Economics 12

1. Economics 12 Unit 2 – Demand and Supply Price Ceilings and Price Floors

2. More on Demand and Supply • Under what circumstances do the forces of demand and supply determine the price of products? • Only in a “perfectly competitive” market • Existence of bigness in the marketplace limits the efficient working of the market.

3. Determinants of Demand Consumer preference Consumer incomes Prices of related producers Expectations of future prices, incomes, or availability Population Its size, income distribution, and age distribution Determinants of Supply Prices of productive resources Business taxes Technology Prices pf substitutes in production Future expectations of suppliers Number of suppliers Determinants of Demand and Supply These all cause the Demand and Supply curves to shift either left (decrease) or right (increase).

4. Higher demand leads to higher equilibrium price and higher equilibrium quantity. Higher supply leads to lower equilibrium price and higher equilibrium quantity. D P Q S P Q Increases in Demand and Supply

5. Increases in Demand and Supply • Both changes in isolation, tend to push up the quantity traded. However, the increase in demand will push the price up, whereas the increase in supply will push the price down. • Therefore, increases (decreases) in both demand and supply will cause the quantity to increase (decrease), but the effect on the price is indeterminate.

6. Demand and Supply Moving in Opposite Directions • When demand and supply move in opposite directions, the price will always move in the same direction as the demand change, but the effect on the quantity is indeterminate.

7. The Price System • The market system, also called the price system, performs two important and closely related functions : • Price Rationing • Resource Allocation

8. Price Rationing • Price rationing is the process by which the market system allocates goods and services to consumers when quantity demanded exceeds quantity supplied.

9. Price Rationing • A decrease in supply creates a shortage at P0. Quantity demanded is greater than quantity supplied. Price will begin to rise. • The lower total supply is rationed to those who are willing and able to pay the higher price.

10. Price Rationing • There is some price that will clear any market. • The price of a rare painting will eliminate excess demand until there is only one bidder willing to buy the single available painting.

12. Price Controls • Governments introduce price controls to correct what they see as undesirable market prices. • A price ceiling is a maximum price that sellers may charge for a good, usually set by government. • Price ceilings cause shortages. • Government believes present market price too high for many buyers • Rent control • National emergencies

13. Allocation Mechanisms Allocation mechanisms are used to allocate products that are in short supply. • The market • First come, first served • Queuing is a nonprice rationing system that uses waiting in line as a means of distributing goods and services.

14. Allocation Mechanisms • Producers’ preferences • Favored customers are those who receive special treatment from dealers during situations when there is excess demand. • Rationing • Ration coupons are tickets or coupons that entitle individuals to purchase a certain amount of a given product per month. • The problem with these alternatives is that excess demand is created but not eliminated.

15. Allocation Mechanisms • In 1974, the government used an alternative rationing system to distribute the available supply of gasoline. • At an imposed price of 57 cents per gallon, the result was excess demand.

16. Allocation Mechanisms • A black market is a market in which illegal trading takes place at market-determined prices.

17. Allocation Mechanisms • No matter how good the intentions of private organizations and governments, it is very difficult to prevent the price system from operating and to stop the willingness to pay from asserting itself. • With favored customers and black markets, the final distribution may be even more unfair than that which would result from simple price rationing.

18. Prices and the Allocation of Resources • Price changes resulting from shifts of demand in output markets cause profits to rise or fall. • Profits attract capital; losses lead to disinvestment. • Higher wages attract labor and encourage workers to acquire skills. • At the core of the system, supply, demand, and prices in input and output markets determine the allocation of resources and the ultimate combinations of things produced.

19. At a world price of $18, imports are 5.9 million barrels per day. The tax on imports causes an increase in domestic production, and quantity imported falls. Supply and Demand Analysis:An Oil Import Fee

20. Price Floors • A price floor is a minimum price that sellers may charge for a good, usually set by government. • Price floors cause surpluses • Government assisting producers and not the consumer • Agriculture

21. Dealing with a Surplus How do you get rid of the surplus that a price floor inevitably produces? • Store it • Convert it • Likely to be expensive • Sell it abroad at reduced pricing • Termed dumping • Forbidden by many international conventions • Donate it • Destroy it

22. The Minimum Wage • Another type of price floor • Minimum wage is the lowest rate of pay per hour for workers, as set by government. • Scenario: • Higher wage means employers are forced to economize on labour and will cut back on employment (quantity of labour demanded falls) • Higher wage attracts more workers (quantity of labour supplied increases) • Net result = surplus of labour (unemployment)

23. Stop Here for Today • For a recap of today’s lesson, try: • http://www.youtube.com/watch?v=4MMIkkG8pAQ