Transcript Q 0

Introduction:
Thinking Like an Economist
CHAPTER 2
CHAPTER 5
1
Using Supply and Demand
It is by invisible hands that we are
bent and tortured worst.
— Nietzsche
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Using Supply and Demand
15
Chapter Goals
 Apply the supply and demand model to real-word events
 Demonstrate the effect of a price ceiling and a price floor
on a market
 Explain the effect of excise taxes and tariffs on a market
 Explain the effect of quantity restrictions on a market
 Explain the effect of a third-party payer system on
equilibrium price and quantity
5-2
Using Supply and Demand
15
Application: Apples in the United States
Hurricane Irene destroyed a
significant portion of the
apple crop in the
northeastern U.S.
Apples
Price
S1
S0
The hurricane damage
caused the supply curve
to shift left
P1
P0
Excess
demand
D0
Q1
Q0
Price rose from P0 to P1
where quantity demanded =
quantity supplied
Quantity
5-3
Using Supply and Demand
15
Application: Sales of SUVs in the U.S.
Gasoline in the U.S. is
increasingly expensive
Increasing gas costs
causes the demand curve
to shift left
Price for SUVs fell
from P0 to P1 where
Q demanded = Q supplied
SUVs
Price
S0
Excess
supply
P0
P1
D0
D1
Q1
Q0
Quantity
5-4
Using Supply and Demand
15
Application: Edible Oils in the World
Price
Edible Oils
Growing middle class in Asia
has increased demand for soy
oils
S1
S0
P1
P0
D1
D0
At the same time, U.S.
farmers are growing more
corn and less soy
(less soy oil)
The result is increased prices
for edible oils
Quantity
5-5
Using Supply and Demand
15
A Review of Changes in Supply and Demand
No change
in Supply
Supply increases
Supply decreases
No change
in Demand
P same
Q same
P down
Q up
P up
Q down
Demand
increases
P up
Q up
P ambiguous
Q up
P up
Q ambiguous
Demand
decreases
P down
Q down
P down
Q ambiguous
P ambiguous
Q down
5-6
Using Supply and Demand
15
Government Intervention
 The invisible hand is not the only factor in determining
prices; social and political forces also determine price.
 Other factors include:
• Price ceilings and price floors
• Excise taxes and tariffs
• Quantity restrictions
• Third-party-payer markets
5-7
Using Supply and Demand
15
Government Intervention: Price Ceilings
 When a government wants to hold prices down to favor
buyers, it imposes a price ceiling
 A price ceiling is a government-imposed limit on how
high a price can be charged
 Price ceilings create shortages
 Price ceilings below equilibrium price will have an effect
on the market
 With price ceilings, existing goods are no longer rationed
entirely by price so other methods of rationing arise
5-8
Using Supply and Demand
15
Application: Rent Controls in Paris
Housing
P(rental price per month)
S0
After WWII, rent controls
(a form of price ceiling)
were put in place
The rent controls caused a
housing shortage
$17
$2.50
D0
Shortage
QS
QD
There would not be a
shortage if rents had been
allowed to increase to the
equilibrium price of $17
Q (number of apartments)
5-9
Using Supply and Demand
15
Government Intervention: Price Floors
 When a government wants to prevent a price from falling
below a certain level to favor suppliers, it imposes a
price floor
 A price floor is a government-imposed limit on how low
a price can be charged
 Price floors create excess supply
 Price floors above equilibrium price will have an effect
on the market
5-10
Using Supply and Demand
15
Application: A Minimum Wage
P (wage per hour)
Labor
Excess supply
= unemployment
S0
Wmin
W0
A minimum wage is a type of
price floor, it is the lowest wage a
firm can legally pay an employee
Minimum wages cause
unemployment
D0
QD
Q0
Q (quantity of workers)
QS
5-11
Using Supply and Demand
15
Government Intervention: Excise Taxes
 Government impacts markets through taxation
 An excise tax is a tax that is levied on a specific good
 A tariff is an excise tax on an imported good
 The result of taxes and tariffs is an increase in
equilibrium prices and reduce equilibrium quantities
5-12
Using Supply and Demand
15
Application: The Effect of an Excise Tax
Price
Luxury Boats
Government imposes a
$10,000 luxury tax on
the suppliers of boats
S1
S0
$70,000
$65,000
Tax = $10,000
The supply curve shifts up by
the amount of the tax
$60,000
$10,000
420 510 600
D0
The price of boats rises by
less than the tax to $65,000
Quantity
5-13
Using Supply and Demand
15
Government Intervention: Quantity Restrictions
 Government regulates markets with licenses, which limit
entry into a market
 Many professions require licenses, such as doctors,
financial planners, cosmetologists, electricians, or taxi
cab drivers
 The results of limited number of licenses in a market
are increases in wages and an increases in the price of
obtaining the license
5-14
Using Supply and Demand
15
Application: The Effect of a Quantity Restriction
NYC Taxi Drivers
P (wages per week )
Successful lobbying by taxi cab
drivers in NYC resulted in
quantity restrictions (medallions)
QR
D1
$15
D0
12,000
When the demand for taxi
services increased, because
the number of taxi licenses was
limited, wages increased
Q (number of licensed taxis)
5-15
Using Supply and Demand
15
Application: The Effect of a Quantity Restriction
NYC Taxis Medallions
P (price of taxi medallion)
QR
The demand for taxi
medallions also increased
because wages were
increasing. But because the
number of taxi licenses was
limited, the price of a
medallion also increased
$400,000
D1
Initial Fee
D0
12,000
Q (number of taxi of medallions)
5-16
Using Supply and Demand
15
Government Intervention:
Third-Party-Payer Markets
 In third-party-payer markets, the person who receives
the good differs from the person paying for the good
 Under a third-party-payer system, the person who
chooses how much to purchase doesn’t pay the entire
cost
 Equilibrium quantity and total spending can be much
higher in third-party-payer markets
 Goods from a third-party-payer system will be rationed
through social and political means
5-17
Using Supply and Demand
15
Application: Third-Party-Payer Markets
Price
With a copayment of $5,
consumers demand 18 units
Health Care
Supply
$45
Sellers require $45 per unit
for that quantity
Total expenditures for 18
units of health care
$25
…are greater than when…
$5
Demand
10
18
The consumer pays the
entire cost
Quantity
5-18
Using Supply and Demand
15
Chapter Summary
 You can describe almost all events in terms of supply
and demand
 Price ceilings, government imposed limits on how high
a price can be charged, create shortages
 Price floors, government-imposed limits on how low a
price can be charged, create surpluses
 Taxes and tariffs paid by suppliers shift the supply curve
up by the amount of the tax or tariff and increase
equilibrium price and decrease quantity
5-19
Using Supply and Demand
15
Chapter Summary
 Quantity restrictions increase equilibrium price and
reduce equilibrium quantity
 In a third-party-payer market, the consumer and the
one who pays the cost differ. Quantity demanded,
price, and total spending are greater when a third party
pays than when the consumer pays.
5-20