning Objectives
Discuss the essential features of the price system Evaluate the effects on the market price and equilibrium quantity of changes in demand and supply Understand the rationing function of prices
Slide 4:Learning Objectives
Explain the effects of price ceilings Explain the effects of price floors Describe various types of government-imposed quantity restrictions on markets
Slide 5:The Price System Exchange and Markets Changes in Demand and Supply Price Flexibility and Adjustment Speed The Rationing Function of Prices
Chapter Outline
Slide 6:The Policy of Government-Imposed Price Controls The Policy of Controlling Rents Price Floors in Agriculture Price Floors in the Labor Market Quantity Restrictions
Chapter Outline
Slide 7:Did You Know That...
A shortage of flu vaccine arose in 2003? Persistent shortages and surpluses may be observed in various markets? The model of supply and demand can explain many of these instances of a gap between quantity supplied and quantity demanded?
Slide 8:The Price System
Price System (market system) An economic system that allocates resources based on relative prices determined by supply and demand Prices signal what is relatively scarce and relatively abundant
Slide 9:Exchange and Markets
Markets Emphasize voluntary exchange Determine the terms of exchange Facilitate exchange
Slide 10:Exchange and Markets
Voluntary Exchange Acts of trading between individuals that make both parties to the trade subjectively better off Terms of Exchange The prices we pay for the desired items
Slide 11:Exchange and Markets
Transaction Cost The costs associated with exchange Examples Price shopping Determining quality Determining reliability Service availability Cost of contracting
Slide 12:Exchange and Markets
The role of middlemen Middlemen (intermediaries) or brokers reduce transaction cost by providing information to buyers and sellers. Examples Real estate brokers Stock brokers Consignment shops Car dealerships
Slide 13:Exchange and Markets
Observation Consumers on the Internet rely on intelligent shopping agents to act as middlemen Question How has the increase in the number of web pages affected the potential market for shopbot services?
Slide 14:Changes in Demand and Supply
Changes in supply and demand create a disequilibrium The market price and quantity adjust to a new equilibrium
Slide 15:Shifts in Demand and Supply: Determinate Results
Increase Demand with Supply Constant S P1 Q1 Figure 4-1
At price P1 quantity demanded exceeds quantity supplied— a shortage existsSlide 16:Shifts in Demand and Supply: Determinate Results
Increase Demand with Supply Constant D1 S P1 Q1 E1 Q2 Figure 4-1
Slide 17:Shifts in Demand and Supply: Determinate Results
Increase Demand with Supply Constant P1 Q1 S E1 Equilibrium price and quantity increase to P2 and Q2 D1 Figure 4-1
At price P1 quantity supplied exceeds quantity demanded— a surplus exists. Q2 SSlide 18:Shifts in Demand and Supply: Determinate Results
Decrease Demand with Supply Constant D1 E1 Q1 P1 Figure 4-1
Slide 19:Shifts in Demand and Supply: Determinate Results
Decrease Demand with Supply Constant P1 Q1 S E1 D3 Equilibrium price and quantity decrease to P3 and Q3 D1 Figure 4-1
Slide 20:Shifts in Demand and Supply: Determinate Results
Increase Supply with Demand Constant P1 Q1 Figure 4-1
At price P1 quantity supplied exceeds quantity demanded— a surplus existsSlide 21:Shifts in Demand and Supply: Determinate Results
Increase Supply with Demand Constant P1 Q1 E1 D Q3 S2 S1 Figure 4-1
Slide 22:Shifts in Demand and Supply: Determinate Results
Increase Supply with Demand Constant P1 Q1 E1 D S2 S1 Equilibrium price decreases and quantity increases to P2 and Q2 Figure 4-1
At price P1 quantity demanded exceeds quantity supplied— a shortage existsSlide 23:Shifts in Demand and Supply: Determinate Results
Decrease Supply with Demand Constant Figure 4-1
Slide 24:Shifts in Demand and Supply: Determinate Results
Decrease Supply with Demand Constant E1 D S1 Equilibrium price decreases and quantity increases to P3 and Q3 Q3 Figure 4-1
Slide 25:Changes in Demand and Supply
Summary Increases in demand increase equilibrium price and quantity. Decreases in demand decrease equilibrium price and quantity.
Slide 26:Changes in Demand and Supply
Summary Increases in supply decrease equilibrium price and increase equilibrium quantity. Decreases in supply increase equilibrium price and decrease equilibrium quantity.
Slide 27:Changes in Demand and Supply
When both demand and supply shift Simultaneous changes in demand and supply put conflicting pressure on price or quantity The resulting effect depends upon how much each curve shifts Either equilibrium price or quantity will be indeterminate
Slide 28:Changes in Demand and Supply
When both demand and supply increase Change in price is indeterminate Quantity will increase When both demand and supply decrease Change in price is indeterminate Quantity will decrease
Slide 29:Changes in Demand and Supply
When supply decreases and demand increases Price will increase Change in quantity is indeterminate When supply increases and demand decreases Price will decrease Change in quantity is indeterminate
Slide 30:Price Flexibility and Adjustment Speed
Flexibility and indirect adjustment Quality Service Rebates
Slide 31:Price Flexibility and Adjustment Speed
Adjustment speed Market characteristics influence adjustment speed Markets may overshoot in the adjustment process
Slide 32:Example: Why Plywood Prices Have Soared
The supply has decreased, due to some lumber sellers going out of business and to delays in timber harvesting as a result of wet weather. Demand has increased both from the private sector and from government purchases for the military.
Slide 33:Example: Why Plywood Prices Have Soared
Figure 4-2
Slide 34:The Rationing Function of Prices
When surpluses and shortages exist, the price adjusts to clear the market. This adjustment is the rationing function of price.
Slide 35:The Rationing Function of Prices
When prices cannot adjust non-price rationing occurs Rationing by queues Rationing by lotteries Rationing by coupons
Slide 36:The Rationing Function of Prices
The essential role of rationing With scarcity rationing must occur We must choose the rationing mechanism: price or non-price Price rationing is the most efficient Further trades could not occur without making somebody worse-off
Slide 37:The Rationing Function of Prices
Question If price rationing is the most efficient is it the best way to ration?
Slide 38:The Policy of Government-Imposed Price Controls
Price Controls Government-mandated minimum or maximum prices Price Ceiling A legal maximum price Price Floor A legal minimum price
Slide 39:The Policy of Government-Imposed Price Controls
Price ceiling and black markets Price ceilings may prevent the equilibrium price from being achieved if it is above the ceiling price.
Slide 40:The Policy of Government-Imposed Price Controls
Non-Price Rationing Devices All methods used to ration scarce goods that are price-controlled Black Market A market in which price-controlled goods are sold at an illegally high price
Slide 41:Black Markets
Figure 4-3 Price Quantity per Unit Time Period
Slide 42:Example: Vaccine Shortages
Government mandates have resulted in a substantial portion of childhood vaccines being sold at prices below the market price. As a consequence, pharmaceutical companies are cutting back on the production of vaccines.
Slide 43:The functions of rental prices Promote the efficient maintenance and construction of housing Allocate existing housing Ration the use of housing
The Policy of Controlling Rents
Slide 44:Rent controls and construction Controls discourage construction With a 16% vacancy rate and no controls, Dallas recently built 11,000 new rental units. With a 1.6% vacancy rate and controls, San Francisco recently built 2,000 new rental units.
The Policy of Controlling Rents
Slide 45:Effects on the existing supply of housing Property owners cannot recover costs
The Policy of Controlling Rents
Slide 46:Rationing the current use of housing Reduces mobility New York’s “housing gridlock”
The Policy of Controlling Rents
Slide 47:Attempts at evading rent controls Forcing tenants to leave Tenants subletting apartments Housing courts
The Policy of Controlling Rents
Slide 48:Who gains and who loses from rent controls? Losers Property owners Low-income individuals Benefits Upper-income professionals
The Policy of Controlling Rents
Slide 49:Price Floors in Agriculture
Support Price the governmentally established minimum price farmers are to receive for a particular agricultural product.
Slide 50:Agricultural Price Supports
Figure 4-4 Dollars per Unit Quantity of Peanuts per Time Period
Slide 51:Price Floors in Agriculture
Questions How could the government keep the price from falling? Who benefits from agricultural price supports?
Slide 52:Policy Example: Agricultural Subsidies in the European Union
The European Union pays farmers for using environmentally sound agricultural practices. In some cases, the preferred practice may be not to farm at all. In effect, this is a program of agricultural price supports.
Slide 53:Price Floors in the Labor Market
Minimum Wage Lowest hourly wage rate that firms may legally pay their workers
Slide 54:The Effect of Minimum Wages
Figure 4-5 Wage Rate per Unit Quantity of Labor per Time Period
Slide 55:Quantity Restrictions
Prohibitions on the ownership or trading of a good Human organs Drugs Hospital beds
Slide 56:Quantity Restrictions
Government Prohibitions or Licensing Requirements Some commodities cannot be purchased at all legally; others require a license. Import Quota Supply restriction that prohibits the importation of more than a specified quantity of a particular good in a one-year period
Slide 57:Policy Example: U.S. Textile Quotas Abound
There are legal restrictions on the amount of textiles and the number of apparel products that can be imported into the U.S. each year. These numbers are specific to the country of origin.
Slide 58:Demand for dock space has increased due to the increased volume of cruise travel. Fees charged for the use of such space are government regulated. Regulators have been slow to respond. A shortage has arisen because the price remains below the market-clearing level.
Issues and Applications: Traffic Jams in U.S. Seaports
Slide 59:Issues and Applications: Traffic Jams in U.S. Seaports
Figure 4-7
Slide 60:Summary Discussion of Learning Objectives
Essential features of the price system A price system (market system) allows prices to respond to changes in supply and demand for different commodities. The terms of exchange—prices—are communicated in markets that tend to minimize transactions costs.
Slide 61:Summary Discussion of Learning Objectives
How changes in demand and supply affect market price and equilibrium quantity Increases in demand increase equilibrium price and quantity. Decreases in demand decrease equilibrium price and quantity. Increases in supply decrease market price and increase equilibrium quantity. Decreases in supply increase market price and decrease equilibrium quantity.
Slide 62:Summary Discussion of Learning Objectives
How changes in demand and supply affect market price and equilibrium quantity When both demand and supply shift at the same time, the result is indeterminate.
Slide 63:Summary Discussion of Learning Objectives
The rationing function of prices In a market system, prices ration scarce goods and services. The effect of price ceilings A price ceiling set below the market (equilibrium) price results in a shortage. The resulting shortage can lead to non-price rationing devices and black markets.
Slide 64:Summary Discussion of Learning Objectives
The effects of price floors If the price floor is set above the market price, a surplus results. A price floor can take the form of a government-imposed price support or minimum wage. Quantity restrictions can take the form of import quotas.
Slide 65:Summary Discussion of Learning Objectives
Government-imposed restrictions on market quantities Bans on sale or ownership Licensing restrictions Import quotas
Slide 66:End of Chapter 4
Extensions of Demand and Supply Analysis
