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Transcript
Using Supply and Demand
Chapter 5
Micro232 2004 - JAFGAC
Laugher Curve
Q. How many conservative economists does
it take to screw in a light bulb?
A. None.
If the government would just leave it
alone, it would screw itself in.
Micro232 2004 JAFGAC
Real-World Supply and
Demand Applications

Supply and demand can be used to
evaluate real-world events.
Micro232 2004 JAFGAC
The Market for Advertising
Supply in this market is relatively constant.
 Demand fluctuates significantly.

Micro232 2004 JAFGAC
The Market for Advertising
In 2001, demand for advertising fell as the
U.S. economy slowed down.
 The supply/demand model would predict
that price and quantity to fall.

Micro232 2004 JAFGAC
The Market for Advertising
Quantity of advertisements
Micro232 2004 JAFGAC
The Market for Advertising
Instead of lowering price, the media offered
higher quality advertising at the same
price.
 This is equivalent to a decline in price.

Micro232 2004 JAFGAC
The Price of a Foreign Currency
The market for foreign currencies is called
the foreign exchange (forex) market.
 The exchange rate – the price of one
currency in terms of another currency.

Micro232 2004 JAFGAC
The Price of a Foreign Currency

People demand currencies of other
countries to buy those countries’ goods
and assets.
Micro232 2004 JAFGAC
The Price of a Foreign Currency
The determination of exchange rate is the
same as the determination of price.
 A currency is just another good.

Micro232 2004 JAFGAC
The Price of a Foreign Currency
The euro is the currency used by 12 of the
members of the European Union.
 The euro dropped from $1.17 to about
$0.90 in the two years from when it was
introduced.

Micro232 2004 JAFGAC
The Price of a Foreign Currency
Micro232 2004 JAFGAC
Three Real World Examples

Supply and demand can shed light on a
variety of real-world events:
Florida freeze.
 Burkhas in Afghanistan.
 Coffee beans.

Micro232 2004 JAFGAC
Florida Freeze
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.

Micro232 2004 JAFGAC
Florida Freeze
S1
S0
P1
P0
Demand
(b)
Micro232 2004 JAFGAC
Q1 Q0
Burkhas in Afghanistan
Once the Taliban was ousted in
Afghanistan, demand for burkhas fell as
many women stopped wearing them.
 At the original price, quantity supplied
exceeded quantity demanded.
 Price fell until the quantity demanded
equaled the quantity supplied.

Micro232 2004 JAFGAC
Burkhas in Afghanistan
Supply
P1
P0
D0
D1
(f)
Micro232 2004 JAFGAC
Q1
Q0
Coffee Beans
The supply of coffee increased as new
growers entered the market, growing
techniques improved, and weather was
favorable.
 Coffee-growers attempted to increase
demand by instituting a successful
marketing campaign.

Micro232 2004 JAFGAC
Coffee Beans
The supply increase causes price to fall.
 If the marketing campaign is successful,
demand will increase, raising price back to
its former level.

Micro232 2004 JAFGAC
Coffee Beans
S0
S1
P0
P1
D1
D0
(b)
Micro232 2004 JAFGAC
Q0
Q1
A Review
No change in
supply
Supply shifts
out
No change
in demand
No change.
Price falls;
Price rises;
Quantity rises. Quantity falls.
Demand
shifts out
Quantity rises;
Price rises;
Quantity rises. Price could be
high or lower.
Price falls;
Price falls;
Quantity could
Quantity falls
rise or fall.
Demand
shifts in
Micro232 2004 JAFGAC
Supply shifts
in
Price rises;
Quantity could
rise or fall.
Quantity falls;
Price could
rise or fall.
Government Intervention in
the Market
Buyers look to government for ways to hold
prices down.
 Sellers look to government for ways to hold
prices up.

Micro232 2004 JAFGAC
Price Ceilings

A price ceiling is a government-imposed
limit on how high a price can be charged.
Micro232 2004 JAFGAC
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.

Micro232 2004 JAFGAC
Rent Controls

Rent control in Paris resulted in:
A huge shortage of living quarters.
 New housing construction stopped.
 Existing housing was allowed to deteriorate.
 Many families had to double up with other
family members.

Micro232 2004 JAFGAC
Rental Price (per month)
Rent Controls
Supply
Shortage
$17.00
2.50
Demand
QS
Micro232 2004 JAFGAC
QD
Quantity of apartments
Price Floors

A price floor is a government-imposed
limit on how low a price can be charged.
Micro232 2004 JAFGAC
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.

Micro232 2004 JAFGAC
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.

Micro232 2004 JAFGAC
Minimum Wage

Economists disagree about the effects of
the minimum wage.
Micro232 2004 JAFGAC
Excise Taxes
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.

Micro232 2004 JAFGAC
Excise Taxes
A luxury tax was imposed on expensive
boats in 1990.
 Because the luxury tax was imposed on
the boat builders, the supply curve moved
up by the amount of the tax.

Micro232 2004 JAFGAC
Excise Taxes

The price of expensive boats rose by less
than the tax, while the quantity supplied
and quantity demanded fell.
Micro232 2004 JAFGAC
The Effect of an Excise Tax on
Price and Quantity
Price of luxury boats
D
$70,000
65,000
60,000
S0
The supply curve
shifts up by the
$10,000 tax
0
McGraw-Hill/Irwin
S1
420 510 600
Quantity of luxury boats
© 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
Excise Taxes
A tariff has the same effect on equilibrium
price and quantity as an excise tax.
 The difference is that foreign producers
sending goods into the U.S. pay the tax.

Micro232 2004 JAFGAC
Quantity Restrictions
Governments often regulate markets with
licenses which limit entry into a market.
 Quantity restrictions tends to increase
price.

Micro232 2004 JAFGAC
Quantity Restrictions in the
Market for Taxi Licenses
Micro232 2004 JAFGAC
Third-Party-Payer Markets
In third-party-payer markets, the person
who receives the good differs from the
person paying for the good.
 Equilibrium quantity and total spending is
much higher in third-party-payer markets.

Micro232 2004 JAFGAC
Third-Party-Payer Markets
Micro232 2004 JAFGAC
Using Supply and Demand
End of Chapter 5
Micro232 2004 - JAFGAC