1. PUTTING DEMAND AND SUPPLY TO WORK Learning Objectives 1.Learn how to apply the model of demand and supply to explaining the behavior of equilibrium.
Mar 30, 2015
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1. PUTTING DEMAND AND SUPPLY TO WORK
Learning Objectives1. Learn how to apply the model of demand and supply to explaining the
behavior of equilibrium prices and quantities in a variety of markets.2. Explain how technological change can be represented using the
model of demand and supply.3. Explain how the model of demand and supply can be used to explain
changes in prices of shares of stock.
1.1 The Personal Computer Market
1.1 The Personal Computer Market
P1
P2
Q1 Q2
S1S2
D1 D2
Computer markets have seen increased supply
and demand.
Computer markets have seen increased supply
and demand.
1.2 The Markets for Crude Oil and Gasoline
$140
Q1 Q2
S1
D1 D2
P2
P1
Q2 Q1
S2
D1
S1
The increasing demand for crude oil.
The increasing demand for crude oil.
The impact of higher gas prices.
The impact of higher gas prices.
35
1.3 The Stock Market
• A sole proprietorship is a situation in which one individual owns a firm.
• A partnership is a situation in which several individuals own a firm.
• A corporation is a situation in which shareholders own stock in a firm.
• Corporate stocks are shares in the ownership of a corporation.
• A stock market is a set of institutions in which shares of stock are bought and sold.
• Retained earnings are profits NOT paid out in dividends.
• Dividends are profits distributed to shareholders.
Demand and Supply in the Stock Market
A Change in Expectations Affects the Price of Corporate Stock
P1
P2
Q1 Q2
S1S2
D1
D2
2. GOVERNMENT INTERVENTION IN MARKET PRICES: PRICE FLOORS AND
PRICE CEILINGS
Learning Objectives1. Use the model of demand and supply to explain what happens
when the government imposes price floors or price ceilings.2. Discuss the reasons why governments sometimes choose to
control prices and the consequences of price control policies.
2.1 Agricultural Price Floors
• Price floor a minimum allowable price set above the equilibrium price. (e.g. Wheat)
PF
PE
W1 W2
D
SSurplus
Supply and Demand Shifts for Agricultural Products
P1
P2
Q1 Q2
S1
S2
D1D2
2.2 Rental Price Ceilings
• Price ceiling a maximum allowable price set below the equilibrium price.
PC
PE
A1 A2
D
S
Shortage
The Unintended Consequences of Rent
Control
PC
PB
A1 A2
D
S
Consumers are willing and able to
pay PB
Consumers are willing and able to
pay PB
This creates a shortage leading to various
backdoor payments to apartment owners
This creates a shortage leading to various
backdoor payments to apartment owners
Shortage
3 THE MARKET FOR HEALTH-CARE SERVICES
Learning Objectives1. Use the model of demand and supply to explain
the effects of third-party payers on the health-care market and on health-care spending.
Health-Care Spending as a % of U.S. Output, 1960-2003
3.1 The Demand and Supply for Health Care
• A third party payer is an agent other than the seller or the buyer who pays part of the price of a good or service.
Total Spending for Physician Office Visits
$30 E
1,000,000
D1
S1
0
Total Spending = P*Q$30*1m = $30m
Total Spending = P*Q$30*1m = $30m
Total Spending = $30mTotal Spending = $30m
Total Spending for Physician Office Visits Covered by Insurance
$50
1,000,000 1,500,000
D1
S1
Doctors receive $50
per visit.
Doctors receive $50
per visit.
Insurers pay $40 per visit.Insurers pay $40 per visit.
Patients pay $10 per visit.Patients pay $10 per visit.
E
F
$30
$10
Total Spending = $75mTotal Spending = $75m
With insurance the number of office visits increases. At $50 per visit quantity supplied increases to
1,500,000
With insurance the number of office visits increases. At $50 per visit quantity supplied increases to
1,500,000
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