Download Using Supply and Demand

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.

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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.

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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.

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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.

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The Price of a Foreign Currency

People demand currencies of other
countries to buy those countries’ goods
and assets.
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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.

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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.

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The Price of a Foreign Currency
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Three Real World Examples

Supply and demand can shed light on a
variety of real-world events:
Florida freeze.
 Burkhas in Afghanistan.
 Coffee beans.

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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.

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Florida Freeze
S1
S0
P1
P0
Demand
(b)
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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.

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Burkhas in Afghanistan
Supply
P1
P0
D0
D1
(f)
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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.

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Coffee Beans
S0
S1
P0
P1
D1
D0
(b)
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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.

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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.

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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.

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Rental Price (per month)
Rent Controls
Supply
Shortage
$17.00
2.50
Demand
QS
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QD
Quantity of apartments
Price Floors

A price floor is a government-imposed
limit on how low a price can be charged.
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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.

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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.

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Minimum Wage

Economists disagree about the effects of
the minimum wage.
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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.

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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.

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Excise Taxes

The price of expensive boats rose by less
than the tax, while the quantity supplied
and quantity demanded fell.
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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.

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Quantity Restrictions
Governments often regulate markets with
licenses which limit entry into a market.
 Quantity restrictions tends to increase
price.

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Quantity Restrictions in the
Market for Taxi Licenses
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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.

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Third-Party-Payer Markets
Micro232 2004 JAFGAC
Using Supply and Demand
End of Chapter 5
Micro232 2004 - JAFGAC