USING SUPPLY AND DEMAND Chapter 5 USING SUPPLY AND DEMAND

Review of Changes in Supply and Demand No change in Supply shifts Supply shifts supply out in No change Price falls; Price rises; No change. in demand Quantity rises. Quantity falls. Quantity rises; Price rises; Demand Price rises; Price could be Quantity could shifts out Quantity rises . high or lower. rise or fall. Price falls ; Price falls; Quantity falls; Demand Quantity falls Quantity could Price could shifts in rise or fall. rise or fall.

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.

Rent Controls S 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. $17.00 2.50 Shortage Rental Price (per month) D QS QD Quantity of apartments

Minimum Wage S 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. Wmin We Wage per hour D Q2 Qe Q1 Quantity of Workers

The decrease in production will decrease supply from S0 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. S1 D1 S0 D0 P P0 P1 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. Q

Review Question 5-2 Given the following demand and supply of pizza: Price Quantity Quantity per Pizza Supplied Demanded $8 200 60 7 150 80 6 100 100 5 50 120 4 0 140 What is the effect of a price floor of $8? A price floor of $8 will create a surplus of 200 – 60 = 140 pizzas.