Learning Objectives

1. Learning Objectives • Discuss the essential features of the price system • Evaluate the effects of changes in demand and supply on the market price and equilibrium quantity • Understand the rationing function of prices Chapter 4 - Extensions of Demand and Supply Analysis

2. Learning Objectives • Explain the effects of price ceilings • Explain the effects of price floors • Describe various types of government-imposed quantity restrictions on markets Chapter 4 - Extensions of Demand and Supply Analysis

3. Did You Know That... • The inflation-adjusted value of the U.S. minimum wage peaked at about $8 in 1964? • We can use supply and demand analysis to analyze effects of the minimum wage? • The model of supply and demand can explain instances of a gap between quantity supplied and quantity demanded? Chapter 4 - Extensions of Demand and Supply Analysis

4. The Price System and Markets • Price System or Market System • An economic system in which relative prices are constantly changing to reflect changes in supply and demand • Prices signal what is relatively scarce and relatively abundant. • Prices provide information to individuals and businesses. Chapter 4 - Extensions of Demand and Supply Analysis

5. The Price System and Markets • Markets • Emphasize voluntary exchange • Determine the terms of exchange • Facilitate exchange Chapter 4 - Extensions of Demand and Supply Analysis

6. The Price System and Markets • Voluntary Exchange • Acts of trading between individuals that make both parties to the trade better off • Terms of Exchange • The prices we pay for the desired items Chapter 4 - Extensions of Demand and Supply Analysis

7. The Price System and Markets • Transaction Costs • The costs associated with exchange • Examples • Price shopping • Determining quality • Determining reliability • Service availability • Cost of contracting Chapter 4 - Extensions of Demand and Supply Analysis

8. The Price System and Markets • The role of middlemen • Middlemen (intermediaries) or brokers reduce transaction costs by providing information to buyers and sellers • Examples • Real estate brokers • Stock brokers • Consignment shops • Car dealerships Chapter 4 - Extensions of Demand and Supply Analysis

9. Changes in Demand and Supply • Changes in supply and demand can create a disequilibrium. • The market price and quantity can/will adjust to a new equilibrium. Chapter 4 - Extensions of Demand and Supply Analysis

10. Shifts in Demand and in Supply: Determinate Results Chapter 4 - Extensions of Demand and Supply Analysis

11. Shifts in Demand and in Supply: Determinate Results Chapter 4 - Extensions of Demand and Supply Analysis

12. Shifts in Demand and in Supply: Determinate Results Chapter 4 - Extensions of Demand and Supply Analysis

13. Shifts in Demand and in Supply: Determinate Results Chapter 4 - Extensions of Demand and Supply Analysis

14. Changes in Demand and Supply • Summary • Increases in demand increase equilibrium price and quantity. • Decreases in demand decrease equilibrium price and quantity. Chapter 4 - Extensions of Demand and Supply Analysis

15. Changes in Demand and Supply • Summary • Increases in supply decrease equilibrium price and increase equilibrium quantity. • Decreases in supply increase equilibrium price and decrease equilibrium quantity. Chapter 4 - Extensions of Demand and Supply Analysis

16. Changes in Demand and Supply • When both demand and supply shift • Simultaneous changes in demand and supply put conflicting pressure on price or quantity. • The resulting effect depends upon how much each curve shifts. • Either equilibrium price or quantity will be indeterminate. Chapter 4 - Extensions of Demand and Supply Analysis

17. Changes in Demand and Supply • When both demand and supply increase • Change in price is indeterminate • Quantity will increase • When both demand and supply decrease • Change in price is indeterminate • Quantity will decrease Chapter 4 - Extensions of Demand and Supply Analysis

18. Changes in Demand and Supply • When supply decreases and demand increases • Price will increase • Change in quantity is indeterminate • When supply increases and demand decreases • Price will decrease • Change in quantity is indeterminate Chapter 4 - Extensions of Demand and Supply Analysis

19. Example: Why Gasoline Prices Have Increased • One factor—an increase in demand, shown by a rightward shift in the demand curve • Another factor—a reduction in supply, shown by a leftward shift in the supply curve • As a result, the market clearing price of gasoline increased. Chapter 4 - Extensions of Demand and Supply Analysis

20. The Effects of a Simultaneous Decrease in Gasoline Supply and Increase in Gasoline Demand Chapter 4 - Extensions of Demand and Supply Analysis

21. The Rationing Function of Prices • Synchronization of decisions of buyers and sellers that leads to equilibrium is called the rationing function of prices. Chapter 4 - Extensions of Demand and Supply Analysis

22. The Rationing Function of Prices • Methods of non-price rationing • Rationing by queues (waiting in line) • Rationing by random assignment, and/or coupons Chapter 4 - Extensions of Demand and Supply Analysis

23. The Rationing Function of Prices • The essential role of rationing (with scarcity rationing must occur) • We must choose the rationing mechanism: price or non-price. • Price rationing leads to most efficient use of available resources; all gains from mutually beneficial trade are captured. Chapter 4 - Extensions of Demand and Supply Analysis

24. The Rationing Function of Prices • Question • If price rationing is the most efficient is it the “best” way to ration? • Answer • Economists cannot say which system is “best.” They can say rationing via the price system leads to the most efficient use of available resources. Chapter 4 - Extensions of Demand and Supply Analysis

25. The Policy of Government-Imposed Price Controls • Price Controls • Government-mandated minimum or maximum prices • Price Ceiling • A legal maximum price • Price Floor • A legal minimum price Chapter 4 - Extensions of Demand and Supply Analysis

26. The Policy of Government-Imposed Price Controls • Price ceiling and black markets • Price ceilings may prevent the equilibrium price from being achieved if it is above the ceiling price. Chapter 4 - Extensions of Demand and Supply Analysis

27. The Policy of Controlling Rents • Effects on the existing supply of housing and current use of housing • Property owners cannot recover costs • Maintenance, repairs, capital improvements • Rations the current use of housing • Reduces mobility, e.g., New York’s “housing gridlock” Chapter 4 - Extensions of Demand and Supply Analysis

28. Price Floors in Agriculture • Support Price • The governmentally established price floor • Associated with agricultural products Chapter 4 - Extensions of Demand and Supply Analysis

29. Agricultural Price Supports Chapter 4 - Extensions of Demand and Supply Analysis

30. Price Floors in the Labor Market • Minimum Wage • A wage floor, legislated by government, setting the lowest hourly wage rate that firms may legally pay their workers Chapter 4 - Extensions of Demand and Supply Analysis

31. The Effect of Minimum Wages Chapter 4 - Extensions of Demand and Supply Analysis

32. Quantity Restrictions • Governments can impose quantity restrictions, most obvious—banning ownership or trading of a good • Human organs • Drugs • Hospital beds Chapter 4 - Extensions of Demand and Supply Analysis

33. Quantity Restrictions • Government Prohibitions and Licensing Requirements • Some commodities cannot be purchased at all legally; others require a license • Import Quota • Supply restriction that prohibits the importation of more than a specified quantity of a particular good Chapter 4 - Extensions of Demand and Supply Analysis

34. Summary Discussion of Learning Objectives • Essential features of the price system • A price system (market system) allows prices to respond to changes in supply and demand for different commodities. • The terms of exchange—prices—are communicated in markets that tend to minimize transactions costs. Chapter 4 - Extensions of Demand and Supply Analysis

35. Summary Discussion of Learning Objectives • How changes in demand and supply affect market price and equilibrium quantity • Increases in demand increase equilibrium price and quantity; decreases in demand decrease equilibrium price and quantity. • Increases in supply decrease market price and increase equilibrium quantity; decreases in supply increase market price and decrease equilibrium quantity. Chapter 4 - Extensions of Demand and Supply Analysis

36. Summary Discussion of Learning Objectives • How changes in demand and supply affect market price and equilibrium quantity • When both demand and supply shift at the same time, the result is indeterminate. Chapter 4 - Extensions of Demand and Supply Analysis

37. Summary Discussion of Learning Objectives • The rationing function of prices • In a market system, prices ration scarce goods and services. • Other ways of rationing include first come, first served; political power; physical force; random assignment; and coupons. Chapter 4 - Extensions of Demand and Supply Analysis

38. Summary Discussion of Learning Objectives • The effects of price ceilings • A price ceiling set below the market (equilibrium) price results in a shortage. • The resulting shortage can lead to non-price rationing devices and black markets. Chapter 4 - Extensions of Demand and Supply Analysis

39. Summary Discussion of Learning Objectives • The effects of price floors • If the price floor is set above the market price, a surplus results. • A price floor can take the form of a government-imposed price support or minimum wage. Chapter 4 - Extensions of Demand and Supply Analysis

40. Summary Discussion of Learning Objectives • Government-imposed restrictions on market quantities • Bans on sale or ownership • Licensing restrictions • Import quotas Chapter 4 - Extensions of Demand and Supply Analysis