Transcript Demand and Supply, an Elaboration

SAYRE | MORRIS
Seventh Edition
CHAPTER 3
Demand and Supply:
an Elaboration
© 2012 McGraw-Hill Ryerson Limited
3-1
CHAPTER 3
Demand and Supply:
an Elaboration
Learning Objectives:
1. Explain the effects on equilibrium price and quantity
of simultaneous changes in supply and demand
2. Explain why markets do not always work well
3. Understand why price ceilings cause shortages
© 2012 McGraw-Hill Ryerson Limited
3-2
CHAPTER 3
Demand and Supply:
an Elaboration
Learning Objectives:
4. Understand why price floors cause surpluses
5. Ask some interesting “what if ” questions concerning
the shape of demand and supply curves
© 2012 McGraw-Hill Ryerson Limited
3-3
Determinants of
Supply and Demand
Determinants of Demand
Determinants of Supply
Consumer preferences
Prices of productive resources
Consumer incomes
Business taxes
Prices of related products
Technology
Expectations of future prices,
incomes, or availability
Population: its size, income
distribution, and age
Distribution
Prices of substitutes in production
LO1
Future expectations of suppliers
Number of suppliers
© 2012 McGraw-Hill Ryerson Limited
3-4
Simultaneous Changes in
Supply and Demand
LO1
• Increase in both demand and supply leads to an increase in
equilibrium quantity; price may rise or fall
© 2012 McGraw-Hill Ryerson Limited
3-5
LO1
Self-Test
Explain what effect the changes will have on equilibrium price and
quantity in the following markets:
Market
Change
a)Day-care
services
More mothers with small children are returning to the labour
force; at the same time, government decides to introduce
subsidies for day-care operators.
b) Marijuana
Government severely increases the penalties for both buying
and selling marijuana.
c)
Compact A new processing method significantly reduces the costs of
discs
producing CDs; at the same time, more consumers
download music directly onto their computers.
d)Organic
vegetables
Vegetarianism increases as a result of medical reports
extolling its health benefits; at the same time, tighter
regulations on the definition of organically grown products
are introduced.
© 2012 McGraw-Hill Ryerson Limited
3-6
LO1
Self-Test
Explain what effect the changes will have on equilibrium price and
quantity in the following markets:
Market
Change
a)Day-care
services
Both demand and supply increase so quantity traded
increases but price is indeterminate.
b) Marijuana
Both demand and supply decrease so price is
indeterminate while quantity traded decreases.
c) Compact discs
Supply increases while demand decreases so price
decreases while quantity traded is indeterminate.
d)Organic
vegetables
Demand increases and supply decreases so that price
increases while quantity traded is indeterminate.
© 2012 McGraw-Hill Ryerson Limited
3-7
LO2
How Well Do Markets Work?
Problems with markets:
1. Markets do not always adjust as quickly as we
would like
2. Markets do not always produce equitable results
3. Competitive markets may not exist for some goods
or services
© 2012 McGraw-Hill Ryerson Limited
3-8
LO3
Price Controls
Price Controls
government regulations to set either a maximum or
minimum price for a product
Price Ceiling
a government regulation stipulating the maximum
price that can be charged for a product
Price Floor
a government regulation stipulating the minimum price
that can be charged for a product
© 2012 McGraw-Hill Ryerson Limited
3-9
LO3
Price Ceiling
•
•
•
Used when present market price for a particular
product is considered too high for many buyers
The product is felt to be a necessity
Example: rent control
© 2012 McGraw-Hill Ryerson Limited
3-10
LO3
Price Ceiling
•
Price ceilings cause shortages
© 2012 McGraw-Hill Ryerson Limited
3-11
LO3
Allocating Shortages
•
•
•
•
The market (supply and demand)
First come, first served
Producers’ preferences
Rationing
© 2012 McGraw-Hill Ryerson Limited
3-12
LO3
Self-Test
a) Suppose the government introduces a price ceiling
that is 20 cents different from the present equilibrium
price. Would the result be a surplus or a shortage? Of
what quantity?
b) If an illegal market
were to develop,
what would be
the maximum
illegal market
price?
© 2012 McGraw-Hill Ryerson Limited
3-13
LO3
Self-Test
a) Suppose the government introduces a price ceiling
that is 20 cents different from the present equilibrium
price. Would the result be a surplus or a shortage?
Of what quantity?
Price = 0.90;
Shortage of 12
b) If an illegal market
were to develop,
what would be
the maximum
illegal market
price? $1.20
© 2012 McGraw-Hill Ryerson Limited
3-14
LO4
Price Floor
•
•
Used when present market price for a particular
product is considered too low for producers
Often used in agricultural markets
© 2012 McGraw-Hill Ryerson Limited
3-15
LO4
Price Floor
•
Price floors cause surpluses
© 2012 McGraw-Hill Ryerson Limited
3-16
LO4
Price Floor
•
Minimum wage laws can cause unemployment
© 2012 McGraw-Hill Ryerson Limited
3-17
LO4
Dealing with Surpluses
•
•
•
•
•
Store it
Convert it
Sell it abroad at a reduced price (dump)
Donate it
Destroy it
© 2012 McGraw-Hill Ryerson Limited
3-18
LO3
Quota
•
A quota, or restricting output, can raise price
without causing a surplus
© 2012 McGraw-Hill Ryerson Limited
3-19
LO3
Self-Test
a) In equilibrium, what is the total revenue received by
producers?
b) Suppose that government imposes a price floor of $4
per kilo. What quantity
will be demanded?
What quantity will
farmers produce?
What quantity will
government buy?
c) How much will it
cost to buy the
surplus?
© 2012 McGraw-Hill Ryerson Limited
3-20
LO3
Self-Test
a) In equilibrium, what is the total revenue received by
producers? TR = Q x P = 5 x 3.50 = $17.50
b) Suppose that government imposes a price floor of $4
per kilo. What quantity
will be demanded?
What quantity will
farmers produce?
What quantity will
government buy?
Qd=4, Qs=6, buy 2
c) How much will it
cost to buy the
surplus? 2 x $4 = $8
© 2012 McGraw-Hill Ryerson Limited
3-21
LO5
Vertical Demand Curve
• A vertical demand curve suggests that price
does not matter
• Same quantity is demanded no matter what
the price
• Some goods seen as necessities (eg, insulin)
may have a perfectly inelastic (vertical) range
• Eventually, quantity demanded decreases as
income is insufficient to pay for the good
© 2012 McGraw-Hill Ryerson Limited
3-22
LO5
Upward Sloping Demand Curve
• Upward sloping demand curves may be true for some
individuals over a limited range of prices
© 2012 McGraw-Hill Ryerson Limited
3-23
LO5
The Demand for Water
• The effect of a change in supply depends very much on the
shape of the demand curve
© 2012 McGraw-Hill Ryerson Limited
3-24
CHAPTER 3 SUMMARY
Key Concepts to Remember:
•
•
•
•
•
The effects on equilibrium price and quantity of
simultaneous changes in supply and demand
Why markets don’t always work well
Why price ceilings create shortages
Why price floors create surpluses
Why demand curves might be vertical or upward
sloping
© 2012 McGraw-Hill Ryerson Limited
3-25