Presentation on theme: "Micro232 2004 - JAFGAC Using Supply and Demand Chapter 5."— Presentation transcript:
Micro232 2004 - JAFGAC Using Supply and Demand Chapter 5
Micro232 2004 JAFGAC Laugher Curve Q. How many conservative economists does it take to screw in a light bulb? A. None. If the government would just leave it alone, it would screw itself in.
Micro232 2004 JAFGAC Real-World Supply and Demand Applications n Supply and demand can be used to evaluate real-world events.
Micro232 2004 JAFGAC The Market for Advertising n Supply in this market is relatively constant. n Demand fluctuates significantly.
Micro232 2004 JAFGAC The Market for Advertising n In 2001, demand for advertising fell as the U.S. economy slowed down. n The supply/demand model would predict that price and quantity to fall.
Micro232 2004 JAFGAC The Market for Advertising Quantity of advertisements
Micro232 2004 JAFGAC The Market for Advertising n Instead of lowering price, the media offered higher quality advertising at the same price. n This is equivalent to a decline in price.
Micro232 2004 JAFGAC The Price of a Foreign Currency n The market for foreign currencies is called the foreign exchange (forex) market. n The exchange rate – the price of one currency in terms of another currency.
Micro232 2004 JAFGAC The Price of a Foreign Currency n People demand currencies of other countries to buy those countries’ goods and assets.
Micro232 2004 JAFGAC The Price of a Foreign Currency n The determination of exchange rate is the same as the determination of price. n A currency is just another good.
Micro232 2004 JAFGAC The Price of a Foreign Currency n The euro is the currency used by 12 of the members of the European Union. n The euro dropped from $1.17 to about $0.90 in the two years from when it was introduced.
Micro232 2004 JAFGAC The Price of a Foreign Currency
Micro232 2004 JAFGAC Three Real World Examples n Supply and demand can shed light on a variety of real-world events: l Florida freeze. l Burkhas in Afghanistan. l Coffee beans.
Micro232 2004 JAFGAC Florida Freeze n The crop-damaging freeze shifted the supply curve to the left. n At the original price, quantity demanded exceeded quantity supplied. n Price rose until the quantity demanded equaled the quantity supplied.
Micro232 2004 JAFGAC Burkhas in Afghanistan n Once the Taliban was ousted in Afghanistan, demand for burkhas fell as many women stopped wearing them. n At the original price, quantity supplied exceeded quantity demanded. n Price fell until the quantity demanded equaled the quantity supplied.
Micro232 2004 JAFGAC Coffee Beans n The supply of coffee increased as new growers entered the market, growing techniques improved, and weather was favorable. n Coffee-growers attempted to increase demand by instituting a successful marketing campaign.
Micro232 2004 JAFGAC Coffee Beans n The supply increase causes price to fall. n If the marketing campaign is successful, demand will increase, raising price back to its former level.
Micro232 2004 JAFGAC Government Intervention in the Market n Buyers look to government for ways to hold prices down. n Sellers look to government for ways to hold prices up.
Micro232 2004 JAFGAC Price Ceilings n A price ceiling is a government-imposed limit on how high a price can be charged.
Micro232 2004 JAFGAC Rent Controls n Rent control is a price ceiling on rents set by government. n An example is rent control in Paris following World War I and World War II.
Micro232 2004 JAFGAC Rent Controls n Rent control in Paris resulted in: l A huge shortage of living quarters. l New housing construction stopped. l Existing housing was allowed to deteriorate. l Many families had to double up with other family members.
Micro232 2004 JAFGAC Price Floors n A price floor is a government-imposed limit on how low a price can be charged.
Micro232 2004 JAFGAC Minimum Wage n The minimum wage is an example of a price floor. n A minimum wage is set by government specifying the lowest wage a firm can legally pay an employee.
Micro232 2004 JAFGAC Minimum Wage n The minimum wage creates winners and losers: l Those who can find work earn a higher wage. l Others become unemployed. l Production costs increase. l Consumers pay higher prices.
Micro232 2004 JAFGAC Minimum Wage n Economists disagree about the effects of the minimum wage.
Micro232 2004 JAFGAC Excise Taxes n An excise tax is a tax that is levied on a specific good. n A tariff is an excise tax on an imported good. n Taxes and tariffs raise prices and reduce quantity.
Micro232 2004 JAFGAC Excise Taxes n A luxury tax was imposed on expensive boats in 1990. n Because the luxury tax was imposed on the boat builders, the supply curve moved up by the amount of the tax.
Micro232 2004 JAFGAC Excise Taxes n The price of expensive boats rose by less than the tax, while the quantity supplied and quantity demanded fell.
Micro232 2004 JAFGAC Excise Taxes n A tariff has the same effect on equilibrium price and quantity as an excise tax. n The difference is that foreign producers sending goods into the U.S. pay the tax.
Micro232 2004 JAFGAC Quantity Restrictions n Governments often regulate markets with licenses which limit entry into a market. n Quantity restrictions tends to increase price.
Micro232 2004 JAFGAC Quantity Restrictions in the Market for Taxi Licenses
Micro232 2004 JAFGAC Third-Party-Payer Markets n In third-party-payer markets, the person who receives the good differs from the person paying for the good. n Equilibrium quantity and total spending is much higher in third-party-payer markets.