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Chapter Outline

4. Demand and Supply Applications. Chapter Outline.

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Chapter Outline

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  1. 4 Demand and SupplyApplications Chapter Outline The Price System: Rationing and Allocating ResourcesPrice RationingConstraints on the Market and Alternative Rationing MechanismsPrices and the Allocation of ResourcesPrice FloorsSupply and Demand Analysis: An Oil Import FeeSupply and Demand and Market EfficiencyConsumer SurplusProducer SurplusCompetitive Markets Maximize the Sum of Producer and Consumer SurplusPotential Causes of DeadweightLoss from Under- and OverproductionLooking Ahead

  2. THE PRICE SYSTEM: RATIONINGAND ALLOCATING RESOURCES price rationing The process by which the market system allocates goods and services to consumers when quantity demanded exceeds quantity supplied.

  3. THE PRICE SYSTEM: RATIONINGAND ALLOCATING RESOURCES PRICE RATIONING FIGURE 4.1 The Market for Lobsters

  4. THE PRICE SYSTEM: RATIONINGAND ALLOCATING RESOURCES When supply is fixed or something for sale is unique, its price is demand determined. Price is what the highest bidder is willing to pay. In 2004, the highest bidder was willing to pay $104.1 million for Picasso’s Boy with a Pipe. The adjustment of price is the rationing mechanism in free markets. Price rationing means that whenever there is a need to ration a good—that is, when a shortage exists—in a free market, the price of the good will rise until quantity supplied equals quantity demanded—that is, until the market clears.

  5. THE PRICE SYSTEM: RATIONINGAND ALLOCATING RESOURCES FIGURE 4.2 Market for a Rare Painting

  6. THE PRICE SYSTEM: RATIONINGAND ALLOCATING RESOURCES CONSTRAINTS ON THE MARKET AND ALTERNATIVE RATIONING MECHANISMS On occasion, both governments and private firms decide to use some mechanism other than the market system to ration an item for which there is excess demand at the current price. • Regardless of the rationale, two things are clear: • 1. Attempts to bypass price rationing in the market and to use alternative rationing devices are much more difficult and costly than they would seem at first glance. • 2. Very often, such attempts distribute costs and benefits among households in unintended ways.

  7. THE PRICE SYSTEM: RATIONINGAND ALLOCATING RESOURCES Oil, Gasoline, and OPEC price ceiling A maximum price that sellers may charge for a good, usually set by government. FIGURE 4.3 Excess Demand (Shortage) Created by a Price Ceiling

  8. THE PRICE SYSTEM: RATIONINGAND ALLOCATING RESOURCES queuing Waiting in line as a means of distributing goods and services: a nonprice rationing mechanism. favored customers Those who receive special treatment from dealers during situations of excess demand.

  9. THE PRICE SYSTEM: RATIONINGAND ALLOCATING RESOURCES ration coupons Tickets or coupons that entitle individuals to purchase a certain amount of a given product per month. black market A market in which illegal trading takes place at market-determined prices. Even when trading coupons is declared illegal, it is virtually impossible to stop black markets from developing. In a black market, illegal trading takes place at market-determined prices.

  10. THE PRICE SYSTEM: RATIONINGAND ALLOCATING RESOURCES NCAA March Madness: College Basketball’s National Championship FIGURE 4.4 Supply of and Demand for a Pair of Final Four Tickets in 2003

  11. THE PRICE SYSTEM: RATIONINGAND ALLOCATING RESOURCES There are many ways to deal with the excess demand to premiere sporting events such as the NCAA finals, but it is hard to keep tickets from those who are willing to pay high prices. Syracuse played Kansas in the NCAA championship game in 2003. No matter how good the intentions of private organizations and governments, it is very difficult to prevent the price system from operating and to stop willingness to pay from asserting itself. Every time an alternative is tried, the price system seems to sneak in the back door. With favored customers and black markets, the final distribution may be even more unfair than that which would result from simple price rationing.

  12. REVIEW TERMS AND CONCEPTS • black market • favored customers • price ceiling price rationing queuing ration coupons

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