chapter 4: extensions of demand and supply analysis econ 151 – principles of macroeconomics...
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![Page 1: Chapter 4: Extensions of Demand and Supply Analysis ECON 151 – PRINCIPLES OF MACROECONOMICS Materials include content from Pearson Addison-Wesley which](https://reader036.vdocuments.site/reader036/viewer/2022062314/56649e0e5503460f94af82a0/html5/thumbnails/1.jpg)
Chapter 4:Extensions of Demand and Supply Analysis
ECON 151 – PRINCIPLES OF MACROECONOMICS
Materials include content from Pearson Addison-Wesley which has been modified by the instructor and displayed with permission of the publisher. All rights reserved.
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The Price System
Price System (market system)An economic system that allocates resources
based on relative prices determined by supply and demand
Prices signal what is relatively scarce and relatively abundant
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Exchange and Markets
MarketsEmphasize voluntary exchangeDetermine the terms of exchangeFacilitate exchange
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Exchange and Markets
Voluntary ExchangeActs of trading between individuals
that make both parties to the trade subjectively better off
Terms of ExchangeThe prices we pay for the desired items
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Exchange and Markets
Transaction CostThe costs associated with exchangeExamples
Price shopping Determining quality Determining reliability Service availability Cost of contracting
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Exchange and Markets
The role of middlemenMiddlemen (intermediaries) or brokers reduce
transaction cost by providing information to buyers and sellers.
Examples Real estate brokers Stock brokers Consignment shops Car dealerships
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Changes in Demand and Supply Changes in supply and demand
create a disequilibrium The market price and quantity
adjust to a new equilibrium
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Shifts in Demand and Supply: Determine Results
Increase Demand with Supply Constant
D1
S
P1
Q1
E1
Figure 4-1
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At price P1 quantitydemanded exceedsquantity supplied—a shortage exists
Shifts in Demand and Supply: Determine Results
Increase Demand with Supply Constant
D1
S
P1
Q1
E1
Q2
D2
Figure 4-1
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Shifts in Demand and Supply: Determine Results
Increase Demand with Supply Constant
P1
Q1
S
E1
D2
Equilibrium price and quantity increase to P2 and Q2
E2
Q2
P2
D1
Figure 4-1
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At price P1 quantitysupplied exceedsquantity demanded—a surplus exists.
Q2
D2
S
Shifts in Demand and Supply: Determinate Results
Decrease Demand with Supply Constant
D1
E1
Q1
P1
Figure 4-1
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Shifts in Demand and Supply: Determinate Results
Decrease Demand with Supply Constant
P1
Q1
SE1
D3
Equilibrium priceand quantity decrease to P3 and Q3
D1
Q3
E3
P3
Figure 4-1
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S1
Shifts in Demand and Supply: Determinate Results
Increase Supply with Demand Constant
D
P1
Q1
E1
Figure 4-1
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At price P1 quantitysupplied exceedsquantity demanded—a surplus exists
Shifts in Demand and Supply: Determinate Results
Increase Supply with Demand Constant
P1
Q1
E1
D
Q3
S2
S1
Figure 4-1
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Shifts in Demand and Supply: Determinate Results
Increase Supply with Demand Constant
P1
Q1
E1
D
Q2
P2
E2
S2
S1Equilibrium price decreases and quantity
increases to P2 and Q2
Figure 4-1
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At price P1 quantitydemanded exceedsquantity supplied—a shortage exists
Shifts in Demand and Supply: Determinate Results
Decrease Supply with Demand Constant
D
S1
E1
Q1
P1
Q2
S3
Figure 4-1
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Shifts in Demand and Supply: Determinate Results
Decrease Supply with Demand Constant
P1
Q1
E1
D
S3
S1
Equilibrium price decreases and quantity
increases to P3 and Q3
Q3
P3
E3
Figure 4-1
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Changes in Demand and Supply Summary
Increases in demand increase equilibrium price and quantity.
Decreases in demand decrease equilibrium price and quantity.
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Changes in Demand and Supply Summary
Increases in supply decrease equilibrium price and increase equilibrium quantity.
Decreases in supply increase equilibrium price and decrease equilibrium quantity.
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Changes in Demand and Supply When both demand and supply shift
Simultaneous changes in demand and supply put conflicting pressure on price or quantity
The resulting effect depends upon how much each curve shifts
Either equilibrium price or quantity will be indeterminate
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Changes in Demand and Supply
When both demand and supply increase Change in price is indeterminate Quantity will increase
When both demand and supply decrease Change in price is indeterminate Quantity will decrease
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Changes in Demand and Supply
When supply decreases and demand increases Price will increase Change in quantity is indeterminate
When supply increases and demand decreases Price will decrease Change in quantity is indeterminate
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Demand Supply Price Quantity
Increase Increase Increase
Decrease Decrease Decrease
Increase Decrease Increase
Decrease Increase Decrease
Demand Supply Price Quantity
Increase Increase Unknown Increase
Increase Decrease Increase Unknown
Decrease Increase Decrease Unknown
Decrease Decrease Unknown Decrease
Change in demand or supply
Change in both demand and supply
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Price Flexibilityand Adjustment Speed Adjustment speed
Market characteristics influence adjustment speed
Markets may overshoot in the adjustment process
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The Rationing Function of Prices
When surpluses and shortages exist, the price adjusts to clear the market.
This adjustment is the rationing function of price.
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The Rationing Function of Prices
When prices cannot adjust non-price rationing occursRationing by queuesRationing by lotteriesRationing by coupons
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The Rationing Function of Prices
The essential role of rationingWith scarcity rationing must occurWe must choose the rationing mechanism:
price or non-pricePrice rationing is the most efficient
Further trades could not occur without making somebody worse-off
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The Policy of Government-Imposed Price Controls Price Controls
Government-mandated minimum or maximum prices
Price Ceiling A legal maximum price
Price Floor A legal minimum price
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The Policy of Government-Imposed Price Controls Non-Price Rationing Devices
All methods used to ration scarce goods that are price-controlled
Black MarketA market in which price-controlled goods are
sold at an illegally high price
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Black Markets
Figure 4-3
D
Qe
Pe
Qs
P1
P2
Qd
S’Implicit supply schedule at P1 < Pe
Shortage
Pric
e
Quantity per Unit Time Period
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The functions of rental pricesPromote the efficient maintenance
and construction of housingAllocate existing housingRation the use of housing
The Policy of Controlling Rents
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Effects on the existing supply of housingProperty owners cannot recover costs
The Policy of Controlling Rents
Rationing the current use of housingReduces mobility
New York’s “housing gridlock”
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Who gains and who loses from rent controls?Losers
Property owners Low-income individuals
Benefits Upper-income professionals
The Policy of Controlling Rents
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Price Floors in Agriculture
Support Price the governmentally established minimum
price farmers are to receive for a particular agricultural product.
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Agricultural Price Supports
Figure 4-4
D
Pe
QeQd
Ps
Qs
Excess quantity supplied
Dol
lars
per
Uni
t
Quantity of Peanuts per Time Period
S
E
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Price Floors in the Labor Market
Minimum WageLowest hourly wage rate that firms
may legally pay their workers
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The Effect of Minimum Wages
Figure 4-5
D
We
QeQd
Wm
Qs
Wag
e R
ate
per
Uni
t
Quantity of Labor per Time Period
S
E
A B C
Reduction in quantity
of labor demanded
Excess quantity supplied at wage Wm
Increase in quantity of labor
supplied
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Quantity Restrictions
Prohibitions on the ownership or trading of a goodHuman organsDrugsHospital beds
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Quantity Restrictions
Government Prohibitions or Licensing Requirements Some commodities cannot be purchased at all legally;
others require a license. Import Quota
Supply restriction that prohibits the importation of more than a specified quantity of a particular good in a one-year period
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Chapter 4:Extensions of Demand and Supply Analysis
ECON 151 – PRINCIPLES OF MACROECONOMICS
Materials include content from Pearson Addison-Wesley which has been modified by the instructor and displayed with permission of the publisher. All rights reserved.