Transcript Applications of Supply and Demand

Ch. 4: Supply and
Demand: Practice
James R. Russell, Ph.D., Professor of Economics & Management, Oral Roberts University
©2005 Thomson Business & Professional Publishing, A Division of Thomson Learning
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Application 1: 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.
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Exhibit 1: College and University
Admissions
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Self-Test


Suppose the demand rises for admission to a
university but both the tuition and the number
of openings in the entering class remain the
same. Will this affect the admission standards
of the university? Explain.
Administrators and faculty at state colleges and
universities often say that their standards of
admission are independent of whether there is
a shortage or surplus of openings at the
university. Do you think this is true? Explain.
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Application 2: What Would
Happen If Marijuana Were
Legalized?
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What would happen to equilibrium price? What
would happen to the equilibrium quantity?
Supply would increase, as farmers began to
grow marijuana instead of corn or other
products.
Demand would increase, as the number of
people who want to buy and consume
marijuana increases.
Equilibrium price is dependent on whether
supply or demand increases the most.
Equilibrium quantity would increase.
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Application 3: Where Did
You Get That Music?
Too many people are downloading music from
the internet instead of purchasing CDs.
Possible solutions:
1.
Higher Price: Recording industry
threatened to sue scores of people who
download music.
2.
Lower Demand: Recording industry aired
television commercials to lower demand.
3.
Lower Supply: Recording industry sued
certain companies such as Napster.
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Self-Test


On January 21, 2004 the recording
industry filed lawsuits against 532 people
it accused of illegally swapping
copyrighted music on the internet. What
does this have to do with supply, demand,
or price?
If the recording industry puts few TV
commercials trying to lower demand for
downloading music, but instead continues
to sue, what does this say?
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Application 4: The
Minimum Wage Law


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At a higher minimum wage,
more unskilled workers want to
work, but only a few are hired.
Additionally, fewer workers are
paid at the higher minimum
wage than at the previous
equilibrium wage.
In a competitive market
setting, the forces of supply
and demand determine
equilibrium wages.
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The Minimum Wage Law

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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.
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Exhibit 2: Effects of the Minimum
Wage
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Self-Test


When the labor supply is upwardsloping, an effective minimum wage
law creates a surplus of labor. If the
labor supply is vertical, does a surplus
of labor still occur? Explain.
Someone says that an increase in the
minimum wage will not cause firms to
hire fewer workers. What is this
person assuming?
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Application 5: Price Ceiling
In The Kidney Market

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Kidneys are currently donated as there is no
free market for kidneys.
Assuming that some people are unwilling to
donate a kidney for $0 but would for some
other amount of money, the kidney market
could be analyzed using a standard supply
and demand curve.
At $0 compensation, there is a larger
quantity demanded than supplied, exactly
the case we see today in the United States.
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Exhibit 3: The Market for Kidneys
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Self-Test
A shortage of kidneys is a
consequence of the price of a kidney
being below equilibrium price. Do
you agree or disagree? Explain.
 Suppose the price ceiling in the
kidney market is $0. Will there be a
shortage of kidneys? Explain.

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Application 6: Health Care and
the Right to Sue Your HMO

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Some people argue you should be able
to sue your HMO.
Consider two settings: one where you
can sue your HMO, and one where you
cannot.
– An HMO’s liability costs are lower if
patients cannot sue. These costs will be
passed on to consumers, raising HMO
rates for everyone.
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Exhibit 4: Apartment Rent
and the Law
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Self-Test

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Economists often say, “There is no such
thing as a free lunch.” How is this saying
related to patients moving from a system
when they cannot sue their HMOs to one
where they can.
A professor tells her students that they
can have an extra week to complete their
research papers. Under what conditions
are the students made better off? Can
you think of a case where the students
would actually be made worse off.
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Application 7: If Gold Prices Are
The Same Everywhere, Then Why
Aren’t House Prices?
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If gold prices were different, sellers would
buy in one area, and sell in another.
As time went on, the lack of gold would
drive up prices in some areas, while the
deluge of gold would drive down prices in
other areas until the prices of gold is fixed
across the world.
However, since we can not pick up a house
and land and transplant them in a new area,
house prices vary across the country.
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Self-Test
What causes the price of gold to be
the same in New York and London?
 The price of a Honda Pilot is nearly
the same in Miami as it is in Dallas.
Why?
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Application 8: Do You Pay
For Good Weather?
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There is no weather market.
But to enjoy the weather in San Diego,
CA, you must be there, either living
there or visiting.
If there were only bad weather in San
Diego, the demand to live there would
be lower and the cost of living would
be lower.
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Self-Test
Give an example to illustrate that
someone may “pay” for clean air in
much the same way that she “pays”
for good weather.
 If people pay for good weather, who
ultimately receives the “good-weather
payment” ?

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Application 9: Paying All
Professors The Same Salary
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Professors have different salaries.
Should they all have the same salary?
Market conditions are different for
history and accounting professors.
Same salary would create surpluses
and shortages.
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Exhibit 5: Paying Professors
the Same Salary
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Self-Test
Suppose the supply of biology and
computer science professors is the
same but the demand for computer
scientists is greater. If a shortage
exists in both fields, in which field is
the shortage greater? Explain.
 Under what condition might an
economist propose that all college
professors be paid the same?

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Application 10: Price Floors
and Winners and Losers
Suppose an agricultural foodstuff
receives a price floor. Who gains and
who loses?
 Consumers lose.
 Producers gain.
 Society loses (consumers lose more
than producers gain).
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Exhibit 6: Agricultural Price
Floors
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Self-Test


Look at the area equal to areas 3 + 5 in
Exhibit 6. If there is a price floor, this area
ends up being a deadweight loss. It is the
loss to society of not producing Q1. Are
there mutually beneficial trades that exist
between Q2 and Q1, and if so, how do
you know this?
Why might producers argue for a price
floor if it ends up making society worse
off?
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Application 11: College
Super-Athletes
Assume a super-athlete receives a full
ride scholarship at a university. NCAA
rules limit payment to the athlete to
the amount of the scholarship even if
the athlete is worth more to the
university.
 Because of a perfectly inelastic supply
curve, NCAA rules result in a transfer
from the athlete to the university.

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Exhibit 7: The College Athlete
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Self-Test
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University X is a large university with a
major football team. A new field house
and track was just added to the university.
What might this have to do with our
discussion?
Sometimes it is argued that if colleges paid
student athletes, the demand for college
sports would decline. How would this
change the analysis?
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Application 12: Supply and
Demand on the Freeway
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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.
If the driving population
increases in an area, and the
supply of freeway space
remains the same, what will
happen to freeway
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congestion?
Exhibit 8: Freeway Congestion
and Supply and Demand
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Self-Test
In Exhibit 9, at what price is there a
surplus of freeway space at 8 A.M.?
 If the driving population increases in
an area and the supply of freeway
space remains constant, what will
happen to freeway congestion?
Explain.
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Application 13: What Does Price
Have to do with Getting to Class
on Time?
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Price and parking places conspire to
delay students.
Students pay money or 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.
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Self-Test
If a person pays for something in
terms of time, he or she is really
paying in terms of money. Do you
agree or disagree? Explain.
 Suppose a price of $1/day is the
equilibrium price. What happens if
demand rises more than supply and
the price is kept at $1?

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Application 14: Aisle Seats
on Commercial Airlines
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The supply curve for
aisle seats and middle
seats are equal straight
lines, while the demand
is anything but equal.
Airlines charge the
same price for middle
and aisle seats.
Late comers get the
middle seats.
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Application 15: 10
O’Clock Classes in College
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Supply for classes is
fixed, but are offered
at different times.
Demand varies based
an times.
There is a set of prices
that will make the
quantity demanded of
each class the same.
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Exhibit 9: The Supply and Demand for
College Classes at Different
Times
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Application 16: What is
the price of an “A”?
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Assume Professor Lawson is a slightly
better teacher that Professor Brown.
Will Professor Brown have fewer students?
Not necessarily. Professor Brown may
lower the cost to students.
–
–
–
–
Less work.
Easier tests.
Higher GPA.
Etc.
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Exhibit 10: The Price of an A
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Self-Test
If more people want to read romance
novels than classic novels, it holds
that the demand for romance novels
is greater than the demand for classic
novels. Agree or disagree? Explain.
 Popularity is a function of demand,
not price. Agree or disagree?
Explain.

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Coming Up (Ch. 5): Macroeconomic
Measurements, Part I: Prices &
Unemployment
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