Chapter 4
Demand and Supply Applications
Prepared by: Fernando & Yvonn Quijano
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair CHAPTER 4: Demand and Supply Applications © 2007 © 2007 Prentice Hall Business Publishing Principles Economics of 8e by Case and Fair Demand and Supply Applications
Looking Looking Ahead Loss from Under CausesPotential Deadweightof Competitive Markets Maximize Sum the of Producer Surplus Consumer Surplus Demand Supply and Demand Supply and Analysis: Price Floors Prices and the Allocation of Resources Constraints on the and Market Alternative Price Rationing The Price System:and Rationing An Oil Import Fee AnOil AllocatingResources Producer Producer and Consumer Surplus Market and Efficiency Rationing Mechanisms Chapter OutlineChapter
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and and Overproduction
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CHAPTER 4: Demand and Supply Applications AND ALLOCATINGRESOURCES THE RATIONING PRICESYSTEM: © 2007 © 2007 Prentice Hall Business Publishing Principles Economics of 8e by Case and Fair demanded exceeds quantitysupplied.exceeds demanded quantityservices to when consumers the and systemallocatesgoodsmarket price rationing
Theby processwhich
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CHAPTER 4: Demand and Supply Applications AND ALLOCATINGRESOURCES THE RATIONING PRICESYSTEM: PRICE RATIONING © 2007 © 2007 Prentice Hall Business Publishing Principles Economics of 8e by Case and Fair FIGURE 4.1
The Market for Lobsters
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CHAPTER 4: Demand and Supply Applications AND ALLOCATINGRESOURCES THE RATIONING PRICESYSTEM: that is, until the market clears. market, the price of the good will rise until quantitysupplied equals quantitydemanded that whenever there is a need to ration a good The adjustment of price is the rationing mechanism in free markets. Price rationing means © 2007 © 2007 Prentice Hall Business Publishing Principles Economics of 8e by Case and Fair
— with with a Pipe $104.1for millionPicasso’s highest bidderwillingto waspay is willingto pay. In 2004,the Price theis whathighestbidder price isdemanddetermined. somethingis unique, forsale its When supplyis fixedor that is, when a shortage exists .
—
in a free Boy — 5 of 23 of
CHAPTER 4: Demand and Supply Applications AND ALLOCATINGRESOURCES THE RATIONING PRICESYSTEM: © 2007 © 2007 Prentice Hall Business Publishing Principles Economics of 8e by Case and Fair FIGURE 4.2
Market Market for a Rare Painting
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CHAPTER 4: Demand and Supply Applications AND ALLOCATINGRESOURCES THE RATIONING PRICESYSTEM: ALTERNATIVERATIONING MECHANISMS CONSTRAINTSON THE MARKET AND © 2007 © 2007 Prentice Hall Business Publishing Principles Economics of 8e by Case and Fair 2. 1. Regardlessof the rationale, twothingsare clear: current current price. ration an item for which there is excess demand at the to use some mechanism other than the market system to On occasion, both governments and private firms decide
among householdsunintendedinways. Veryoften, suchattempts distribute benefitscosts and and costlythan theywouldat glance.seemfirst use rationingalternativemuchdevicesare moredifficult Attempts priceto bypass rationingin theto marketand
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CHAPTER 4: Demand and Supply Applications AND ALLOCATINGRESOURCES THE RATIONING PRICESYSTEM: Oil, Oil, Gasoline, and OPEC © 2007 © 2007 Prentice Hall Business Publishing Principles Economics of 8e by Case and Fair charge for a good,set usuallyby government. price ceiling
A maximummay that sellersprice
FIGURE 4.3
by a Price Ceiling (Shortage) Created Excess Demand
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CHAPTER 4: Demand and Supply Applications AND ALLOCATINGRESOURCES THE RATIONING PRICESYSTEM: © 2007 © 2007 Prentice Hall Business Publishing Principles Economics of 8e by Case and Fair during situations of demand. duringexcess situations treatment receive specialfrom dealers favored customers mechanism. rationingnonprice services: and a goodsdistributing queuing
Waitingof as a means in line
Those whoThose
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CHAPTER 4: Demand and Supply Applications AND ALLOCATINGRESOURCES THE RATIONING PRICESYSTEM: determined prices. markets from developing. In a black market, illegal trading takes place at market Even when trading coupons is declared illegal, it is virtuallyimpossible to stop black © 2007 © 2007 Prentice Hall Business Publishing Principles Economics of 8e by Case and Fair determined prices. trading takes at market place black market month. certain amountof aproductper given that to entitlepurchasea individuals ration coupons
A illegal market in which
Tickets or coupons
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-
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CHAPTER 4: Demand and Supply Applications AND ALLOCATINGRESOURCES THE RATIONING PRICESYSTEM: National Championship NCAAMarch Madness:College Basketball’s © 2007 © 2007 Prentice Hall Business Publishing Principles Economics of 8e by Case and Fair
FIGURE 4.4
2003 Pair of Final Four Tickets in Supplyof and Demand for a
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CHAPTER 4: Demand and Supply Applications AND ALLOCATINGRESOURCES THE RATIONING PRICESYSTEM: maybe even more unfair than that which would result from simple price rationing. sneak in the back door. With favored customers and black markets, the final distribution payfrom asserting itself. Every time an alternative is tried, the price systemseems to very difficult to prevent the price systemfrom operating and to stop willingness to No matter how good the intentions of private organizations and governments, it is © 2007 © 2007 Prentice Hall Business Publishing Principles Economics of 8e by Case and Fair 2003. NCAA championshipgame in SyracuseplayedKansasin the willingto payhighprices. keep tickets from those whoare the NCAA finals,butto it ishard premiere sportingsuchevents as withdemandthe excessto There aremany waysto deal
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CHAPTER 4: Demand and Supply Applications REVIEW TERMS CONCEPTSAND price ceiling favored customers black market © 2007 © 2007 Prentice Hall Business Publishing Principles Economics of 8e by Case and Fair
ration coupons queuing price rationing
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