Extensions of Demand and Supply Analysis Chapter 4 Extensions of Demand and Supply Analysis

Changes in Demand and Supply Changes in supply and demand create a disequilibrium. The market price and quantity adjust to a new equilibrium.

Figure 4-1 Shifts in Demand and in Supply: Determinate Results, Panel (a)

Figure 4-1 Shifts in Demand and in Supply: Determinate Results, Panel (b)

Figure 4-1 Shifts in Demand and in Supply: Determinate Results, Panel (c)

Figure 4-1 Shifts in Demand and in Supply: Determinate Results, Panel (d)

Changes in Demand and Supply (cont'd) Summary Increases in demand increase equilibrium price and quantity. Decreases in demand decrease equilibrium price and quantity. Increases in supply decrease equilibrium price and increase equilibrium quantity. Decreases in supply increase equilibrium price and decrease equilibrium quantity.

The Policy of Government-Imposed Price Controls Government-mandated minimum or maximum prices Price Ceiling A legal maximum price (rent control) Price Floor A legal minimum price (e.g., farm products, minimum wage)

Figure 4-4 Agricultural Price Supports

Myth #4: Government intervention is a good thing The truth is: Government intervention in a free market most often leads to wastes (inefficiency) There’s no free lunch: Government policy can benefit some people at the expense of other people, but there is an overall waste in society