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Using Supply and Demand

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Using Supply and Demand Chapter 5 Laugher Curve Q. How many conservative economists does it take to screw in a lightbulb? A. None. If the government would just leave ... – PowerPoint PPT presentation

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Title: Using Supply and Demand


1
Using Supply and Demand
  • Chapter 5

2
Laugher Curve
  • Q. How many conservative economists does it take
    to screw in a lightbulb?
  • A. None.
  • If the government would just leave it alone, it
    would screw itself in.

3
The Power of Supply and Demand
  • Changes in supply and demand will change
    equilibrium price and quantity.

4
The Power of Supply and Demand
  • A shift in demand that moves the demand curve to
    the right causes equilibrium price and quantity
    to rise.

5
The Power of Supply and Demand
  • A shift in supply that moves the supply curve to
    the left causes equilibrium price to rise and
    equilibrium quantity to fall.

6
A Shift in Demand
7
A Shift in Supply
8
Six Real World Examples of Supply and Demand
  • Supply and demand can shed light on a variety of
    real-world events
  • Florida freeze.
  • Financial assets and the baby boomers.
  • Ten percent excise tax.
  • Rice in Indonesia.
  • Farm laborers.
  • Christmas toys.

9
Florida Freeze
  • The crop-damaging freeze shifted the supply curve
    to the left.
  • At the original price, quantity demanded exceeded
    quantity supplied.
  • Price rose until the quantity demanded equaled
    the quantity supplied.

10
Florida Freeze
11
Financial Assets and the Baby Boomers
  • Demographic changes among baby boomers moved the
    demand curve for financial assets to the right.
  • At the original price, quantity demanded exceeded
    quantity supplied.
  • Price rose until the quantity demanded equaled
    the quantity supplied.

12
Financial Assets and the Baby Boomers
13
Financial Assets and the Baby Boomers
  • The same phenomenon occurred in the surging
    demand for housing among this group during the
    1980s.

14
Excise Taxes
  • Congress imposed a 10 percent surtax on luxury
    boats.

15
Excise Taxes
  • A 10 percent surtax on luxury boats levied on
    suppliers shifts the supply curve to the left.

16
Excise Taxes
17
Rice in Indonesia
  • Drought, pestilence, and the financial crisis
    shifted the supply curve to the left.
  • The steep demand curve means that the quantity
    demanded does not change much with changes in
    price.

18
Rice in Indonesia
  • Responding to high prices, the government
    imported rice and distributed it to the market,
    causing the supply curve to shift to the right.

19
Rice in Indonesia
20
Farm Laborers
  • The compressed harvesting season increased the
    demand and increased INS patrols decreased
    supply.
  • Demand shifted to the right and supply shifted to
    the left.

21
Farm Laborers
  • At the original price, the quantity of workers
    demanded exceeded the quantity supplied.

22
Farm Laborers
  • Price rises until the quantity demanded equaled
    the quantity supplied.

23
Farm Laborers
  • The effect on the number of laborers hired
    depended on the relative size of the supply shift.

24
Farm Laborers
25
Christmas Toys
  • A Christmas craze for Furbies shifts demand to
    the right.
  • A shortage ensued along with a black market.

26
Christmas Toys
  • Finally the supplier produced more, shifting the
    supply curve to the right, causing the price to
    drop.

27
Christmas Toys
28
A Review
29
Government Interferences
  • Buyers look to government for ways to hold prices
    down.
  • Sellers look to government for ways to hold
    prices up.

30
Price Ceilings
  • A price ceiling is a government-imposed limit on
    how high a price can be charged.

31
Rent Controls
  • Rent control is a price ceiling on rents set by
    government.
  • An example is rent control in Paris following
    World War I and World War II.

32
Rent Controls
  • The following were the consequences of rent
    control in Paris

33
Rent Controls
  • The following were the consequences of rent
    control in Paris

34
Rent Controls
35
Rent Controls
  • A similar situation occurred in New York City.

36
Price Floors
  • A price floor is a government-imposed limit on
    how low a price can be charged.

37
Minimum Wage
  • The minimum wage is an example of a price floor.
  • A minimum wage is set by government specifying
    the lowest wage a firm can legally pay an
    employee.

38
Minimum Wage
  • The minimum wage creates winners and losers

39
Minimum Wage
  • Economists disagree about the effects of the
    minimum wage.

40
Taxes, Tariffs, and Quotas
  • An excise tax is a tax that is levied on a
    specific good.
  • A tariff is an excise tax on an imported good.
  • Taxes and tariffs raise prices and reduce
    quantity.

41
The Effect of an Excise Tax on Price and Quantity
  • A 10 percent luxury tax on expensive boats was
    imposed in 1990.

42
The Effect of an Excise Tax on Price and Quantity
  • Because the luxury tax was imposed on the boat
    builders, the supply curve moved up by the amount
    of the tax.

43
The Effect of an Excise Tax on Price and Quantity
  • At a price equal to the original price plus the
    tax there was excess supply.

44
The Effect of an Excise Tax on Price and Quantity
45
The Effect of an Excise Tax on Price and Quantity
  • The tax was repealed in 1993 because of tax
    revenue shortfalls.

46
Quantity Restrictions Quotas
  • A quota is a quantitative restriction on the
    amount that one nation can export to another.

47
Quantity Restrictions Quotas
  • The U.S. government restricted imports of
    Japanese cars.

48
Quantity Restrictions Quotas
49
The Relationship Between a Quota and a Tariff
  • Tariffs and quotas can both be used to reduce
    quantity and raise prices.

50
The Relationship Between a Quota and a Tariff
  • There is a difference between imposing a tariff
    and imposing a quota.

51
The Relationship Between a Quota and a Tariff
  • As a consequence, once quotas are instituted,
    Japanese firms competed intensely to get them.

52
The Relationship Between a Quota and a Tariff
53
The Limitations Of Supply And Demand Analysis
  • It is not enough to be able to explain what
    happens when supply or demand curves shift.
  • It is necessary to understand the assumptions
    underlying the analysis.

54
The Limitations Of Supply And Demand Analysis
  • Other things don't remain constant.

55
The Limitations Of Supply And Demand Analysis
  • Deciding whether the effects are significant to
    consider requires a knowledge of the structure of
    the economy because all actions have ripple or
    feedback effects.

56
The Limitations Of Supply And Demand Analysis
  • The other-things-constant assumption is likely
    not to hold true when one the goods represent a
    large percentage of the entire economy.

57
The Fallacy of Composition
  • The fallacy of composition is the false
    assumption that what is true for a part will also
    be true for the whole.

58
The Fallacy of Composition
  • Thousands of small effects taken together add up
    to a large effect.

59
The Fallacy of Composition
  • When analyzing the aggregate, small effects that
    can be put aside in micro, can add up, and hence
    cannot be forgotten.

60
The Fallacy of Composition
  • Small effects comprise microeconomics while large
    effects comprise macroeconomics.

61
The Roles of Government
  • Provide a stable institutional framework.
  • Promote effective and workable competition.
  • Correct for externalities.
  • Ensure economic stability and growth.
  • Provide for public goods.
  • Adjust for undesired market results.

62
Provide a Stable Set of Institutions and Rules
  • Only the government can create a stable
    environment and enforce contracts through its
    legal system.

63
Provide a Stable Set of Institutions and Rules
  • When governments do not provide a stable
    environment, as is now happening in Russia,
    economic growth is difficult - usually such
    economies are stagnant.

64
Promote Effective and Workable Competition
  • Government promotes competition and protect
    against monopolies.
  • Monopoly power is the ability of individuals or
    firms currently in business to prevent other
    individuals or firms from entering the same kind
    of business

65
Promote Effective and Workable Competition
  • Monopoly power gives existing firms or
    individuals the power to raise prices.

66
Promote Effective and Workable Competition
  • Many players in the market insist on open
    competition except when it comes to themselves

67
Correct for Externalities
  • Unless they are required to do so, parties to any
    exchange are unlikely to take into account any
    externality.

68
Correct for Externalities
  • An externality is the effect that an action may
    have on a third party that the person who
    undertook that action did not take into account.

69
Correct for Externalities
  • The externality may be positive in which case
    society benefits even more than the two parties
    an example is education.

70
Correct for Externalities
  • The externality may be negative in which case
    society as a whole benefits less than the two
    parties an example is pollution.

71
Correct for Externalities
  • When there are externalities, government has the
    potential role to change the rules so that the
    parties must take into account the effect of
    their actions on others.

72
Ensure Economic Stability and Growth
  • Most Americans agree that government should
  • Prevent large fluctuations in economic activity.
  • Maintain a relatively constant price level.
  • Provide an economic environment conducive to
    economic growth.

73
Ensure Economic Stability and Growth
  • Most economists support these goals since they
    involve macroeconomic externalities.

74
Provide for Public Goods
  • Public goods are those whose consumption by one
    individual does not prevent their consumption by
    other individuals an example is a public park.

75
Provide for Public Goods
  • In contrast, a private good is one that, when
    consumed by one individual, cannot be consumed by
    other individuals an example is an apple.

76
Provide for Public Goods
  • A free rider is a person who participates in
    something without having to pay for it.

77
Provide for Public Goods
  • Since most everyone would enjoy having public
    parks without having to pay for them, government
    requires that the public be taxed to pay for
    public parks, thereby eliminating free riders.

78
Adjust for Undesired Market Results
  • In an attempt to make the market fairer, the
    government, through taxes and expenditures,
    redistributes income among households.
  • The result is controversy.

79
Adjust for Undesired Market Results
  • For example, in trying to be fair, which type of
    tax should the government use?

80
Adjust for Undesired Market Results
  • A progressive tax, such as the U.S. income tax is
    one whose rates increase as a person's income
    increases.

81
Adjust for Undesired Market Results
  • A regressive tax such as a sales tax is one whose
    effect decrease as income rises.

82
Adjust for Undesired Market Results
  • A proportional tax, such as the Social Security
    tax, is one whose rates are constant at all
    income levels, regardless of the taxpayer's total
    annual income.

83
Adjust for Undesired Market Results
  • Another controversial role for government
    involves deciding what is best for people
    independently of their desires.

84
Adjust for Undesired Market Results
  • Should government prohibit demerit goods and
    activities?

85
Adjust for Undesired Market Results
  • Demerit goods and activities are things
    government believes are bad for you, although you
    may like them.

86
Adjust for Undesired Market Results
  • Merit goods and activities are things the
    government believes are good for you, although
    you may not like them.

87
Market Failures and Government Failures
  • Market failures are the reason why government
    intervenes.

88
Market Failures and Government Failures
  • Market failures are situations where the market
    does not lead to a desired result.

89
Market Failures and Government Failures
  • Government intervention, however, may make
    matters worse.

90
Market Failures and Government Failures
  • Government failures are situations where the
    government intervenes and makes the situation
    worse government is always failing in one way
    or another.

91
Market Failures and Government Failures
  • Real-world policy makers are left with the choice
    of selecting that which is least bad -- market
    failure or government failure.

92
Using Supply and Demand
  • End of Chapter 5

93
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