Introduction: Thinking Like an Economist 1 CHAPTER 2 Using Supply and Demand It is by invisible hands that we are bent and tortured worst. — Nietzsche CHAPTER 5 Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

1 Using Supply and Demand Application: Apples in the United States D0D0 Quantity The hurricane damage caused the supply curve to shift left Hurricane Irene destroyed a significant portion of the apple crop in the northeastern U.S. S1S1 Price rose from P 0 to P 1 where quantity demanded = quantity supplied Q1Q1 P1P1 S0S0 Price P0P0 Q0Q0 Apples Excess demand

1 Using Supply and Demand Application: Sales of SUVs in the U.S. P0P0 Q1Q1 P1P1 Increasing gas costs causes the demand curve to shift left Gasoline in the U.S. is increasingly expensive Price for SUVs fell from P 0 to P 1 where Q demanded = Q supplied S0S0 D0D0 Price Quantity Q0Q0 SUVs Excess supply D1D1

1 Using Supply and Demand Application: Edible Oils in the World S0S0 D0D0 Price Quantity Growing middle class in Asia has increased demand for oils S1S1 At the same time, U.S. farmers are growing more corn and less soy (less soy oil) Edible Oils P0P0 P1P1 D1D1 The result is increased prices for edible oils

1 Using Supply and Demand S0S0 D0D0 P (rental price per month) Q (number of apartments) $17 $2.50 QDQD QSQS Shortage Housing The rent controls caused a housing shortage After WWII, rent controls (a form of price ceiling) were put in place There would not be a shortage if rents had been allowed to increase to the equilibrium price of $17 Application: Rent Controls in Paris

1 Using Supply and Demand Application: A Minimum Wage S0S0 D0D0 P (wage per hour) Q (quantity of workers) W0W0 W min QDQD QSQS Excess supply = unemployment Labor Minimum wages cause unemployment A minimum wage is a type of price floor, it is the lowest wage a firm can legally pay an employee Q0Q0

1 Using Supply and Demand Application: The Effect of an Excise Tax S0S0 D0D0 Price Quantity $60, The supply curve shifts up by the amount of the tax Government imposes a $10,000 luxury tax on the suppliers of boats S1S1 The price of boats rises by less than the tax to $65,000 Tax = $10,000 Luxury Boats $65, $10,000 $70,000

1 Using Supply and Demand Application: The Effect of a Quantity Restriction QRQR D0D0 12,000 When the demand for taxi services increased, because the number of taxi licenses was limited, wages increased Successful lobbying by taxi cab drivers in NYC resulted in quantity restrictions (medallions) NYC Taxi Drivers $15 P (wages per week ) Q (number of licensed taxis) D1D1

1 Using Supply and Demand Application: The Effect of a Quantity Restriction QRQR D0D0 12,000 The demand for taxi medallions also increased because wages were increasing. But because the number of taxi licenses was limited, the price of a medallion also increased NYC Taxis Medallions $400,000 P (price of taxi medallion ) Q (number of taxi of medallions) D1D1 Initial Fee

1 Using Supply and Demand Application: Third-Party-Payer Markets D emand 10 Health Care $25 Price Quantity $45 $5 S upply 18 The consumer pays the entire cost Total expenditures for 18 units of health care With a copayment of $5, consumers demand 18 units Sellers require $45 per unit for that quantity …are greater than when…