Quiz #4

What should be on the graph?

• X axis, the horizontal line usually represents quantity.

• Y axis, the vertical line usually represents price.

• The whole graph should describe the supply and demand of ONE product.

• Draw both supply and demand curves on the same graph.

Graph you should keep in mind

quantity

price

Demand curve(downward sloping)

Supply curve(upward sloping)

equilibrium

Pe

Qe

Movement or Shift

• Movement is caused only by the change of the price of the product on the graph.

• Lots of factors cause shift. (review your notes)

Equilibrium

• For a pair of given demand and supply curves, there is only one intersection, therefore only one equilibrium.

• You will get a new equilibrium after the shift of supply or demand curve.

• The movement along supply or demand curve doesn’t give you a new curve, thus your can’t get a new equilibrium.

• Quiz, question 2, a-d

One step deeper

• After the change of equilibrium, the equilibrium price is also changed.

• The change of the price will probably cause the change of the supply or demand.

• Quiz 4, question 1

Examples of supply and demand

• Example 1 market for gasoline in summer

• Example 2 housing analysis

• Example 3 price control and rent control

• Example 4 cigarettes tax-who pays

Homework

• Page 95– 1,5,7,10

• Page 121– 7,8

Chapter 5

The price system, supply and demand, and elasticity

The Price System: Rationing and Allocating Resources

• The price system performs two important and closely related functions in a society with unregulated markets. – PRICE RATIONING– ALLOCATING RESOURCES

PRICE RATIONING

• PRICE RATIONING: is the process by which the market system allocates goods and services to consumers when quantity demanded exceeds quantity supplied.

• Consider the following example in the market for lobster...

This rationing process determines:

• This rationing process determines:

• the allocation of resources among suppliers

• the final mix of output to be allocated across consumers

Price Rationing in the Market for Lobsters

• Figure 5.1

• At $3.27, the quantity demanded and quantity supplied are both 47 lobsters.

• Suppose the supply of lobster shifts to the left.

• At a price of $3.27, there is now a demand of 22 lobsters.

Equilibrium is restored.

• Equilibrium is restored at a price of $4.50.

• Quantity supplied rises and quantity demanded falls as price rises.

• Thirty-five million pounds of lobster is “rationed ” to the consumers who are willing and able to pay $4.50 per pound for it.

Constraints on the market and alternative rationing mechanisms

• Some of these methods include:– Price ceilings: a maximum price that sellers may charge

for a good, usually set by government.– Queuing: waiting in line as a means of distributing goods

and services; a non price rationing mechanism.– Favored customers: those who receive special treatment

from dealers during situations of excess demand.– 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.

Oil supply in 1973-1974

• Figure 5.3

• Congress: price ceiling

• Most common non price rationing system: queuing…

• A second device: favored customers

• Another way: ration coupons

• Black market

Price and the allocation of resources

• Figure 5.4

World Cup Soccer championship in 1994...

• Consider the market for tickets to major sporting events, like the finals of the World Cup Soccer championship in 1994...

• The problem with these alternatives: excess demand is created but not eliminated.

World Cup Soccer championship in 1994...

$3,000

The average ticket price was set at $300 for the final game of the World Cup.

$300

This price was below the equilibrium price, and scalpers made a tidy profit. Can you explain why?

Scalper’s profit

The actual demand curve

SUPPLY AND DEMAND ANALYSIS: AN OIL IMPORT FEE

• An oil import fee would place a tax on all oil imported into the U.S...

• Why might politicians choose to impose such a tax?

The world and US markets for crude oil in 1989 (w/o tax)

p

q

p

q

Sworld

D.usa

S.usa

Dworld

$18

Millions of Barrels/day Millions of Barrels/day56 7.7 13.6

5.9

The import tax raises the price of all gasoline in the U.S.

p

q

D.usa

S.usa

$18$24

Millions of Barrels/day7.7 13.6

5.9

What is the impact of this policy on :•domestic producers? •foreign producers? •U.S. consumers? •U.S. government?

The import tax raises the price of all gasoline in the U.S.

p

q

D.usa

S.usa

$24

7.7 13.6

5.9

p

q

D.usa

S.usa

$24

9.0 12.2

3.2

$18 $18Import fee

Government tax revenue

Review questions

• What is price rationing?

• Apply the knowledge.