Transcript Chap 05R Micro Colander 8e

Chapter 5
USING SUPPLY
AND DEMAND
Review of Changes in
Supply and Demand
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;
Price rises;
Quantity could
Quantity rises . Price could be
high or lower. rise or fall.
Price falls;
Quantity falls;
Price falls;
Quantity falls Quantity could Price could
rise or fall.
rise or fall.
Demand
shifts in
5-2
Supply shifts
in
Government Intervention
in the Market
• Buyers look to the government for ways to hold
prices down.
• A price ceiling is a government-imposed limit on
how high a price can be charged.
• Sellers look to the government for ways to hold
prices up.
• A price floor is a government-imposed limit on
how low a price can be charged.
5-3
Rent Controls
S
$17.00
Rental Price (per month)
• A rent control is a price ceiling
on rents set by the
government.
• Rent control set at $2.50 per
month in Paris after World
War II created a housing
shortage.
• The shortage would have been
eliminated if rents had been
allowed to rise to $17 per
month.
Shortage
2.50
D
QS
5-4
QD
Quantity of apartments
Minimum Wage
S
Wmin
Wage per hour
We
D
Q2
Qe
Q1
Quantity of Workers
5-5
• The minimum wage, a price
floor, is set by government
specifying the lowest wage a
firm can legally pay.
• A minimum wage, Wmin, above
the equilibrium wage, We,
helps those who are employed,
Q2, but hurts those who would
have been employed at We, but
can no longer find
employment, Qe- Q2.
Review Question 5-1 Use a graph to explain the likely impact
on the price of gasoline of a decrease in OPEC oil production
due to instability in Iraq and an increase in vacation travel
during the summer.
P
The decrease in production
will decrease supply from S0
to S1. The increase in demand
for gasoline for vacation travel
will increase
demand from D0 to D1. Price
increases from P0 to P1.
S1
S0
P1
P0
D0
5-6
D1
Q
Review Question 5-2
Given the following demand and supply of pizza:
Price Quantity
per Pizza Supplied
$8
7
6
5
4
Quantity
Demanded
200
150
100
50
0
60
80
100
120
140
What is the effect of a price floor of $8?
A price floor of $8 will create a surplus of 200 – 60 = 140
pizzas.
5-7