Download Applications of Supply and Demand

Applications of Supply and
Demand
Explaining and Predicting Market and
Non-market Behavior
Del Mar College, John Daly
©2002 South-Western Publishing, A Division of Thomson Learning
Predicting the Number of Friends
You Will Have
• The “Price” of Friendship
• Measuring the “Price” of Friendship
• Are you likely to spend more time making
new friends in your first week in college or
more time making new friends in “finals”
week.
The Price of an A
• A difference in studying
time demanded leads to a
shift in the demand curve
for a teacher’s class.
• Low demand and low
price can generate the
same quantity demanded
as high demand and high
price
Why are Speeding Tickets so
expensive? Or two ways to get
the same price
• The Price of speeding
is equal to the
Speeding ticket price
multiplied by the
probability of getting
caught.
• There is more than one
way to achieve a
particular outcome
Are New Car Companies Hurt by
the Used Car Market?
• Implies fewer buyers for new cars
• Implies a stronger preference for new cars
• Some companies offer rebates for the goods
they sell. The companies argue that this
effectively reduces the price (after rebate).
Are there similarities between rebates and
being able to sell your old car on the used
car market?
Will a Self-Interested, ProfitSeeking Oil Producer Conserve
Oil for the Future?
• It is interesting that Tex,
who only wants to
maximize his profits, ends
up conserving a resource
(oil) that is expected to
become relatively more
scarce in the future.
• Suppose Tex expects to
die in a year. Is he more
or less likely to conserve?
Does it matter to your
answer whether Tex has
children or not?
Who Pays The Tax?
• Buyers vs. Sellers
• When the tax was placed on a good, the sellers
paid one half the tax, and the buyers paid the other
half of the tax.
• However, the tax was not placed on the buyers, yet
they paid half the tax.
• How does the tax discussed in this application
affect the amount of exchange in the market?
The Effect of a Tax on
Consumers’ and Producers’
Surplus
• Because of the tax, buyers
lose consumers’ surplus
and sellers lose producers’
surplus.
• The Net loss due to the tax
is sometimes referred to as
the deadweight loss of the
tax.
• It is the loss in consumers’
and producers’ surplus
over and above the gains
of the tax.
Supply and Demand on the
Freeway
• The supply of freeway space
remains the same, but the
demand for space fluctuates.
• Some people have proposed
tolls to control the demand
for freeway space (since it is
free).
• If the driving population
increases in an area, and the
supply of freeway space
remains the same, what will
happen to freeway
congestion?
What Does Price Have to do with
Getting to Class on Time?
• Price and Parking Places conspire to delay
students.
• Students pay in money or in time to get to
classes.
• Some suggest auctioning off parking spaces
on a yearly basis.
• Just because someone doesn’t pay the price
doesn’t mean there isn’t a price to pay.
Aisle Seats on Commercial
Airlines
• The supply curve for aisle
seats and middle seats are
equal straight lines, while
the demand is anything
but equal.
• But airlines charge the
same price for middle and
aisle seats.
• The result is the late
comers get the middle
seats.
10 O’Clock Classes in College
• Supply for classes is
constant, they are offered
at different times.
• Demand varies based off
of preferences.
• Even though the demand
for various classes at
various times may be
different, there is some set
of prices that will make
the quantity demanded of
each class the same.
Tipping in a Vegas Show
• The show has two
markets: a market for
good seats, and a market
for bad seats.
• The hotel-casino sells all
of the seats for the same
price
• The people who wait to
get good seats can only do
one thing while they wait:
gamble.
Why Do Colleges Use GPAs,
ACTs, and SATs for Purposes of
Admission?
• The tuition that students pay to attend
college is usually less than the equilibrium
tuition.
• The college is likely to ration its available
space by a combination of money price and
some other non-price rationing device, such
as GPA, SAT, TASP, and ACT.
Where will People Buy
Relatively More Apples?
• Since Washington State
produces more apples than
New York City, Will New
York City eat more high
quality apples than
Washington State?
• How do you make the
numbers “relative”? What
do you compare?
The Minimum Wage Law
• At a higher minimum
wage, more unskilled
workers want to work, but
only a few are hired.
• Additionally, fewer
workers are paid at
minimum wage than at the
equilibrium wage.
• In a competitive market
setting, the forces of
supply and demand
determine equilibrium
wages.
Minimum Wage Law (cont.)
• If labor markets are competitive and the demand
for labor is downward-sloping, a minimum wage
(above equilibrium wage) will reduce
employment.
• The important question is: How much will it
reduce employment? A $1 raise at the expense of
1 labor hour is different than a $1 raise at the
expense of 1,000,000 labor hours.