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
price
Supply curve
(upward sloping)
equilibrium
Pe
Demand curve
(downward sloping)
Qe
quantity
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...
The average ticket price was
set at $300 for the final game
of the World Cup.
The actual
demand curve
$3,000
Scalper’s
profit
$300
This price was below the
equilibrium price, and scalpers
made a tidy profit. Can you
explain why?
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)
S.usa
p
p
Sworld
$18
D.usa
Dworld
5.9
56
q
Millions of Barrels/day
7.7
13.6
q
Millions of Barrels/day
The import tax raises the price of
all gasoline in the U.S.
S.usa
p
$24
$18
What is the impact of this policy on :
•domestic producers?
•foreign producers?
•U.S. consumers?
•U.S. government?
D.usa
5.9
7.7
13.6
q
Millions of Barrels/day
The import tax raises the price of
all gasoline in the U.S.
S.usa
p
p
Government
tax revenue
$24
$18
Import fee
$24
$18
S.usa
D.usa
D.usa
5.9
7.7
13.6
q
3.2
9.0 12.2
q
Review questions
• What is price rationing?
• Apply the knowledge.