Supply and Demand

1
Supply and Demand

• ECO 105
• Lecture 1.8
• 5 September 2008

2
Changes in Equilibrium Price (and Quantity)

• When either demand or supply changes, so do the
  equilibrium price and quantity.

3
Change in Demand

• Some years back, Taco Bell (Yo quiero Taco Bell!)
  sharply reduced its prices.
• Can you draw this?
• What happened
• 60 Minutes reported that the pesticide Alar, used
  to keep bugs off the apple crop, caused cancer.

4
Change in Supply

• Pork producers raise lots more hogs.
• What happens in the
• What happens in the
• A breakthrough in fuel-cell technology sharply
  reduces the cost of hydrogen-powered cars.
• What happens in the

5
Change in Demand and Supply

• More and more people want to own a cell phone.
• The technology used to produce cell phones
  improves.
• What happens to
• What happens to

6
Prices and Resource Allocation

• Americas electrical power grid needs to be
  upgraded. Lets consider the market for
  electrical workers.
• Demand rises sharply.
• What happens to the wage?
• In the long run, the supply of electrical workers
  increases - the wage moderates.

7
So what?

• A lower wage acts as both a _______ that fewer
  programmers are needed and as an _________ for
  people choosing careers to acquire other skills.
• The price movement

8
Another example

• The resources in the earths crust are limited,
  and
• So why are proven reserves of nearly all
  resources
• Higher demand
• Spending increases on (a) __________ __________
  and (b) finding

9
Prices Convey Information

• How do producers know what to produce?
• Prices provide much of the information.
• Without competitive markets,
• Government cant ________________ without the
  market,

10
When Government Messes with Markets
11
Of Ceilings and Floors

• Why would government want to control prices?
• The desire to _________________ underlies nearly
  all government price controls.

12
Price Ceilings

• Price ceiling - the
• If effective, it generates an

13
Incredible Shrinking Candy Bars

• During the early 1970s, price controls were
  placed on most goods and services.
• Producers were forbidden to raise the price of
  candy bars - although costs kept rising.
• How to respond?
• Sell _______ candy bars for the _______ price.

14
Rent control

• Excess demand for apartments at below-market
  price
• How are apartments allocated?
• __________________________________
• What happens
• Both D and S become _____________. Excess demand

15
Rent control

• Rent controls do more harm the longer theyre in
  place.
• In the short run, the supply of apartments is
  approximately constant.
• As a group, renters gain from controls, while
  landlords lose.
• In the long run, both D and S become more
  elastic.

16
Rent Controls in the Short- and Long Runs
P
SSR
SLR
Pf
DLR
DSR
Q
17
Policy Issue

• Do rent controls help the poor?
• Evidence indicates that
• Little old ladies with