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DEMAND AND SUPPLY APPLICATIONS

5. DEMAND AND SUPPLY APPLICATIONS. CHAPTER. Price Rationing. The process by which the market system allocates goods and services to consumers when quantity demanded exceeds quantity supplied.

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DEMAND AND SUPPLY APPLICATIONS

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  1. 5 DEMAND AND SUPPLY APPLICATIONS CHAPTER

  2. Price Rationing • The process by which the market system allocates goods and services to consumers when quantity demanded exceeds quantity supplied. • Queuing is waiting in a line as a means of distributing goods and services: a non-price rationing mechanism. • Favored customers are the ones who receive special treatment from dealers during situations of excess demand. • Black market is a market in which illegal trading takes place at market-determined prices.

  3. Price Floors • A minimum price below which exchange is not permitted. • Minimum wage is a price floor set under the price of labor.

  4. Consumer Surplus • Consumer surplus is the value of a good minus the price paid for it. • If a person buys something for less than they are willing to pay for it, a consumer surplus exists.

  5. Consumer surplus Lisa’s consumer surplus from the 10th pizza Market price Amount paid Consumer Surplus • CS 2.50 Price (dollars per slice) 2.00 1.50 1.00 0.50 D 0 10 20 30 40

  6. Producer Surplus • Producer surplus is the value of a good minus the • opportunity cost of producing it. • If a firm sells something for more that it costs to produce, a • producer surplus exists

  7. Max’s producer surplus from the 50th pizza Market price Producer surplus Cost of Production Producer Surplus • PS S = MC 25 20 Price (dollars per pizza) 15 10 5 0 50 100 150 200 Quantity (pizzas per day)

  8. Consumer surplus Marginal cost-- (opportunity cost) --of pizza Marginal benefit-- (value)--of pizza Producer surplus Efficient quantity of pizzas An Efficient Market for Pizza • EF S 25 Price (dollars per pizza) 20 15 10 D 0 5 10 15 20 Quantity (thousands of pizzas per day)

  9. Deadweight Loss • The decrease in consumer and producer surplus that results from an inefficient allocation of resources.

  10. Deadweight loss Deadweight Loss Underproduction • DWL S 25 Price (dollars per pizza) 20 15 10 5 D 0 5 10 15 20 Quantity (thousands of pizzas per day)

  11. Deadweight loss Deadweight Loss Overproduction • DWL Overproduction S 25 Price (dollars per pizza) 20 15 10 5 D 0 5 10 15 20 Quantity (thousands of pizzas per day)

  12. THE END

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