Case Econ08 04

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Demand and supplyAPPLICATIONS

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Recap: Demand & Supply

Curves

Movement = Price changesShift = Changes in NON-

PRICE factors

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SHIFT OF DEMAND VERSUSMOVEMENT ALONG A DEMANDCURVE

Income and Wealth

Prices of Other Goodsand Services

Tastes and Preferences

Expectations

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SHIFT OF SUPPLY VERSUSMOVEMENT ALONG A SUPPLYCURVE

The Cost of Production

Prices of RelatedProducts

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MARKET EQUILIBRIUM

The condition that exists when

quantity supplied and quantitydemanded are equal.

At equilibrium, there is no

tendency for price to change.

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EXCESS DEMAND OR SHORTAGE

EXCESS SUPPLY OR SURPLUS

quantity supplied > quantity demanded

at the current price.

quantity demanded > quantity supplied

at the current price.

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CHANGES IN EQUILIBRIUM

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Demand and supply

APPLICATIONS

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THE PRICE SYSTEM: RATIONINGAND ALLOCATING RESOURCES

price rationing The process by

which the market systemallocates goods and

services to consumers

Qty demanded > Qty supplied

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PRICE RATIONING

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When supply is fixed

or something for saleis unique, its price isdemand determined.

Price is what thehighest bidder iswilling to pay.


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FIGURE 4.2 Market for a Rare Painting


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Oil, Gasoline, and OPEC

price ceiling A

maximum pricethat sellers may

charge for a good,

usually set bygovernment.

THE PRICE SYSTEM: RATIONING

AND ALLOCATING RESOURCES

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queuing Waiting in line as ameans of distributing goodsand services: a nonpricerationing mechanism.

favored customers Those

who receive specialtreatment from dealersduring situations of excessdemand.


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ration coupons Tickets orcoupons that entitle individualsto purchase a certain amountof a given product per month.

Black market A market in

which illegal trading takesplace at market-determinedprices.


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price floor A minimum price below

which exchange is not permitted.

minimum wage A price floor set under

the price of labor.


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consumer surplus The differencebetween the maximum amount a

person is willing to pay for a goodand its current market price.


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consumer surplus

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producer surplus Thedifferencebetween the current

market price and the full cost ofproduction for the firm.


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Producer surplus

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SUPPLY AND DEMAND ANDMARKET EFFICIENCY

COMPETITIVE MARKETS MAXIMIZE THE SUM OFPRODUCER AND CONSUMER SURPLUS

FIGURE 4.8 Total Producer and Consumer Surplus

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deadweight loss The net loss ofproducer and consumer surplus

from underproduction oroverproduction.


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deadweight loss

FIGURE 4.9 Deadweight Loss


SUPPLY AND DEMAND AND

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POTENTIAL CAUSES OF DEADWEIGHT LOSSFROM UNDER- AND OVERPRODUCTION

When supply and demand interact freely,

competitive markets produce what people want atleast cost, that is, they are efficient.

Documents

Case Econ08 04