Transcript 04 D & S appli cations

Chapter
4
Demand and Supply
Applications
Prepared by:
Fernando & Yvonn Quijano
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair
CHAPTER 4: Demand and Supply
Applications
Demand and Supply
Applications
4
Chapter Outline
The Price System: Rationing and
Allocating Resources
Price Rationing
Constraints on the Market and Alternative
Rationing Mechanisms
Prices and the Allocation of Resources
Price Floors
Supply and Demand Analysis:
An Oil Import Fee
Supply and Demand
and Market Efficiency
Consumer Surplus
Producer Surplus
Competitive Markets Maximize the Sum of
Producer and Consumer Surplus
Potential Causes of Deadweight
Loss from Under- and Overproduction
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CHAPTER 4: Demand and Supply
Applications
THE PRICE SYSTEM: RATIONING
AND ALLOCATING RESOURCES
price rationing The process by which
the market system allocates goods and
services to consumers when quantity
demanded exceeds quantity supplied.
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THE PRICE SYSTEM: RATIONING
AND ALLOCATING RESOURCES
CHAPTER 4: Demand and Supply
Applications
PRICE RATIONING
FIGURE 4.1 The Market for Lobsters
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CHAPTER 4: Demand and Supply
Applications
THE PRICE SYSTEM: RATIONING
AND ALLOCATING RESOURCES
When supply is fixed or
something for sale is unique, its
price is demand determined.
Price is what the highest bidder
is willing to pay. In 2004, the
highest bidder was willing to pay
$104.1 million for Picasso’s Boy
with a Pipe.
The adjustment of price is the rationing mechanism in free markets. Price
rationing means that whenever there is a need to ration a good—that is, when a
shortage exists—in a free market, the price of the good will rise until quantity
supplied equals quantity demanded—that is, until the market clears.
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CHAPTER 4: Demand and Supply
Applications
THE PRICE SYSTEM: RATIONING
AND ALLOCATING RESOURCES
FIGURE 4.2 Market for a Rare Painting
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CHAPTER 4: Demand and Supply
Applications
THE PRICE SYSTEM: RATIONING
AND ALLOCATING RESOURCES
CONSTRAINTS ON THE MARKET AND
ALTERNATIVE RATIONING MECHANISMS
On occasion, both governments and private firms decide
to use some mechanism other than the market system to
ration an item for which there is excess demand at the
current price.
Regardless of the rationale, two things are clear:
1. Attempts to bypass price rationing in the market and to
use alternative rationing devices are much more difficult
and costly than they would seem at first glance.
2. Very often, such attempts distribute costs and benefits
among households in unintended ways.
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THE PRICE SYSTEM: RATIONING
AND ALLOCATING RESOURCES
CHAPTER 4: Demand and Supply
Applications
Oil, Gasoline, and OPEC
price ceiling A maximum price that sellers may
charge for a good, usually set by government.
FIGURE 4.3 Excess Demand
(Shortage) Created
by a Price Ceiling
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CHAPTER 4: Demand and Supply
Applications
THE PRICE SYSTEM: RATIONING
AND ALLOCATING RESOURCES
queuing Waiting in line as a means of
distributing goods and services: a
nonprice rationing mechanism.
favored customers Those who
receive special treatment from dealers
during situations of excess demand.
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CHAPTER 4: Demand and Supply
Applications
THE PRICE SYSTEM: RATIONING
AND ALLOCATING RESOURCES
ration coupons Tickets or coupons
that entitle individuals to purchase a
certain amount of a given product per
month.
black market A market in which illegal
trading takes place at marketdetermined prices.
Even when trading coupons is declared illegal, it is virtually impossible
to stop black markets from developing.
In a black market, illegal trading takes place at market-determined
prices.
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THE PRICE SYSTEM: RATIONING
AND ALLOCATING RESOURCES
CHAPTER 4: Demand and Supply
Applications
NCAA March Madness: College Basketball’s
National Championship
FIGURE 4.4 Supply of and Demand for a
Pair of Final Four Tickets in
2003
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CHAPTER 4: Demand and Supply
Applications
THE PRICE SYSTEM: RATIONING
AND ALLOCATING RESOURCES
There are many ways to deal
with the excess demand to
premiere sporting events such
as the NCAA finals, but it is
hard to keep tickets from those
who are willing to pay high
prices.
Syracuse played Kansas in the
NCAA championship game in
2003.
No matter how good the intentions of private organizations and governments, it
is very difficult to prevent the price system from operating and to stop
willingness to pay from asserting (explaining) itself.
Every time an alternative is tried, the price system seems to sneak(leak) in the
back door.
With favored customers and black markets, the final distribution may be even
more unfair than that which would result from simple price rationing.
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THE PRICE SYSTEM: RATIONING
AND ALLOCATING RESOURCES
CHAPTER 4: Demand and Supply
Applications
PRICES AND THE ALLOCATION OF RESOURCES
Thinking of the market system as a mechanism for
allocating scarce goods and services among competing
demanders is very revealing, but the market determines
much more than just the distribution of final outputs.
It also determines what gets produced and how resources
are allocated among competing uses.
Price changes resulting from shifts of demand in output markets cause profits
to rise or fall.
Profits attract capital; losses lead to disinvestment.
Higher wages attract labor and encourage workers to acquire skills.
At the core of the system, supply, demand, and prices in input and output
markets determine the allocation of resources and the ultimate combinations of
things produced.
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THE PRICE SYSTEM: RATIONING
AND ALLOCATING RESOURCES
CHAPTER 4: Demand and Supply
Applications
PRICE FLOORS
price floor A minimum price below
which exchange is not permitted.
minimum wage A price floor set under
the price of labor.
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Applications
SUPPLY AND DEMAND ANALYSIS:
AN OIL IMPORT FEE
The basic logic of supply and
demand is a powerful tool of
analysis.
FIGURE 4.5 The U.S. Market for Crude
Oil, 1989
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SUPPLY AND DEMAND AND
MARKET EFFICIENCY
CHAPTER 4: Demand and Supply
Applications
CONSUMER SURPLUS
consumer surplus The difference
between the maximum amount a
person is willing to pay for a good and
its current market price.
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SUPPLY AND DEMAND AND
MARKET EFFICIENCY
FIGURE 4.6 Market Demand and Consumer Surplus
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SUPPLY AND DEMAND AND
MARKET EFFICIENCY
CHAPTER 4: Demand and Supply
Applications
PRODUCER SURPLUS
producer surplus The difference
between the current market price and
the full cost of production for the firm.
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SUPPLY AND DEMAND AND
MARKET EFFICIENCY
FIGURE 4.7 Market Supply and Producer Surplus
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SUPPLY AND DEMAND AND
MARKET EFFICIENCY
CHAPTER 4: Demand and Supply
Applications
COMPETITIVE MARKETS MAXIMIZE THE SUM OF
PRODUCER AND CONSUMER SURPLUS
FIGURE 4.8 Total Producer and Consumer Surplus
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Applications
SUPPLY AND DEMAND AND
MARKET EFFICIENCY
Deadweight(net) loss The net loss of
producer and consumer surplus from
underproduction or overproduction.
FIGURE 4.9 Deadweight Loss
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Applications
SUPPLY AND DEMAND AND
MARKET EFFICIENCY
POTENTIAL CAUSES OF DEADWEIGHT LOSS
FROM UNDER- AND OVERPRODUCTION
When supply and demand interact freely,
competitive markets produce what people
want at least cost, that is, they are
efficient.
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Applications
REVIEW TERMS AND CONCEPTS
black market
consumer surplus
deadweight loss
favored customers
minimum wage
price ceiling
price floor
producer surplus
price rationing
queuing
ration coupons
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