1. Allocation and Information
PRICES
Allocation and Information

2. When left alone, the market will always find the optimal (market-clearing) price!
QS > QD = Surplus P1
Sale
“The Happy Place” PM
Market – Clearing Price
Equilibrium
QD=QS
Bid-up
QD > QS = Shortage P2 D Q QS QD QD QE QS
Pizza

3. 1970’s Gas Shortage – gas lines OPEC
Organization of the Petroleum Exporting Countries
Middle East
Religious Revolutions
“Western Influence”
Sharply decreased the supply of oil to the United States and other western countries

4. 1970’s S1 S S1 S Soil Poil Sgas Pgas P P P2 $2.00/g P2 P1 $.25/g P1 DQ Q2 Q1 Q Q2 Q1
OIL
GAS
Cost of producing gas
Soil
Poil
Sgas
Pgas

5. 1970’s Cars of the 70’s “Gas Guzzlers” Muscle Cars Big Engines Heavy
Averaged 8 mi./gallon !!!!!

6. What the government did to solve the problem with gas prices….
$2.00 PM
Equilibrium
QD=QS
QD > QS = Shortage
$1.00 PC D
Price Ceiling: A maximum legal price, below market price Q QS QD QE
Gas

7. Effects of the Gas Shortage
Short-term effects:
Gas lines / gas rationing
“Black Market” for gas
Gas related crime
Long-term effects:
Nearly destroyed the US auto industry
Delayed the development of alternative fuel sources

8. 1980’s “Cold War” US v. USSR War of ideology – capitalism v. communism
Arms race
Invaded Afghanistan
Boycotted Olympics
Armed the resistance
Led by Osama Bin Laden
Instituted full economic embargo

9. Effects of the Embargo against the Soviet Union….P S S1
$30/b PM
$10/b P1 D Q QE Q1
Wheat

10. What the government did to help the farmers……
Price Floor:
A minimum legal price, above market price
$20/b PF
QS > QD = Surplus
$10/b P1 D Q QD Q1 QS
Wheat

11. Effects of the Wheat Surplus
Farmers couldn’t sell wheat at the floor price, so government bought it
Had the market been left alone, farmers would have reallocated resources to more profitable crops

12. Let’s Practice! Get into groups
Each group will have a whiteboard and a marker
The following slides will describe various situations. As a group, discuss the effect on either supply or demand and draw a graph that illustrates the change, showing the new equilibrium price and quantity, on your whiteboard. State the determinant.
The group that holds up its whiteboard first, with the correct answer gets a point.

13. Practice Question
A freeze destroys Florida’s orange crop.

14. Practice Question
A freeze destroys Florida’s orange crop. This would decrease the supply, because of change in the number of producers.

15. A freeze destroys Florida’s orange crop.
Practice Question
A freeze destroys Florida’s orange crop. S1 S
A decrease in supply causes and increase in price and a decrease in quantity available. D
Price P2 P1
Oranges Q2 Q1
Quantity

16. Your turn!
What would be the effect of the freeze that destroyed Florida’s orange crop on the market for apple juice?
Steak is a normal good. What happens to the price and quantity of steak if consumer incomes rise?
People’s taste for pizza increases. At the same time, Pizza Hut builds several new restaurants.

17. Your turn!
New technology improves production of home satellite dishes at the same time more people subscribe to cable. How will this affect the market for satellite systems?
Economic stress causes more heart attacks. At the same time, more organ donors are living longer. What will happen to the market for heart transplants?

18. Your turn!
Consumers consider Spam to be an inferior good. What happens to its price and quantity when consumer incomes fall?
The price of hamburger falls. What will happen in the market for hot dogs?
New Federal regulations increase the cost of producing all types of meat. How will this affect the market for hot dog buns?