Applications of Demand and Supply

1. Applications of Demand and Supply Chapter 4

2. The Personal Computer Market Invention of the microchip reduced the cost of producing computers This technological improvement shifted supply to the right (see Exhibit 4-2p.85) 1990 27 million computers sold 1997 87 million sold

3. Households with Computer and Internet UseSource: U.S. Census Bureau, Current Population Survey, October 1984, 1989, 1993, 1997, 2000, 2001, 2003, 2007, 2009. 1989 94,061 households owned computers 1997 102,158 households owned computers 2009 199,296 households owned computers

4. The Stock Market Types of firms Sole proprietorship (firm owned by one person) Partnership (firm owned by several individuals) Corporation (firm owned by shareholders who own stock in the firm

5. The Stock Market Most firms in US are sole proprietorships or partnerships Corporations produce 90% of the nation’s total output How is the price of corporate stock determined? Corporate stock- shares in the ownership of a corporation

6. The Stock Market One way a corporation can generate financial capital is by offering shares of stock for sale. The first time a corporation does this is called an IPO (initial public offering) Stock prices on news are usually that of secondary markets

7. The Stock Market NYSE (New York Stock Exchange) 1792, 2,800 companies listed, home of the Dow Jones and S&P 500 indexes AMEX (American Stock Exchange) Founded after the Civil War, ~800 companies NASDAQ (NASDAQ Stock Market) 1971, ~3,700 companies listed, largest market in terms of stocks traded

8. The Stock Market Intersection of supply and demand curves for stock determines the equilibrium price per share Because stock represents ownership in a company, the expected level of future profits, plays role in determining value

9. Factors Affecting a Stock’s Value Most important factor in determining supply and demand for stock is the expectations about a company’s future profits Demographic changes and income level Information on the economy as a whole Because information about the economy and individual corporations is readily available, value of stock fluctuates daily

10. Government Intervention in Markets Government sometimes intervenes in market to prevent it (usually for political reasons) from reaching equilibrium This may be politically expedient, but is not usually economically efficient

11. Price Floors (Agriculture) Price floora minimum allowable price Set above equilibrium (see Exhibit 4-5, p. 90) Creates a surplus Set to protect a particular group (see Case in Point, p. 91) Supply of agricultural products has increased faster than demand

12. Price Floors (Agriculture) Government Intervention Government buys up surplus After 1973, government agreed to give farmers a target price for the goods; government pays difference between market and target Goal was to help small farmers, but usually benefits large farms Restructure policy to aid small farmers directly

13. Price Floors (Agriculture) Effects Inefficiency consumers pay more 1996 FAIR (Federal Agriculture Improvement and Reform Act) To try and reduce price support for most crops Congress extended price supports in 1998 in light of falling prices

14. Price Ceilings (Rent Control) Price ceiling a maximum allowable price Set below equilibrium (see Exhibit 4-7 on p. 93) Creates shortage Idea is to keep housing affordable to low and middle income tenants

15. Price Ceilings (Rent Control) Effects People reluctant to move Leads to abuse of tenants by landlords Often the poor are not help Increases government spending in terms of enforcement and administration Another solution could be housing subsidies to those who meet criteria