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2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 1 of 22

PowerPoint Lectures for

Principles of Economics,

9e

By

Karl E. Case,

Ray C. Fair &

Sharon M. Oster

; ;


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2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster

PART I INTRODUCTION TO ECONOMICS

4Demand and SupplyApplications

Fernando & Yvonn Quijano

Prepared by:


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4PART I INTRODUCTION TO ECONOMICS

Demand and SupplyApplicationsThe Price System: Rationing and

Allocating Resources

Price RationingConstraints on the Market andAlternative Rationing Mechanisms

Prices and the Allocation of ResourcesPrice Floors

Supply and Demand Analysis:

An Oil Import Fee

Supply and Demand

and Market Efficiency

Consumer Surplus

Producer SurplusCompetitive Markets Maximize theSum of Producer and ConsumerSurplus

Potential Causes of DeadweightLoss from Under- and Overproduction

Looking Ahead

CHAPTER OUTLINE


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The Price System: Rationing and Allocating Resources

price rationing The process by which the marketsystem allocates goods and services to consumerswhen quantity demanded exceeds quantity supplied.

Price Rationing

FIGURE 4.1 The Market forLobsters

Suppose in 2008 that 15,000square miles of lobstering waters

off the coast of Maine are closed.

The supply curve shifts to the left.

Before the waters are closed, the

lobster market is in equilibrium at

the price of $11.50 and a quantity

of 81 million pounds. The

decreased supply of lobster leads

to higher prices, and a new

equilibrium is reached at $16.10

and 60 million pounds (point B).


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The adjustment of price is the rationing mechanism in free markets.Price rationing means that whenever there is a need to ration agoodthat is, when a shortage existsin a free market, the price ofthe good will rise until quantity supplied equals quantity demanded

that is, until the market clears.

FIGURE 4.2 Market for aRare Paining

There is some price that will

clear any market, even if supply

is strictly limited. In an auction

for a unique painting, the price

(bid) will rise to eliminate

excess demand until there isonly one bidder willing to

purchase the single available

painting. Some estimate that

the Mona Lisa would sell for

$600 million if auctioned.

Price Rationing


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Constraints on the Market and Alternative Rationing Mechanisms

On occasion, both governments and private firms decide touse some mechanism other than the market system to

ration an item for which there is excess demand at thecurrent price.

Regardless of the rationale, two things are clear:

1. Attempts to bypass price rationing in the market and touse alternative rationing devices are much more

difficult and costly than they would seem at first glance.2. Very often, such attempts distribute costs and benefitsamong households in unintended ways.


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Oil, Gasoline, and OPEC

price ceiling A maximum price thatsellers may charge for a good,usually set by government.


FIGURE 4.3 Excess Demand (Shortage) Createdby a Price Ceiling

In 1974, a ceiling price of $0.57 cents per gallon

of leaded regular gasoline was imposed. If the

price had been set by the interaction of supply

and demand instead, it would have increased to

approximately $1.50 per gallon.At $0.57 per gallon, the quantity demanded

exceeded the quantity supplied. Because the

price system was not allowed to function, an

alternative rationing system had to be found to

distribute the available supply of gasoline.


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queuing Waiting in line as a means ofdistributing goods and services: anonprice rationing mechanism.

favored customers Those who receivespecial treatment from dealers duringsituations of excess demand.


ration coupons Tickets or coupons thatentitle individuals to purchase a certainamount of a given product per month.

black market A market in which illegaltrading takes place at market-determinedprices.


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NCAA March Madness: College Basketballs National

Championship


FIGURE 4.4 Supply of and Demand for aConcert in 2007

The face value of a ticket to the Justin

Timberlake concert on September 16, 2007, at

the Staples Center in Los Angeles was $50. The

Staples Center holds 20,000. The supply curve

is vertical at 20,000.

At $50, the quantity supplied is below the

quantity demanded. The diagram shows that thequantity demanded and the quantity supplied

would be equal at $300.

The Web shows that one ticket could be worth

$16,000.


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No matter how good the intentions of privateorganizations and governments, it is very difficult to

prevent the price system from operating and to stopwillingness to pay from asserting itself. Every timean alternative is tried, the price system seems tosneak in the back door. With favored customersand black markets, the final distribution may beeven more unfair than that which would result from

simple price rationing.



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Prices and the Allocation of Resources

Price changes resulting from shifts of demand inoutput markets cause profits to rise or fall. Profitsattract capital; losses lead to disinvestment. Higherwages attract labor and encourage workers toacquire skills. At the core of the system, supply,demand, and prices in input and output marketsdetermine the allocation of resources and theultimate combinations of things produced.


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The Price Mechanism at

Work for Shakespeare

Every summer, New York Cityputs on free performances ofShakespeare in the Park.

The true cost of a ticket is $0 plus the opportunity cost ofthe time spent in line.

Students can produce tickets relatively cheaply by waitingin line. They can then turn around and sell those tickets tothe high-wage Shakespeare lovers.


Prices and the Allocation of Resources


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Price Floors

price floor A minimum price below whichexchange is not permitted.

minimum wage A price floor set for theprice of labor.


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Supply and Demand and Market Efficiency

Consumer Surplus

consumer surplus The difference between themaximum amount a person is willing to pay for agood and its current market price.


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Supply and Demand and Market Efficiency

Producer Surplus

producer surplus The differencebetween the current market price and the full cost ofproduction for the firm.


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2009 Pearson Education Inc Publishing as Prentice Hall Principles of Economics 9e by Case Fair and Oster 16 of 22

REVIEW TERMS AND CONCEPTS

black market

favored customers

minimum wage

price ceiling

price floor

price rationing

queuing

ration coupons

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