2. 1. PUTTING DEMAND AND SUPPLY TO WORK Learning Objectives 1.Learn how to apply the model of demand and supply to explaining the behavior of equilibrium prices and quantities in a variety of markets. 2.Explain how technological change can be represented using the model of demand and supply. 3.Explain how the model of demand and supply can be used to explain changes in prices of shares of stock.

3. 1.1 The Personal Computer Market

4. 1.1 The Personal Computer Market P1P1 P2P2 Q1Q1 Q2Q2 S1S1 S2S2 D1D1 D2D2 Computer markets have seen increased supply and demand.

5. 1.2 The Markets for Crude Oil and Gasoline $140 Q1Q1 Q2Q2 S1S1 D1D1 D2D2 P2P2 P1P1 Q2Q2 Q1Q1 S2S2 D1D1 S1S1 The increasing demand for crude oil. The impact of higher gas prices. 35

6. 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.

7. Demand and Supply in the Stock Market

8. A Change in Expectations Affects the Price of Corporate Stock P1P1 P2P2 Q1Q1 Q2Q2 S1S1 S2S2 D1D1 D2D2

9. 2. GOVERNMENT INTERVENTION IN MARKET PRICES: PRICE FLOORS AND PRICE CEILINGS Learning Objectives 1.Use the model of demand and supply to explain what happens when the government imposes price floors or price ceilings. 2.Discuss the reasons why governments sometimes choose to control prices and the consequences of price control policies.

10. 2.1 Agricultural Price Floors Price floor a minimum allowable price set above the equilibrium price. (e.g. Wheat) PFPF PEPE W1W1 W2W2 D S Surplus

11. Supply and Demand Shifts for Agricultural Products P1P1 P2P2 Q1Q1 Q2Q2 S1S1 S2S2 D1D1 D2D2

12. 2.2 Rental Price Ceilings Price ceiling a maximum allowable price set below the equilibrium price. PCPC PEPE A1A1 A2A2 D S Shortage

13. The Unintended Consequences of Rent Control PCPC PBPB A1A1 A2A2 D S Consumers are willing and able to pay P B This creates a shortage leading to various backdoor payments to apartment owners Shortage

14. 3 THE MARKET FOR HEALTH- CARE SERVICES Learning Objectives 1.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.

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

16. 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.

17. Total Spending for Physician Office Visits $30 E 1,000,000 D1D1 S1S1 0 Total Spending = P*Q $30*1m = $30m Total Spending = P*Q $30*1m = $30m

18. Total Spending = $30m Total Spending for Physician Office Visits Covered by Insurance $50 1,000,000 1,500,000 D1D1 S1S1 Doctors receive $50 per visit. Insurers pay $40 per visit. Patients pay $10 per visit. E F $30 $10 Total Spending = $75m With insurance the number of office visits increases. At $50 per visit quantity supplied increases to 1,500,000