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Chapter 4 Applications of Demand and Supply

Chapter 4 Applications of Demand and Supply. Personal Computer Shipments, Market Percentage Shares by Vendors, World and United States 2011. The Personal Computer Market. Supply increases due to Δ in technology Product becomes more useful due to network effects and improved quality

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Chapter 4 Applications of Demand and Supply

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  1. Chapter 4 Applications of Demand and Supply

  2. Personal Computer Shipments, Market Percentage Shares by Vendors, World and United States 2011

  3. The Personal Computer Market • Supply increases due to Δ in technology • Product becomes more useful due to network effects and improved quality • Network effect: when a product becomes more valuable as more people have it…telephones, etc • Demand increases because of improved network effect and quality • Increased demand spurs continued investment/improvement…

  4. Increasing Demand for Crude Oil Clicker: In this graph, Demand increases from D1 to D2. What happens to Supply? Supply increases Supply is unchanged Supply decreases Huh???

  5. Increasing Demand for Crude Oil Clicker: In this graph, Demand increases from D1 to D2. What happens to Quantity Supplied? Quantity Supplied increases Quantity Supplied is unchanged Quantity Supplied decreases Huh???

  6. Quick Market Terms: • 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 Reports suggest rising profits for Intel corp. Seller Expectations? Buyer Expectations?

  9. A Change in Expectations Affects the Price of Corporate Stock CLICKER In this graph, after both supply and demand effects have taken place what is the result in comparison to the initial equilibrium? Price and quantity both increased Price increased Quantity increased Price and quantity decreased We’re not sure what the net effect is.

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

  11. Price Floors and Ceilings • Price Floor: price is not allowed to decrease below a certain level. Examples: minimum wage, agricultural price supports. • If the floor is above the equilibrium price, then it results in a surplus. • In the labor market, a “surplus” means unemployment. But how much? • Price Ceiling: price is not allowed to increase above a certain level. Example: rent controls. • If the ceiling is below the equilibrium price, then it results in a shortage.

  12. With demand curve in position D1, the market would be in equilibrium at a price of $13 With a price support (minimum price) of $13 and demand curve D2, there would be a surplus of milk Price Support for Milk:A Price Floor

  13. Another Price Floor / Price support

  14. Another Price Floor / Price support

  15. A Price Floor

  16. Price Floors in Wheat Markets

  17. Rental Price Ceilings • The purpose of rent control is to make rental units cheaper for tenants than they would otherwise be • Rent control is an example of a price ceiling • Price ceiling a maximum allowable price set below the equilibrium price.

  18. Rent control (establishing a limit on maximum rent) on housing will cause a shortage of rental housing The shortage will be greater in the long run, when there is time to adjust the quantity of housing supplied Effects of Rent Control

  19. Rent Controls:A price ceiling

  20. The Unintended Consequences of Rent Control • Side payments • Cost-cutting discrimination • Smokers? • Children? • Pets? • College men? • Poor maintenance • Ghetto??? • …. Etc???

  21. 3. THE MARKET FOR HEALTH-CARE SERVICES • Learning Objectives • 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.

  22. THE MARKET FOR HEALTH-CARE SERVICES • There has been much discussion over the past three decades about the health-care problem in the United States. • Much of this discussion has focused on rising spending for health care

  23. Health -Care Spending as a Percentage of U.S. Output, 1960–2009

  24. 3.1 The Demand and Supply for Health Care • To assess the market forces affecting health care, we will focus first on just one of these markets: the market for physician office visits.

  25. Total Spending for Physician Office Visits

  26. 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. • Consumers use more than they would in the absence of third-party payers • Providers are encouraged to supply more than they otherwise would. • The result is increased total spending.

  27. Total Spending for Physician Office Visits Covered by Insurance

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