Using Supply and Demand PPT

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Using Supply and Demand
5
CHAPTER 5
Using Supply and Demand
It is by invisible hands that we are
bent and tortured worst.
— Nietzsche
McGraw-Hill/Irwin
Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.
Using Supply and Demand
5
Chapter Goals
• Explain real-world events using supply and demand
• Discuss how exchange rates are determined
• Demonstrate the effect of a price ceiling and price floor
• Explain the effects of excise taxes and tariffs
• Explain the effect of a third-party-payer system
5-2
Using Supply and Demand
5
Application: Bananas in Australia
P
Bananas
Cyclone Larry destroyed
80% of the banana crop
S1
S0
The cyclone damage caused
the supply curve to shift left
$2
$1
Excess
demand
Price rose from $1 to $2
where quantity demanded =
quantity supplied
D0
Q1
Q0
Q
5-3
Using Supply and Demand
5
Application: Sales of SUVs in the U.S.
Gasoline in the U.S. is
increasingly expensive
Increasing gas costs
causes the demand curve
to shift left
Price for SUVs fell
from P0 to P1 where
Q demanded = Q supplied
SUVs
P
S0
Excess
supply
P0
P1
D0
D1
Q1
Q0
Q
5-4
Using Supply and Demand
5
Application: Edible Oils in the World
P
Edible Oils
Growing middle class in Asia
has increased demand for oils
S1
S0
At the same time, U.S.
farmers are growing more
corn and less soy (less soy
oil)
P1
P0
D1
D0
The result is increased prices
for edible oils
Q
5-5
Using Supply and Demand
5
The Price of a Foreign Currency
• The market for foreign currencies is called the foreign
exchange (forex) market
• The exchange rate is the price of one currency in terms
of another one
• People demand foreign currencies to buy those
countries’ goods and assets
• Exchange rates are determined by supply and demand
5-6
Using Supply and Demand
5
Examples of U.S. dollar foreign-exchange rates
Country currency
In US$
Per US$
US$ vs. YTD
change (%)
Mexico peso
0.0738
13.5520
- 1.3
China yuan
0.1463
6.8348
0.2
United Kingdom pound
1.4828
0.6744
- 1.6
Poland zloty
0.3032
3.2982
11.1
Israel shekel
0.2400
4.1667
10.3
Kuwait dinar
3.4376
0.2909
5.3
5-7
Using Supply and Demand
5
Application: The Market for Euros
• The 16 members of the European Union use a common
currency, the euro
• The value of a euro was $0.85 in 2001
• By the early 2000s the euro had risen to $1.50 because:
1. U.S. interest rates decreased and Europeans
bought fewer U.S. financial assets, so the supply
of euros decreased
2. Americans increased their demand for euros in
order to buy European financial assets
5-8
Using Supply and Demand
5
Application: The Market for Euros
The price is in P
terms of dollars,
how many dollars
it takes to buy or
sell one euro
The quantity of
euros is on the
horizontal axis
Euros
The supply of
euros represents
people who want
to sell euros and
buy dollars
S0
D0
Q
The demand for
euros represents
people who want
to buy euros and
sell dollars
5-9
Using Supply and Demand
5
Application: The Market for Euros
P
Euros
Europeans buy fewer
U.S. financial assets
and supply decreases
S1
$1.30
S0
Americans buy more
European financial assets
and demand increases
$0.85
D1
D0
The price of euros
increases to $1.30
Q
5-10
Using Supply and Demand
5
A Review of Changes in Supply and Demand
No change
in Supply
Supply shifts out
Supply shifts in
No change
in Demand
No Change
Price falls,
Quantity rises
Price rises,
Quantity falls
Demand
shifts out
Price rises,
Quantity rises
Quantity rises,
Price could rise
or fall
Price rises,
Quantity could
rise or fall
Demand
shifts in
Price falls,
Quantity falls
Price falls,
Quantity could
rise or fall
Quantity falls,
Price could rise
or fall
5-11
Using Supply and Demand
5
Government Intervention in the Market
• The invisible hand is not the only factor in determining
prices, social and political forces also determine price
• Other factors include:
• Price ceilings and price floors
• Excise taxes
• Quantity restrictions
• Third-party-payer markets
5-12
Using Supply and Demand
5
Price Ceiling
• When a government wants to hold prices down to favor
buyers, it imposes a price ceiling
• A price ceiling is a government-imposed limit on how
high a price can be charged
• Price ceilings create shortages
• Price ceilings below equilibrium price will have an effect
on the market
• With price ceilings, existing goods are no longer rationed
entirely by price so other methods of rationing arise
5-13
Using Supply and Demand
5
Application: Rent Controls in Paris
P(rent)
Housing
S0
After WWII, rent controls
(a form of price ceiling)
were put in place
The rent controls caused a
housing shortage
$17
$2.50
D0
Shortage
QS
QD
There would not be a
shortage if rents had been
allowed to increase to the
equilibrium price of $17
Q(housing)
5-14
Using Supply and Demand
5
Price Floor
• When a government wants to prevent a price from falling
below a certain level to favor suppliers, it imposes a
price floor
• A price floor is a government-imposed limit on how low
a price can be charged
• Price floors create excess supply
• Price floors above equilibrium price will have an effect
on the market
5-15
5
Using Supply and Demand
Application: A Minimum Wage
P(wage)
Labor
Excess supply
= unemployment
S0
Wmin
W0
A minimum wage is a type of
price floor, it is the lowest wage a
firm can legally pay an employee
Minimum wages cause
unemployment
D0
QD
QS
Q(of workers)
5-16
Using Supply and Demand
5
Excise Taxes
• Government impacts markets through taxation
• An excise tax is a tax that is levied on a specific good
• A tariff is an excise tax on an imported good
• The result of taxes and tariffs is an increase in
equilibrium prices and reduce equilibrium quantities
5-17
Using Supply and Demand
5
Application: The Effect of an Excise Tax
P
Luxury Boats
Government imposes a
$10,000 luxury tax on
the suppliers of boats
S1
S0
Tax = $10,000
$70,000
The supply curve shifts up by
the amount of the tax
$65,000
$60,000
The price of boats rises by
less than the tax to $70,000
D0
420
510
Q
5-18
Using Supply and Demand
5
Quantity Restrictions
• Government regulates markets with licenses, which limit
entry into a market
• Many professions require licenses, such as doctors,
financial planners, cosmetologists, electricians, or taxi
cab drivers
• The results of limited number of licenses in a market
are increases in wages and an increases in the price of
obtaining the license
5-19
Using Supply and Demand
5
Application: The Effect of a Quantity Restriction
NYC Taxi Drivers
P(wage)
Successful lobbying by taxi cab
drivers in NYC resulted in
quantity restrictions (medallions)
QR
D1
$15
D0
12,000
When the demand for taxi
services increased, because
the number of taxi licenses was
limited, wages increased
Q(of drivers)
5-20
Using Supply and Demand
5
Application: The Effect of a Quantity Restriction
P
NYC Taxis Medallions
QR
The demand for taxi
medallions also increased
because wages were
increasing. But because the
number of taxi licenses was
limited, the price of a
medallion also increased
$400,000
D1
Initial Fee
D0
12,000
Q(of medallions)
5-21
Using Supply and Demand
5
Third-Party-Payer Markets
• In third-party-payer markets, the person who receives
the good differs from the person paying for the good
• Under a third-party-payer system, the person who
chooses how much to purchase doesn’t pay the entire
cost
• Equilibrium quantity and total spending can be much
higher in third-party-payer markets
• Goods from a third-party-payer system will be rationed
through social and political means
5-22
Using Supply and Demand
5
Application: Third-Party-Payer Markets
P
With a copayment of $5,
consumers demand 18 units
Health Care
Sellers require $45 per unit
for that quantity
S0
$45
Total expenditures for 18
units of health care
$25
…are greater than when…
$5
D0
10
18
Q
The consumer pays the
entire cost
5-23
Using Supply and Demand
5
Chapter Summary
• You can describe almost all events in terms of supply
and demand
• The determination of foreign exchange rates can be
analyzed with the supply and demand model
• Price ceilings, government imposed limits on how high
a price can be charged, create shortages
• Price floors, government-imposed limits on how low a
price can be charged, create surpluses
5-24
Using Supply and Demand
5
Chapter Summary
• Taxes and tariffs paid by suppliers shift the supply curve
up by the amount of the tax or tariff and increase
equilibrium price and decrease quantity
• Price ceilings, government-imposed limits on how high
a price can be charged, create shortages
• Price floors, government-imposed limits on how low a
price can be charged, create surpluses
5-25
Using Supply and Demand
5
Preview of Chapter 6:
Thinking Like a Modern Economist
• Differentiate traditional economic building blocks from behavioral
economic building blocks
•
Explain what heuristic models are and how traditional and behavioral
heuristic economic models differ
• Distinguish an empirical model from a formal model and explain the
advantages of each
• List three types of formal models used by modern economists
• Discuss how modern economics and traditional economics differ in their
policy prescriptions
5-26
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