Applications of Demand and Supply Chapter 4 Applications of Demand and Supply

1. PUTTING DEMAND AND SUPPLY TO WORK Learning Objectives Learn how to apply the model of demand and supply to explaining the behavior of equilibrium prices and quantities in a variety of markets. Explain how technological change can be represented using the model of demand and supply. Explain how the model of demand and supply can be used to explain changes in prices of shares of stock.

1.1 The Personal Computer Market

1.1 The Personal Computer Market Computer markets have seen increased supply and demand. S1 S2 P1 P2 D1 D2 Q1 Q2

1.2 The Markets for Crude Oil and Gasoline The increasing demand for crude oil. The impact of higher gas prices. S1 S2 S1 $140 35 P2 P1 D1 D1 D2 Q1 Q2 Q2 Q1

1.3 The Stock Market A sole proprietorship is a situation in which one individual owns a firm. A partnership is a situation in which several individuals own a firm. A corporation is a situation in which shareholders own stock in a firm. Corporate stocks are shares in the ownership of a corporation. A stock market is a set of institutions in which shares of stock are bought and sold. Retained earnings are profits NOT paid out in dividends. Dividends are profits distributed to shareholders.

Demand and Supply in the Stock Market

A Change in Expectations Affects the Price of Corporate Stock D2 D1 Q1 Q2

2. GOVERNMENT INTERVENTION IN MARKET PRICES: PRICE FLOORS AND PRICE CEILINGS Learning Objectives Use the model of demand and supply to explain what happens when the government imposes price floors or price ceilings. Discuss the reasons why governments sometimes choose to control prices and the consequences of price control policies.

2.1 Agricultural Price Floors Price floor a minimum allowable price set above the equilibrium price. (e.g. Wheat) Surplus S PF PE D W1 W2

Supply and Demand Shifts for Agricultural Products Q1 Q2

2.2 Rental Price Ceilings Price ceiling a maximum allowable price set below the equilibrium price. S PE PC Shortage D A1 A2

The Unintended Consequences of Rent Control Consumers are willing and able to pay PB S This creates a shortage leading to various backdoor payments to apartment owners PB PC Shortage D A1 A2

3 THE MARKET FOR HEALTH-CARE SERVICES Learning Objectives Use the model of demand and supply to explain the effects of third-party payers on the health-care market and on health-care spending.

Health-Care Spending as a % of U.S. Output, 1960-2003

3.1 The Demand and Supply for Health Care A third party payer is an agent other than the seller or the buyer who pays part of the price of a good or service.

Total Spending for Physician Office Visits $30 E Total Spending = P*Q $30*1m = $30m D1 1,000,000

Total Spending for Physician Office Visits Covered by Insurance With insurance the number of office visits increases. At $50 per visit quantity supplied increases to 1,500,000 Doctors receive $50 per visit. S1 $50 F Total Spending = $75m Insurers pay $40 per visit. $30 E Total Spending = $30m $10 Patients pay $10 per visit. D1 1,000,000 1,500,000