Download Using Supply and Demand

Using Supply and
Demand
Chapter 5
© 2003 McGraw-Hill Ryerson Limited
5-2
The Power of Supply and
Demand

Changes in supply and demand will
change equilibrium price and quantity.
© 2003 McGraw-Hill Ryerson Limited
5-3
The Power of Supply and
Demand

A shift in demand that moves the
demand curve to the right causes
equilibrium price and quantity to rise.
© 2003 McGraw-Hill Ryerson Limited
5-4
The Power of Supply and
Demand

A shift in supply that moves the supply
curve to the left causes equilibrium price
to rise and equilibrium quantity to fall.
© 2003 McGraw-Hill Ryerson Limited
5-5
A Shift in Demand Fig. 5-1a, p 105
S0
B
$2.50
Excess demand
A
2.25
D0
(a)
0
D1
8
9
10
Quantity of cassettes (per week)
© 2003 McGraw-Hill Ryerson Limited
5-6
A Shift in Supply Fig. 5-1b, p 105
S1
S0
C
$2.50
2.25
B
Excess demand
A
D0
(b)
0
8
9
10
Quantity of cassettes (per week)
© 2003 McGraw-Hill Ryerson Limited
5-7
Six Real World Examples of
Supply and Demand changes

Supply and demand can shed light on a
variety of real-world events:
 Brazil
freeze.
 Financial assets and the baby boomers.
 Twenty percent excise tax.
 Rice in Indonesia.
 Farm labourers.
 Christmas toys.
© 2003 McGraw-Hill Ryerson Limited
5-8
Sugar Shock in Brazil
The crop-damaging freeze shifted the
supply curve to the left.
 At the original price, quantity demanded
exceeded quantity supplied.
 Price rose until the quantity demanded
equaled the quantity supplied.

© 2003 McGraw-Hill Ryerson Limited
5-9
Brazil Freeze Fig. 5-2c, p 107
S1
S0
P1
P0
Demand
(c)
QS
Qe Q D
© 2003 McGraw-Hill Ryerson Limited
5 - 10
Financial Assets and the
Baby Boomers
Demographic changes among baby
boomers moved the demand curve for
financial assets to the right.
 At the original price, quantity demanded
exceeded quantity supplied.
 Price rose until the quantity demanded
equaled the quantity supplied.

© 2003 McGraw-Hill Ryerson Limited
5 - 11
Financial Assets and the
Baby Boomers Fig. 5-2f, p 107
S
P1
P0
D1
D0
(f)
Q0
Q1
QD
© 2003 McGraw-Hill Ryerson Limited
5 - 12
Housing Market and the
Baby Boomers

The same phenomenon occurred in the
surging demand for housing among this
group during the 1980s.
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5 - 13
Excise Taxes

Korean Government imposed a 20
percent luxury tax on imported golf
clubs.
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5 - 14
Excise Taxes

A 20 percent tax levied on suppliers
shifts the supply curve to the left.

After the tax is imposed, the quantity of
imported clubs demanded drops.
© 2003 McGraw-Hill Ryerson Limited
5 - 15
Excise Taxes Fig. 5-2e, p 107
S1
S0
P1
P0
D0
(e)
Q1
Q0
© 2003 McGraw-Hill Ryerson Limited
5 - 16
Rice in Indonesia
Drought, pestilence, and the financial
crisis shifted the supply curve to the left.
 The steep demand curve means that
the quantity demanded does not change
much with changes in price.

© 2003 McGraw-Hill Ryerson Limited
5 - 17
Rice in Indonesia

Responding to high prices, the
government imported rice and
distributed it to the market, causing the
supply curve to shift to the right.
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5 - 18
Rice in Indonesia Fig. 5-2a, p 107
S1
S2
S0
P1
P2
P0
Demand
(a)
Q1 Q2 Q0
© 2003 McGraw-Hill Ryerson Limited
5 - 19
Farm Labourers
The compressed harvesting season
increased the demand and increased
authority border patrols decreased
supply of labour.
 Demand shifted to the right and supply
shifted to the left.

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5 - 20
Farm Labourers

At the original price, the quantity of
workers demanded exceeded the
quantity supplied.
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5 - 21
Farm Labourers

Price rises until the quantity demanded
equals the quantity supplied.
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5 - 22
Farm Labourers

The effect on the number of labourers
hired depended on the relative size of
the supply shift.
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5 - 23
Farm Labourers Fig. 5-2b, p 107
S1
S0
P1
P0
D1
D0
(b)
Qe
© 2003 McGraw-Hill Ryerson Limited
5 - 24
Christmas Toys
A Christmas craze for Furbies shifts
demand to the right.
 A shortage ensued along with a black
market.

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5 - 25
Christmas Toys

Finally the supplier produced more,
shifting the supply curve to the right,
causing the price to drop.
© 2003 McGraw-Hill Ryerson Limited
5 - 26
Christmas Toys Fig. 5-2d, p 107
S0
S1
P1
P0
D1
D0
(d)
QS0
QD0
QD1
© 2003 McGraw-Hill Ryerson Limited
5 - 27
Effects of Shifts of Demand and
Supply on Price and Quantity,
Table 5-1, p 110
No change in
supply
Supply shifts out
Supply shifts
in
No change
in demand No change.
Price falls; Quantity
rises.
Demand
shifts out
Price rises;
Quantity rises.
Quantity rises; Price
could be higher or
lower.
Price rises;
Quantity
falls.
Price rises;
Quantity
could rise or
fall.
Demand
shifts in
Price falls.
Quantity falls.
Price falls; Quantity
could rise or fall.
Quantity
falls; Price
could rise or
fall.
© 2003 McGraw-Hill Ryerson Limited
5 - 28
Government Interventions
Buyers look to government for ways to
hold prices down.
 Sellers look to government for ways to
hold prices up.

© 2003 McGraw-Hill Ryerson Limited
5 - 29
Price Ceilings

A price ceiling is a governmentimposed limit on how high a price can
be charged.
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5 - 30
Rent Controls
Rent control is a price ceiling on rents
set by government.
 An example is rent control in Paris
following World War I and World War II.

© 2003 McGraw-Hill Ryerson Limited
5 - 31
Rent Controls

The following were the consequences of
rent control in Paris:
A
huge shortage of living quarters.
 New housing construction stopped.
 Existing housing was allowed to
deteriorate.
© 2003 McGraw-Hill Ryerson Limited
5 - 32
Rent Controls

The following were the consequences of
rent control in Paris:
 For
many, the only way to get living
quarters was to offer a huge bribe to the
landlord.
 Many families had to double up with other
family members.
© 2003 McGraw-Hill Ryerson Limited
5 - 33
Rental Price (per month)
Rent Controls Fig. 5-3, p 111
Supply
Shortage
$17.00
2.50
Demand
QS
QD
Quantity of apartments
© 2003 McGraw-Hill Ryerson Limited
5 - 34
Rent Controls
With price ceilings, existing goods are
no longer rationed entirely by price
 Non-price rationing occurs

© 2003 McGraw-Hill Ryerson Limited
5 - 35
Rent Controls Over Time
Short run supply for rental units is
relatively fixed (inelastic).
 In the long run supply is more elastic,
indicating that landowners will increase
the quantity of apartments supplied if
rents rise, over time.

© 2003 McGraw-Hill Ryerson Limited
5 - 36
Rent Controls Over Time
Rent controls will set the price below
equilibrium and create shortages.
 This will cause the short run supply to
decrease.


If rent controls are removed, the short
run supply will increase again.
© 2003 McGraw-Hill Ryerson Limited
5 - 37
Rent Controls Over Time, Fig. 5Rental Price ($ / month)
4, p 113
S’S SS
1250
1000
SL
B
A
750
500
C
250
D
Quantity of rental units
© 2003 McGraw-Hill Ryerson Limited
5 - 38
When Rent Controls Work
If a temporary increase in the demand
for housing is expected, rent controls
may be effective.
 This would create a temporary shortage
of housing, but it would prevent high
prices and a windfall to landlords.

© 2003 McGraw-Hill Ryerson Limited
5 - 39
When Rent Controls Work, Fig.
5-5, p 114
Rental Price
SS
R1
SL
R0
B
A
D’
D
Quantity of rental units
© 2003 McGraw-Hill Ryerson Limited
5 - 40
Price Floors

A price floor is a government-imposed
limit on how low a price can be charged.
© 2003 McGraw-Hill Ryerson Limited
5 - 41
Minimum Wage
The minimum wage is an example of a
price floor.
 A minimum wage is set by government
specifying the lowest wage a firm can
legally pay an employee.

© 2003 McGraw-Hill Ryerson Limited
5 - 42
Minimum Wage

The minimum wage creates winners
and losers:
 Those
who can find work earn a higher
wage.
 Others become unemployed.
 Production costs increase.
 Consumers pay higher prices.
© 2003 McGraw-Hill Ryerson Limited
5 - 43
Minimum Wage

Economists disagree about the effects
of the minimum wage.
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5 - 44
Wage (per hour)
A Minimum Wage, Fig. 5-6, p 115
S
Wmin
We
D
Q2
Qe
Q1 Quantity of workers
© 2003 McGraw-Hill Ryerson Limited
5 - 45
Taxes, Tariffs, and Quotas
An excise tax is a tax that is levied on a
specific good.
 A tariff is an excise tax on an imported
good.
 Taxes and tariffs raise prices and
reduce quantity exchanged.

© 2003 McGraw-Hill Ryerson Limited
5 - 46
The Effect of an Excise Tax
on Price and Quantity

A luxury tax on jewellery manufactured
in Canada is imposed.
© 2003 McGraw-Hill Ryerson Limited
5 - 47
The Effect of an Excise Tax
on Price and Quantity

Because the luxury tax was imposed on
the jewellery manufacturers, the supply
curve shifted up by the amount of the
tax.
© 2003 McGraw-Hill Ryerson Limited
5 - 48
The Effect of an Excise Tax
on Price and Quantity
At a price equal to the original price plus
the tax there was excess supply.
 The price for rings rose by less than the
tax, while quantity supplied and
demanded fell.

© 2003 McGraw-Hill Ryerson Limited
5 - 49
The Effect of an Excise Tax
Fig. 5-7, p 116
Price of rings
D
S1
$620
$610
$600
S0
The supply curve
shifts up by the
$20 tax
0
420 510 600
Quantity of rings
© 2003 McGraw-Hill Ryerson Limited
5 - 50
Quantity Restrictions: Quotas
A quota is a quantitative restriction on
the amount that can be bought or sold.
 In international trade, it is a restriction
on the amount one nation can export to
another.

© 2003 McGraw-Hill Ryerson Limited
5 - 51
Quantity Restrictions: Quotas
The Canadian government restricted
imports of Japanese cars.
 The effect was to raise the prices of
Japanese automobiles in Canada.

© 2003 McGraw-Hill Ryerson Limited
5 - 52
Quantity Restrictions: Quotas
Fig. 5-8a, p 117
$27,000
Supply
20,000
16,000
Quota
Demand
5
8
Japanese exports of cars (in millions)
© 2003 McGraw-Hill Ryerson Limited
5 - 53
The Relationship Between a
Quota and a Tariff

Tariffs and quotas can both be used to
reduce quantity and raise prices.
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5 - 54
The Relationship Between a
Quota and a Tariff

There is a difference between imposing
a tariff and imposing a quota.
 In
the case of a quota, the profits from a
higher price goes to the manufacturer.
 In the case of the tariff, the tax goes to the
government.
© 2003 McGraw-Hill Ryerson Limited
5 - 55
The Relationship Between a
Quota and a Tariff

As a consequence, once quotas are
instituted, Japanese firms competed
intensely to get them.
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5 - 56
The Relationship Between a
Quota and a Tariff Fig. 5-8b, p 117
Price of Japanese cars
S1
$27,000
S0
20,000
Tariff
revenue
$11,000
16,000
Demand
5
8
Japanese exports of cars
© 2003 McGraw-Hill Ryerson Limited
5 - 57
The Limitations Of Supply
And Demand Analysis
It is not enough to be able to explain
what happens when supply or demand
curves shift.
 It is necessary to understand the
assumptions underlying the analysis.

© 2003 McGraw-Hill Ryerson Limited
5 - 58
The Limitations Of Supply
And Demand Analysis
Other things don't remain constant.
 Sometimes supply and demand are
interconnected.
 Supply/demand analysis is the first step
to analysis, not the complete analysis.

© 2003 McGraw-Hill Ryerson Limited
5 - 59
The Limitations Of Supply
And Demand Analysis

Deciding whether the effects are
significant to consider requires a
knowledge of the structure of the
economy because all actions have
ripple or feedback effects.
© 2003 McGraw-Hill Ryerson Limited
5 - 60
The Limitations Of Supply
And Demand Analysis

The other-things-constant assumption
will likely not hold true when one
analyses the goods which represent a
large percentage of the entire economy.
© 2003 McGraw-Hill Ryerson Limited
Using Supply and
Demand
End of Chapter 5
© 2003 McGraw-Hill Ryerson Limited