roger leroy miller economics today chapter 4 extensions of demand and supply analysis
TRANSCRIPT
Roger LeRoy Miller
Economics Today
Chapter 4Extensions of Demand
and Supply Analysis
Miller, Economics Today, © 2001 Addison Wesley Longman, Inc.
Slide 4-2
Introduction
Young athletes and computer science students are leaving college before graduation to take very
high-paying jobs. Are they grabbing near-term gains at the expense of lower future earnings?
Slide 4-3
Learning Objectives
Discuss the essential features of the price system
Evaluate the effects on the market price and equilibrium quantity of changes in demand and supply
Understand the rationing function of prices
Slide 4-4
Learning Objectives
Explain the effects of price ceilings
Explain the effects of price floors
Describe various types of government-imposed quantity restrictions on markets
Slide 4-5
The Price System
Exchange and Markets
Changes in Demand and Supply
Price Flexibility and Adjustment Speed
The Rationing Function of Prices
Chapter Outline
Slide 4-6
The Policy of Government-Imposed Price Controls
The Policy of Controlling Rents
Price Floors in Agriculture
Price Floors in the Labor Market
Quantity Restrictions
Chapter Outline
Slide 4-7
Did You Know That...
According to the U.S. Customs Service, the second most serious smuggling problem along the Mexican border involves the refrigerant freon?
When an older U.S. air conditioner needs fixing, it is often cheaper to pay a relatively high price for illegally smuggled freon than to modify the unit?
Slide 4-8
The Price System
Price System (market system)
– An economic system that allocates resources based on relative prices determined by supply and demand
– Prices signal what is relatively scarce and relatively abundant
Slide 4-9
Exchange and Markets
Markets
– Emphasize voluntary exchange
– Determine the terms of exchange
– Facilitate exchange
Slide 4-10
Exchange and Markets
Voluntary Exchange
– Acts of trading between individuals that make both parties to the trade subjectively better off
Terms of Exchange
– The prices we pay for the desired items
Slide 4-11
Exchange and Markets
Transaction Cost
– The costs associated with exchange
– Examples• Price shopping• Determining quality• Determining reliability• Service availability• Cost of contracting
Slide 4-12
Exchange and Markets
The role of middlemen
– Middlemen (intermediaries) or brokers reduce transaction cost by providing information to buyers and sellers.
– Examples• Real estate brokers• Stock brokers• Consignment shops• Car dealerships
Slide 4-13
Exchange and Markets
Observation
– Middle men flourish on the Internet
Question
– Since anyone connected to the Internet can find the same information as an Internet middleman, or a shopbot, why would someone pay for the services of an Internet middleman?
Slide 4-14
Changes in Demand and Supply
Changes in supply and demand create a disequilibrium
The market price and quantity adjusts to a new equilibrium
Slide 4-15
The Upside of the Yo-Yo Cycle
Observations
– Yo-yo’s are very popular again.
– Yo-yo manufacturers cannot keep up with the demand at current prices.
– There is a shortage of yo-yo’s.
Question
– What is likely to happen to yo-yo prices?
Slide 4-16
Responses to a Shift in Yo-Yo Demand
Figure 4-2
Slide 4-17
Shifts in Demand and Supply: Determinate Results
Increase Demand with Supply Constant
D1
S
P1
Q1
E1
Slide 4-18
At price P1 quantitydemanded exceedsquantity supplied—a shortage exists
Shifts in Demand and Supply: Determinate Results
Increase Demand with Supply Constant
D1
S
P1
Q1
E1
D2
Q3
Slide 4-19
Shifts in Demand and Supply: Determinate Results
Increase Demand with Supply Constant
P1
Q1
S
E1
D2
Equilibrium price and quantity increase to P2 and Q2
Q2
E2
P2
D1
Slide 4-20
At price P1 quantitysupplied exceedsquantity demanded—a surplus exists.
Q2
D2
S
Shifts in Demand and Supply: Determinate Results
Decrease Demand with Supply Constant
D1
E1
Q1
P1
Slide 4-21
Shifts in Demand and Supply: Determinate Results
Decrease Demand with Supply Constant
P1
Q1
SE1
D2
Equilibrium priceand quantity decrease to P3 and Q3
D1
Q3
E3
P3
Slide 4-22
S1
Shifts in Demand and Supply: Determinate Results
Increase Supply with Demand Constant
D
P1
Q1
E1
Slide 4-23
At price P1 quantitysupplied exceedsquantity demanded—a surplus exists
Shifts in Demand and Supply: Determinate Results
Increase Supply with Demand Constant
P1
Q1
E1
D
Q3
S2
S1
Slide 4-24
Shifts in Demand and Supply: Determinate Results
Increase Supply with Demand Constant
P1
Q1
E1
D
Q2
E2
P2
S2
S1Equilibrium price decreases and quantity
increases to P2 and Q2
Slide 4-25
At price P1 quantitydemanded exceedsquantity supplied—a shortage exists
Shifts in Demand and Supply: Determinate Results
Decrease Supply with Demand Constant
D
S1
E1
Q1
P1
Q2
S3
Slide 4-26
Shifts in Demand and Supply: Determinate Results
Decrease Supply with Demand Constant
P1
Q1
E1
D
S3
S1
Equilibrium price decreases and quantity
increases to P3 and Q3
Q3
E3
P3
Slide 4-27
Changes in Demand and Supply
Summary
– Increases in demand increase equilibrium price and quantity.
– Decreases in demand decrease equilibrium price and quantity.
Slide 4-28
Changes in Demand and Supply
Summary
– Increases in supply decrease equilibrium price and increase equilibrium quantity.
– Decreases in supply increase equilibrium price and decrease equilibrium quantity.
Slide 4-29
Changes in Demand and Supply
When both demand and supply shift
– Simultaneous changes in demand and supply put conflicting pressure on price or quantity
– The resulting effect depends upon how much each shift
– Either equilibrium price or quantity will be indeterminate
Slide 4-30
D1
Shifts in Demand and Supply: Shortage
Increase Demand > Increase Supply
S1
P1
Q1
E1
D2
S2
Slide 4-31
Shifts in Demand and Supply: Shortage
P1
Q1
E1
S2S1
D2D1
At price P1 quantitydemanded exceedsquantity supplied—a shortage exists
Increase Demand > Increase Supply
Qs Qd
Slide 4-32
Shifts in Demand and Supply: Shortage
Increase Demand > Increase Supply
P1
Q1
S2S1
D2
Q2
E2P2
Equilibrium price increases and quantity decreases to P2 and Q2
E1
D1
Slide 4-33
Shifts in Demand and Supply: Shortage
Decrease Demand < Decrease Supply
D1
QdQs
At price P1 quantitydemanded exceedsquantity supplied—a shortage exists
S1
D2
P1
Q1
E1
S2
Slide 4-34
Shifts in Demand and Supply: Shortage
Decrease Demand < Decrease Supply
P1
Q1
S2 S1
D2 D1
E1
Q2
E2
Equilibrium price increases and quantity decreases to P2 and Q2P2
Slide 4-35
Shifts in Demand and Supply: Shortage
Increase Demand > Decrease Supply
S1
D2D1
P1
Q1
E1
S2
Slide 4-36
Shifts in Demand and Supply: Shortage
Increase in Demand > Decrease in Supply
P1
Q1
S2S1
D2
E1
D1
QdQs
At price P1 quantitydemanded exceedsquantity supplied—a shortage exists
Slide 4-37
Shifts in Demand and Supply: Shortage
Increase Demand > Decrease in Supply
P1
Q1
S2S1
D2
E1
D1
Q2
E2
Equilibrium price increases and quantity decreases to P2 and Q2
P2
Slide 4-38
Shifts in Demand and Supply: Shortage
Increase Demand < Decrease in Supply
S1
D1 D2
P1
Q1
E1
S2
Slide 4-39
Shifts in Demand and Supply: Shortage
Increase Demand < Decrease in Supply
P1
Q1
S2 S1
D2
E1
D1
QdQs
At price P1 quantitydemanded exceedsquantity supplied—a shortage exists
Slide 4-40
Shifts in Demand and Supply: Shortage
Increase Demand < Decrease in Supply
P1
Q1
S2 S1
D2
E1
D1
Equilibrium price increases and quantity decreases to P2 and Q2
Q2
E2
P2
Slide 4-41
D1
Shifts in Demand and Supply: Surplus
Increase Supply > Increase in Demand
S2S1
D2
P1
Q1
E1
Slide 4-42
Shifts in Demand and Supply: Surplus
Increase Supply > Increase in Demand
P1
Q1
S1 S2
D2
E1
D1
Qd Qs
At price P1 quantitysupplied exceedsquantity demanded—a surplus exists
Slide 4-43
Shifts in Demand and Supply: Surplus
Increase Supply > Increase in Demand
P1
Q1
S1 S2
D2
E1
D1
Q2
E2 Equilibrium price decreases and quantity
increases to P2 and Q2
P2
Slide 4-44
Shifts in Demand and Supply: Surplus
Decrease Demand > Decrease in Supply
S1
D1
D2
S2
Q1
E1
P1
Slide 4-45
Shifts in Demand and Supply: Surplus
Decrease Demand > Decrease in Supply
Q1
S1S2
D2
E1
D1
P1
Qd Qs
At price P1 quantitysupplied exceedsquantity demanded—a surplus exists
Slide 4-46
Shifts in Demand and Supply: Surplus
Decrease Demand > Decrease in Supply
Q1
S1S2
D2
E1
D1
P1E2
Qd
P2
Equilibrium price decreases and quantity decreases to P2 and Q2
Slide 4-47
Shifts in Demand and Supply: Surplus
Increase Supply > Decrease in Demand
S1
D1
D2
S2
Q1
E1
P1
Slide 4-48
Shifts in Demand and Supply: Surplus
Increase Supply > Decrease in Demand
Q1
S1
S2
D2
E1
D1
P1
Qd Qs
At price P1 quantitysupplied exceedsquantity demanded—a surplus exists
Slide 4-49
Shifts in Demand and Supply: Surplus
Increase Supply > Decrease in Demand
Q1
S1
S2
D2
E1
D1
P1
Equilibrium price decreases and quantity decreases to P2 and Q2
Q2
E2
P2
Slide 4-50
Shifts in Demand and Supply: Surplus
Increase Supply < Decrease in Demand
S1
D1
Q1
E1
P1
D2
S2
Slide 4-51
Shifts in Demand and Supply: Surplus
Increase Supply < Decrease in Demand
Q1
S1 S2
D2
E1
D1
P1
Qd Qs
At price P1 quantitysupplied exceedsquantity demanded—a surplus exists
Slide 4-52
Shifts in Demand and Supply: Surplus
Increase Supply < Decrease in Demand
Q1
S1 S2
D2
E1
D1
P1 Equilibrium price decreases and quantity decreases to P2 and Q2
Q2
E2
P2
Slide 4-53
Changes in Demand and Supply
When both demand and supply increase
– Change in price is indeterminate
– Quantity will increase
When both demand and supply decrease
– Change in price is indeterminate
– Quantity will decrease
Slide 4-54
Changes in Demand and Supply
When supply decreases and demand increases– Price will increase
– Change in quantity is indeterminate
When supply increases and demand decreases– Price will decrease
– Change in quantity is indeterminate
Slide 4-55
Price Flexibilityand Adjustment Speed
Flexibility and indirect adjustment
– Quality
– Service
– Rebates
Slide 4-56
Price Flexibilityand Adjustment Speed
Adjustment speed
– Market characteristics influence adjustment speed
– Markets may overshoot in the adjustment process
Slide 4-57
The Rationing Function of Prices
When surpluses and shortages exist price adjusts to clear the market.
This adjustment is the rationing function of price.
Slide 4-58
The Rationing Function of Prices
When prices cannot adjust non-price rationing occurs
– Rationing by queues
– Rationing by lotteries
– Rationing by coupons
Slide 4-59
The Rationing Function of Prices
The essential role of rationing
– With scarcity rationing must occur
– We must choose the rationing mechanism: price or non-price
– Price rationing is the most efficient• Further trades could not occur without making
somebody worse-off
Slide 4-60
The Rationing Function of Prices
Question
– If price rationing is the most efficient is it the best way to ration?
Slide 4-61
The Policy of Government-Imposed Price Controls
Price Controls– Government-mandated minimum
or maximum prices
Price Ceiling– A legal maximum price
Price Floor– A legal minimum price
Slide 4-62
The Policy of Government-Imposed Price Controls
Price ceiling and black markets– Price ceilings may prevent the equilibrium
price from being achieved if it is above the ceiling price.
Slide 4-63
The Policy of Government-Imposed Price Controls
Non-Price Rationing Devices– All methods used to ration scarce goods
that are price-controlled
Black Market– A market in which price-controlled goods
are sold at an illegally high price
Slide 4-64
Black Markets
Figure 4-3
Slide 4-65
The functions of rental prices
– Promote the efficient maintenance and construction of housing
– Allocate existing housing
– Ration the use of housing
The Policy of Controlling Rents
Slide 4-66
Rent controls and construction
– Controls discourage construction• With a 16% vacancy rate and no controls,
Dallas recently built 11,000 new rental units.• With a 1.6% vacancy rate and controls,
San Francisco recently built 2,000 new rental units.
The Policy of Controlling Rents
Slide 4-67
Effects on the existing supply of housing
– Property owners cannot recover costs
The Policy of Controlling Rents
Slide 4-68
Rationing the current use of housing
– Reduces mobility• New York’s “housing gridlock”
The Policy of Controlling Rents
Slide 4-69
Attempts at evading rent controls
– Forcing tenants to leave
– Tenants subletting apartments
– Housing courts
The Policy of Controlling Rents
Slide 4-70
Who gains and who loses from rent controls?
– Losers• Property owners• Low-income individuals
– Benefits• Upper-income professionals
The Policy of Controlling Rents
Slide 4-71
Price Floors in Agriculture
Support Price
– the governmentally established minimum price farmers are to receive for a particular agricultural product.
Slide 4-72
Agricultural Price Supports
Figure 4-4
Slide 4-73
Price Floors in Agriculture
Questions
– How could the government keep the price from falling?
– Who benefits from agricultural price supports?
Slide 4-74
Price Floors in the Labor Market
Minimum Wage
– Lowest hourly wage rate that firms may legally pay their workers
Slide 4-75
The Effect of Minimum Wages
Figure 4-5
Slide 4-76
Quantity Restrictions
Prohibitions on the ownership or trading of a good
– Human organs
– Drugs
– Hospital beds
Slide 4-77
Quantity Restrictions
Import Quota
– Supply restriction that prohibits the importation of more than a specified quantity of a particular good in a one-year period
Slide 4-78
Quantity Restrictions
Policy example
– Should the legal quantity of cigarettes supplied be set at zero?• 1603—Japan prohibited the “evil weed”• 17th century—Bans on tobacco existed
in Bavaria, Saxony, Zurich, Turkey, and Russia
Why not ban tobacco in the United States?
Slide 4-79
Despite increasing enrollments, fewer computer science students are finishing their degrees.
– Rising Salaries for IT specialists attract students before they finish their degrees.
Question
– What is likely to happen to wages for IT specialists over time?
Issues and Applications: Computer Science Students, Like Everyone Else,
Respond to Incentives
Slide 4-80
The Market for Computer Science Specialists
Figure 4-6, Panel (a)
Slide 4-81
The Market for Computer Science Specialists
Figure 4-6, Panel (b)
Slide 4-82
Web Links
The following Web link appears in the margin of this chapter in the textbook:
– http://www.epfnet.org
Slide 4-83
Summary Discussion of Learning Objectives
Essential features of the price system
– A price system (market system) allows prices to respond to changes in supply and demand for different commodities.
– The terms of exchange—prices—are communicated in markets that tend to minimize transactions costs.
Slide 4-84
Summary Discussion of Learning Objectives
How changes in demand and supply affect market price and equilibrium quantity– Increases in demand increase equilibrium price
and quantity. Decreases in demand decrease equilibrium price and quantity.
– Increases in supply decrease market price and increase equilibrium quantity. Decreases in supply increase market price and decrease equilibrium quantity.
Slide 4-85
Summary Discussion of Learning Objectives
How changes in demand and supply affect market price and equilibrium quantity
– When both demand and supply shift at the same time, indeterminate results occur.
Slide 4-86
Summary Discussion of Learning Objectives
The rationing function of prices– In a market system, prices ration
scarce goods and services.
The effect of price ceilings– A price ceiling set below the market
(equilibrium) price results in a shortage.
– The resulting shortage can lead to non-price rationing devices and black markets.
Slide 4-87
Summary Discussion of Learning Objectives
The effects of price floors– If the price floor is set above
the market price, a surplus results.– A price floor can take the form
of a government-imposed price support or minimum wage.
– Quantity restrictions can take the form of import quotas.
Slide 4-88
Summary Discussion of Learning Objectives
Government-imposed restrictions on market quantities
– Bans on sale or ownership
– Licensing restrictions
– Import quotas
Slide 4-89
Shifts in Demand and in Supply: Determinate Results
Figure 4-1
End of Chapter
Chapter 4Extensions of Demand
and Supply Analysis