1. Micro232 2004 - JAFGAC Using Supply and Demand Chapter 5

2. Micro232 2004 JAFGAC Laugher Curve Q. How many conservative economists does it take to screw in a light bulb? A. None. If the government would just leave it alone, it would screw itself in.

3. Micro232 2004 JAFGAC Real-World Supply and Demand Applications n Supply and demand can be used to evaluate real-world events.

4. Micro232 2004 JAFGAC The Market for Advertising n Supply in this market is relatively constant. n Demand fluctuates significantly.

5. Micro232 2004 JAFGAC The Market for Advertising n In 2001, demand for advertising fell as the U.S. economy slowed down. n The supply/demand model would predict that price and quantity to fall.

6. Micro232 2004 JAFGAC The Market for Advertising Quantity of advertisements

7. Micro232 2004 JAFGAC The Market for Advertising n Instead of lowering price, the media offered higher quality advertising at the same price. n This is equivalent to a decline in price.

8. Micro232 2004 JAFGAC The Price of a Foreign Currency n The market for foreign currencies is called the foreign exchange (forex) market. n The exchange rate – the price of one currency in terms of another currency.

9. Micro232 2004 JAFGAC The Price of a Foreign Currency n People demand currencies of other countries to buy those countries’ goods and assets.

10. Micro232 2004 JAFGAC The Price of a Foreign Currency n The determination of exchange rate is the same as the determination of price. n A currency is just another good.

11. Micro232 2004 JAFGAC The Price of a Foreign Currency n The euro is the currency used by 12 of the members of the European Union. n The euro dropped from $1.17 to about $0.90 in the two years from when it was introduced.

12. Micro232 2004 JAFGAC The Price of a Foreign Currency

13. Micro232 2004 JAFGAC Three Real World Examples n Supply and demand can shed light on a variety of real-world events: l Florida freeze. l Burkhas in Afghanistan. l Coffee beans.

14. Micro232 2004 JAFGAC Florida Freeze n The crop-damaging freeze shifted the supply curve to the left. n At the original price, quantity demanded exceeded quantity supplied. n Price rose until the quantity demanded equaled the quantity supplied.

15. Micro232 2004 JAFGAC Florida Freeze Demand S0S0 (b) P1P1 Q1Q1 P0P0 Q0Q0 S1S1

16. Micro232 2004 JAFGAC Burkhas in Afghanistan n Once the Taliban was ousted in Afghanistan, demand for burkhas fell as many women stopped wearing them. n At the original price, quantity supplied exceeded quantity demanded. n Price fell until the quantity demanded equaled the quantity supplied.

17. Micro232 2004 JAFGAC Burkhas in Afghanistan Supply (f) P1P1 Q0Q0 Q1Q1 P0P0 D1D1 D0D0

18. Micro232 2004 JAFGAC Coffee Beans n The supply of coffee increased as new growers entered the market, growing techniques improved, and weather was favorable. n Coffee-growers attempted to increase demand by instituting a successful marketing campaign.

19. Micro232 2004 JAFGAC Coffee Beans n The supply increase causes price to fall. n If the marketing campaign is successful, demand will increase, raising price back to its former level.

20. Micro232 2004 JAFGAC Coffee Beans (b) S1S1 D0D0 P1P1 S0S0 D1D1 P0P0 Q1Q1 Q0Q0

21. Micro232 2004 JAFGAC A Review

22. Micro232 2004 JAFGAC Government Intervention in the Market n Buyers look to government for ways to hold prices down. n Sellers look to government for ways to hold prices up.

23. Micro232 2004 JAFGAC Price Ceilings n A price ceiling is a government-imposed limit on how high a price can be charged.

24. Micro232 2004 JAFGAC Rent Controls n Rent control is a price ceiling on rents set by government. n An example is rent control in Paris following World War I and World War II.

25. Micro232 2004 JAFGAC Rent Controls n Rent control in Paris resulted in: l A huge shortage of living quarters. l New housing construction stopped. l Existing housing was allowed to deteriorate. l Many families had to double up with other family members.

26. Micro232 2004 JAFGAC Rent Controls QSQS QDQD Supply Demand Rental Price (per month) Quantity of apartments 2.50 $17.00 Shortage

27. Micro232 2004 JAFGAC Price Floors n A price floor is a government-imposed limit on how low a price can be charged.

28. Micro232 2004 JAFGAC Minimum Wage n The minimum wage is an example of a price floor. n A minimum wage is set by government specifying the lowest wage a firm can legally pay an employee.

29. Micro232 2004 JAFGAC Minimum Wage n The minimum wage creates winners and losers: l Those who can find work earn a higher wage. l Others become unemployed. l Production costs increase. l Consumers pay higher prices.

30. Micro232 2004 JAFGAC Minimum Wage n Economists disagree about the effects of the minimum wage.

31. Micro232 2004 JAFGAC Excise Taxes n An excise tax is a tax that is levied on a specific good. n A tariff is an excise tax on an imported good. n Taxes and tariffs raise prices and reduce quantity.

32. Micro232 2004 JAFGAC Excise Taxes n A luxury tax was imposed on expensive boats in 1990. n Because the luxury tax was imposed on the boat builders, the supply curve moved up by the amount of the tax.

33. Micro232 2004 JAFGAC Excise Taxes n The price of expensive boats rose by less than the tax, while the quantity supplied and quantity demanded fell.

34. 65,000 510 S1S1 420 $70,000 D S0S0 Quantity of luxury boats 0 Price of luxury boats The Effect of an Excise Tax on Price and Quantity The supply curve shifts up by the $10,000 tax 60,000 600 McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

35. Micro232 2004 JAFGAC Excise Taxes n A tariff has the same effect on equilibrium price and quantity as an excise tax. n The difference is that foreign producers sending goods into the U.S. pay the tax.

36. Micro232 2004 JAFGAC Quantity Restrictions n Governments often regulate markets with licenses which limit entry into a market. n Quantity restrictions tends to increase price.

37. Micro232 2004 JAFGAC Quantity Restrictions in the Market for Taxi Licenses

38. Micro232 2004 JAFGAC Third-Party-Payer Markets n In third-party-payer markets, the person who receives the good differs from the person paying for the good. n Equilibrium quantity and total spending is much higher in third-party-payer markets.

39. Micro232 2004 JAFGAC Third-Party-Payer Markets

40. Micro232 2004 - JAFGAC Using Supply and Demand End of Chapter 5