Download AGGREGATE DEMAND, AGGREGATE SUPPLY, AND MODERN …

USING
SUPPLY AND
DEMAND
McGraw-Hill/Irwin
Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved.
5-2
The Price of a Foreign Currency
• People demand a country’s currency to
buy its goods, services, and assets.
• The market for currencies is called the
foreign exchange market
• The exchange rate is the price of one
currency in terms of another currency.
• Rates are determined by supply and
demand in the foreign exchange market.
McGraw-Hill/Irwin
Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved.
5-3
Examples of Exchange Rates
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Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved.
5-4
The Euro
• The 13 members of the European Union use a
common currency, the euro.
• The value of a euro was $0.85 in 2001.
• By the early 2000s the euro had risen to $1.30
because U.S. interest rates decreased. So:
 Europeans bought fewer U.S. financial assets.
 Americans bought more European financial assets.
McGraw-Hill/Irwin
Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved.
5-5
Price of euros in dollars
Euro Supply and Demand
•
S
•
$0.85
Supply of euros represents
people who want to sell euros
and buy dollars
Demand for euros represents
people who want to buy euros
and sell dollars.
D
Quantity of Euros
McGraw-Hill/Irwin
Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved.
5-6
Why the euro increased in Price
Europeans buy fewer U.S.
financial assets and ↓supply
of euros.
Price of euros
S1
S0
$1.30
Americans buy more
European financial assets
and ↑demand for euros.
$0.85
D0
The price of euros
Increases to $1.30.
D1
Quantity of Euros
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Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved.
5-7
Price Ceilings: Rent Controls
• New York City has rent
controls
• Rent control cause housing
shortages
 Increase demand
 Reduce supply
Rent per Month
S
$2,000
Shortage
$500
D
• Rent controls also cause
strange behaviors
QS
QD
Quantity of apartments
McGraw-Hill/Irwin
Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved.
5-8
Price Floors: Minimum Wage
S
• The U.S. government has
established a minimum wage
that firms can legally pay.
Wage per hour
Wmin
• A minimum wage, Wmin, above
We
the equilibrium wage, We,
 Helps those who are employed, Q2,
D
 Hurts those who would have been
employed at We, but can no longer
find employment, Qe- Q2.
Q2
Qe
Q1
Quantity of Workers
McGraw-Hill/Irwin
Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved.
5-9
Excise Taxes
• An excise tax is a tax that is levied
on a specific good.
• Excise taxes raise prices and reduce
the quantity exchanged.
McGraw-Hill/Irwin
Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved.
5-10
Excise Tax on Luxury Boats
Price of luxury boats
D
$70,000
65,000
60,000
0
McGraw-Hill/Irwin
S1
A $10,000 excise tax
shifts the supply curve
up by $10,000.
S0
The result of the tax is
to reduce equilibrium
quantity of boats by 90
units.
Increase equilibrium
price by less than
$10,000.
420 510 600
Quantity of luxury boats
Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved.
5-11
Quantity Restrictions
In 1937 New York City limited the number
of taxi licenses to 12,000 to increase the
wages of taxi drivers.
McGraw-Hill/Irwin
Because taxi medallions were limited in
supply, as demand for taxi services rose,
so did the demand for medallions, increasing
their price to $2500 by 1947. Today,
medallions sell for $400,000!
Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved.
5-12
What Would be the Impact
of Legalizing Marijuana?
McGraw-Hill/Irwin
Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved.