1. USING SUPPLY AND DEMAND
Chapter 5
USING SUPPLY AND DEMAND

2. Review of Changes in Supply and Demand
No change in
Supply shifts
Supply shifts
supply
out in
No change
Price falls;
Price rises;
No change.
in demand
Quantity rises.
Quantity falls.
Quantity rises;
Price rises;
Demand
Price rises;
Price could be
Quantity could
shifts out
Quantity
rises .
high or lower.
rise or fall.
Price
falls ;
Price falls;
Quantity falls;
Demand
Quantity falls
Quantity could
Price could
shifts in
rise or fall.
rise or fall.

3. Government Intervention in the Market
Buyers look to the government for ways to hold prices down.
A price ceiling is a government-imposed limit on how high a price can be charged.
Sellers look to the government for ways to hold prices up.
A price floor is a government-imposed limit on how low a price can be charged.

4. Rent Controls S
A rent control is a price ceiling on rents set by the government.
Rent control set at $2.50 per month in Paris after World War II created a housing shortage.
The shortage would have been eliminated if rents had been allowed to rise to $17 per month.
$17.00
2.50
Shortage
Rental Price (per month) D QS QD
Quantity of apartments

5. Minimum Wage S
The minimum wage, a price floor, is set by government specifying the lowest wage a firm can legally pay.
A minimum wage, Wmin, above the equilibrium wage, We, helps those who are employed, Q2, but hurts those who would have been employed at We, but can no longer find employment, Qe- Q2.
Wmin We
Wage per hour D Q2 Qe Q1
Quantity of Workers

6. The decrease in production will decrease supply from S0
Review Question 5-1 Use a graph to explain the likely impact
on the price of gasoline of a decrease in OPEC oil production
due to instability in Iraq and an increase in vacation travel
during the summer. S1 D1 S0 D0 P P0 P1
The decrease in production
will decrease supply from S0
to S1. The increase in demand for gasoline for vacation travel will increase
demand from D0 to D1. Price increases from P0 to P1. Q

7. Review Question 5-2
Given the following demand and supply of pizza:
Price Quantity Quantity
per Pizza Supplied Demanded $
What is the effect of a price floor of $8?
A price floor of $8 will create a surplus of 200 – 60 = 140
pizzas.