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7/30/2019 econ Standardch04
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DemandandSupplyApplica
tions
2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 1 of 22
PowerPoint Lectures for
Principles of Economics,
9e
By
Karl E. Case,
Ray C. Fair &
Sharon M. Oster
; ;
7/30/2019 econ Standardch04
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2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster
PART I INTRODUCTION TO ECONOMICS
4Demand and SupplyApplications
Fernando & Yvonn Quijano
Prepared by:
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2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 3 of 22
4PART I INTRODUCTION TO ECONOMICS
Demand and SupplyApplicationsThe Price System: Rationing and
Allocating Resources
Price RationingConstraints on the Market andAlternative Rationing Mechanisms
Prices and the Allocation of ResourcesPrice Floors
Supply and Demand Analysis:
An Oil Import Fee
Supply and Demand
and Market Efficiency
Consumer Surplus
Producer SurplusCompetitive Markets Maximize theSum of Producer and ConsumerSurplus
Potential Causes of DeadweightLoss from Under- and Overproduction
Looking Ahead
CHAPTER OUTLINE
7/30/2019 econ Standardch04
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2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 4 of 22
The Price System: Rationing and Allocating Resources
price rationing The process by which the marketsystem allocates goods and services to consumerswhen quantity demanded exceeds quantity supplied.
Price Rationing
FIGURE 4.1 The Market forLobsters
Suppose in 2008 that 15,000square miles of lobstering waters
off the coast of Maine are closed.
The supply curve shifts to the left.
Before the waters are closed, the
lobster market is in equilibrium at
the price of $11.50 and a quantity
of 81 million pounds. The
decreased supply of lobster leads
to higher prices, and a new
equilibrium is reached at $16.10
and 60 million pounds (point B).
7/30/2019 econ Standardch04
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2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 5 of 22
The Price System: Rationing and Allocating Resources
The adjustment of price is the rationing mechanism in free markets.Price rationing means that whenever there is a need to ration agoodthat is, when a shortage existsin a free market, the price ofthe good will rise until quantity supplied equals quantity demanded
that is, until the market clears.
FIGURE 4.2 Market for aRare Paining
There is some price that will
clear any market, even if supply
is strictly limited. In an auction
for a unique painting, the price
(bid) will rise to eliminate
excess demand until there isonly one bidder willing to
purchase the single available
painting. Some estimate that
the Mona Lisa would sell for
$600 million if auctioned.
Price Rationing
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2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 6 of 22
The Price System: Rationing and Allocating Resources
Constraints on the Market and Alternative Rationing Mechanisms
On occasion, both governments and private firms decide touse some mechanism other than the market system to
ration an item for which there is excess demand at thecurrent price.
Regardless of the rationale, two things are clear:
1. Attempts to bypass price rationing in the market and touse alternative rationing devices are much more
difficult and costly than they would seem at first glance.2. Very often, such attempts distribute costs and benefitsamong households in unintended ways.
7/30/2019 econ Standardch04
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2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 7 of 22
The Price System: Rationing and Allocating Resources
Oil, Gasoline, and OPEC
price ceiling A maximum price thatsellers may charge for a good,usually set by government.
Constraints on the Market and Alternative Rationing Mechanisms
FIGURE 4.3 Excess Demand (Shortage) Createdby a Price Ceiling
In 1974, a ceiling price of $0.57 cents per gallon
of leaded regular gasoline was imposed. If the
price had been set by the interaction of supply
and demand instead, it would have increased to
approximately $1.50 per gallon.At $0.57 per gallon, the quantity demanded
exceeded the quantity supplied. Because the
price system was not allowed to function, an
alternative rationing system had to be found to
distribute the available supply of gasoline.
7/30/2019 econ Standardch04
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2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 8 of 22
The Price System: Rationing and Allocating Resources
queuing Waiting in line as a means ofdistributing goods and services: anonprice rationing mechanism.
favored customers Those who receivespecial treatment from dealers duringsituations of excess demand.
Constraints on the Market and Alternative Rationing Mechanisms
ration coupons Tickets or coupons thatentitle individuals to purchase a certainamount of a given product per month.
black market A market in which illegaltrading takes place at market-determinedprices.
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2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 9 of 22
The Price System: Rationing and Allocating Resources
NCAA March Madness: College Basketballs National
Championship
Constraints on the Market and Alternative Rationing Mechanisms
FIGURE 4.4 Supply of and Demand for aConcert in 2007
The face value of a ticket to the Justin
Timberlake concert on September 16, 2007, at
the Staples Center in Los Angeles was $50. The
Staples Center holds 20,000. The supply curve
is vertical at 20,000.
At $50, the quantity supplied is below the
quantity demanded. The diagram shows that thequantity demanded and the quantity supplied
would be equal at $300.
The Web shows that one ticket could be worth
$16,000.
7/30/2019 econ Standardch04
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2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 10 of 22
The Price System: Rationing and Allocating Resources
No matter how good the intentions of privateorganizations and governments, it is very difficult to
prevent the price system from operating and to stopwillingness to pay from asserting itself. Every timean alternative is tried, the price system seems tosneak in the back door. With favored customersand black markets, the final distribution may beeven more unfair than that which would result from
simple price rationing.
Constraints on the Market and Alternative Rationing Mechanisms
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DemandandSupplyApplica
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2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 11 of 22
The Price System: Rationing and Allocating Resources
Prices and the Allocation of Resources
Price changes resulting from shifts of demand inoutput markets cause profits to rise or fall. Profitsattract capital; losses lead to disinvestment. Higherwages attract labor and encourage workers toacquire skills. At the core of the system, supply,demand, and prices in input and output marketsdetermine the allocation of resources and theultimate combinations of things produced.
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2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 12 of 22
The Price Mechanism at
Work for Shakespeare
Every summer, New York Cityputs on free performances ofShakespeare in the Park.
The true cost of a ticket is $0 plus the opportunity cost ofthe time spent in line.
Students can produce tickets relatively cheaply by waitingin line. They can then turn around and sell those tickets tothe high-wage Shakespeare lovers.
The Price System: Rationing and Allocating Resources
Prices and the Allocation of Resources
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2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 13 of 22
The Price System: Rationing and Allocating Resources
Price Floors
price floor A minimum price below whichexchange is not permitted.
minimum wage A price floor set for theprice of labor.
7/30/2019 econ Standardch04
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DemandandSupplyApplica
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2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 14 of 22
Supply and Demand and Market Efficiency
Consumer Surplus
consumer surplus The difference between themaximum amount a person is willing to pay for agood and its current market price.
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dandSupplyApplica
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2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 15 of 22
Supply and Demand and Market Efficiency
Producer Surplus
producer surplus The differencebetween the current market price and the full cost ofproduction for the firm.
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2009 Pearson Education Inc Publishing as Prentice Hall Principles of Economics 9e by Case Fair and Oster 16 of 22
REVIEW TERMS AND CONCEPTS
black market
favored customers
minimum wage
price ceiling
price floor
price rationing
queuing
ration coupons