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Shifts Demand Supply
Increase Demand With Supply Constant,
Equilibrium Price and Quantity Both Increase.
At price P3 quantity demanded equals quantity
supplied--
E2
P3
E1
Q3
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People Decide to Have More Children
Minivan Market

• Consider the market for minivans.
• For each event identify whether demand or supply
  is affected.
• Determine the direction of change.
• Draw a diagram to illustrate how equilibrium is
  changed.

3
Steelworkers Strike Raises Steel Prices
Minivan Market
4
New Automated Machinery Introduced
Minivan Market
5
Price of Station Wagons Rises
Minivan Market
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Stock Market Crash Lowers Wealth
Minivan Market
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Simultaneous Shifts
Example of a double shift.

• 2 events
• 1. ? supply
• 2. ? demand
• only ? supply ?P, ?Q.
• only ? demand ?P, ?Q.
• Result ?Q guaranteed

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Shifts in Demand and in Supply
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Simultaneous Shifts
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Simultaneous Shifts
Example of a double shift.

• second possibility
• 2 events
• 1. ? supply
• 2. ? demand
• only ? supply ?P, ?Q.
• only ? demand ?P, ?Q
• Result ? P guaranteed

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Shifts in Demand and in Supply
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Shifts in Demand and in Supply
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Markets and Government Policy

• Supply and demand together determine the prices
  of the economys many different goods services.
• Prices guide the use of resources and the
  allocation of final goods and services.

14
Price Controls

• Price fixing is based on debatable reasoning
• 1) Belief that one side of the market is to
  blame for undesirable price changes.
• 2) Belief that governments can repeal the laws of
  supply and demand.
• If you prevent prices from changing, you
  effectively suspend the mechanism for economic
  coordination.

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Price Controls
Price Floor Legal Min. P.
S
Surplus
P2
P2
Pe
E1
Price
Equilibrium price
P1
P1
Shortage
Price Ceiling Legal Max. P.
D
Qd
Qs
Qe
Qd
Qs
Quantity per Unit Time Period
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Price Ceiling

• Defn places a legal maximum on the price at
  which the good can be sold.
• Below the equilibrium price, creates a shortage
  in the market.
• Alternative methods of rationing must then be
  found
• E.G., First come, first served, personal biases,
  lottery, bribes...

S
Equilibrium price
Pe
E1
Price
P1
P1
Shortage
D
Qd
Qs
Qe
Qd
Qs
Price Ceiling Legal Max. P.
Quantity per Unit of Time
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A Market with a Price Ceiling
S

• eg. Rent Control goal, make housing more
  affordable.
• Effects Housing shortage, reduces quality of
  available housing, alternate methods of rationing
  available apartments

P3
P2
Price Ceiling
P1
shortage
D
Q2
Q1
Q3
Quantity supplied
Quantity demanded
18
Market for Organs

• The Canadian government has essentially placed a
  price ceiling of 0 on organs to sell
  human organs in this country is illegal.
• At the end of 2003, more than 3,700 Canadians
  were waiting for an organ transplant and 147 died
  in 2003 waiting.

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Market for Organs

• All of us have two kidneys, but can survive (in
  fact live a normal life) with just one.
• It is therefore possible for anyone to decide to
  offer one of his or her own kidneys, if the
  proper incentive exists.
• For some this incentive would be a financial one,
  and some people desperate for a kidney would be
  willing to pay
• Black Market in Kidneys

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Black Market / Illegal Market
Black Market price will be between P1 and P2.
Price Ceiling
Equilibrium price
Forces of demand and supply persists despite
price controls
21
Price Floor

• Defn legal minimum placed on the price, above
  the equilibrium, resulting in a surplus.
• E.g., minimum wage, agricultural price supports.
• Alternative methods of dealing with the surplus
  will emerge-
• Consequences include waste, government purchase
  of surplus, subsidize consumer to purchase,
  production control.

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The Effect of Minimum Wages
23
Agricultural Price SupportsThe Regulated Market
for Eggs
Price will rise to Pq with imposition of a quota.
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Price Controls

• Economists usually oppose price controls for
  everyday kinds of commodities because
• They obscure the signals given by market prices
  that normally guide the allocation of societys
  scarce resources.
• \Markets are prevented from performing their
  coordinating and rationing activities.

• However, if all things are not equal, and a
  market is not operating properly, price controls
  can be useful
• Ie controls placed upon a monopoly

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Consumer Surplus

• The individuals demand curve can be seen as
  the individuals willingness to pay curve.
• On the other hand, the individual must only
  actually pay the market price for (all) the units
  consumed.
• For example, you may be willing to pay 40 for
  a haircut, but upon arriving at the stylist,
  discover that the price is only 20
• The difference between willingness to pay and
  the amount you pay is the Consumer Surplus

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Example Consumer's Surplus
Definition The net economic benefit to the
consumer due to a purchase (i.e. the willingness
to pay of the consumer net of the actual
expenditure on the good) is called consumer
surplus. The area under an ordinary demand
curve and above the market price provides a
measure of consumer surplus. Note that a
consumer will receive more surplus from the first
good than from the last good.
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Consumer Surplus
Consumer Surplus The difference between what a
consumer is willing to pay and what they pay for
each item
Price
P
D
Quantity
Q
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Efficiency of the Equilibrium Quantity
Price
Consumer Surplus area of triangle 1/2bh 1/
2(16-8)(10) 40
16
8
D
Quantity
10
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Producer Surplus
-a firms supply curve shows how much it is
willing to sell a good for -the firm receives,
however, the market price, which is often above
their willingness to sell Definition Producer
Surplus is the area above the supply curve and
below the price. It is a monetary measure of the
benefit that producers derive from producing a
good at a particular price.
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Producer Surplus
Producer Surplus The difference between what a
producer is willing to accept and what they
receive for each item
Price
S
P
Producer Surplus
Quantity
Q
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Producer Surplus
Producer Surplus (1/2)BH PS(1/2)10(5) PS25
Price
S
8
Producer Surplus
3
Quantity
10
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Price Controls and Surplus

• When the government (or other agency, such as a
  union) imposes price floors and price ceilings,
  consumer and producer surplus is generally
  decreased (except in very rare and unique cases)
• Generally, the consumers with the greatest
  willingness to pay or the producers with the
  greatest efficiency will consume and provide the
  good
• The alternate situation is provided graphically
  for interest sake only

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Deadweight Loss?
Without price controls, efficiency was
maximized. After the price control is imposed,
some surplus is transferred between producers and
consumers BUT SOME SURPLUS IS LOST! After the
price control, production decreases, and a small
triangle of producer and consumer surplus is lost
this triangle is the deadweight loss
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Deadweight Loss?
Deadweight loss reduction in net economic
benefit due to inefficient allocation of
resources Price controls create inefficiencies!!
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Price Ceiling
P
Old Consumer Surplus
Supply
A
C
B
P
Price Ceiling
D
Old Producer Surplus
Demand
Q
Q
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Policy Price Ceiling

• The impact of a price ceiling depends on which
  consumer receive the available good. We will
  examine the 2 extreme cases
• Consumers with greatest willingness to pay
  receive good (maximize consumer surplus)
• Consumers with least willingness to pay receive
  good (minimize consumer surplus)

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Price Ceiling Maximize Consumer Surplus
P
New Consumer Surplus
Supply
A
Deadweight Loss
C
B
P
Price Ceiling
New Producer Surplus
D
Excess Demand
Qs
Demand
Q
Qs
Qd
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Price Ceiling Minimize Consumer Surplus
P
Supply
A
New Consumer Surplus
C
B
P
Price Ceiling
Qs
New Producer Surplus
D
Excess Demand
Demand
Q
Qs
Qd
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Price Ceiling Minimize Consumer Surplus
P
Supply
Deadweight LossA-B
A
P
B
Price Ceiling
Qs
Excess Demand
Demand
Q
Qs
Qd
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Policy Price Ceiling

• It is generally assumed that the consumers with
  the greatest willingness to pay receive the good,
  but this does not always occur
• Price ceilings are only effective if resale
  (black market) is prevented
• Price ceilings can also cause a reliance on
  imports to meet excess demand

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Policy Price Floor

• A price floor always has the following effects
• Excess supply will exist
• The market will underconsume
• Consumer surplus will decrease
• Some consumer surplus is transferred to the
  producer
• Producer surplus may increase or decrease
• There will be a deadweight loss

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Price Floor
P (W)
Old Consumer Surplus
Supply
A
Price Ceiling (min. wage)
C
B
P
D
Old Producer Surplus
Demand
Q (L)
Q
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Policy Price Floor

• The impact of a price floor depends on which
  producer will sell the good (which worker works).
  We will examine the 2 extreme cases
• Producers with greatest efficiency supply good
  (maximize producer surplus)
• Producers with least efficiency supply good
  (minimize producer surplus)

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Price Floor Maximize Producer Surplus
P (W)
New Consumer Surplus
Supply
A
Price Floor Ie Min. Wage
C
B
P
Deadweight Loss
New Producer Surplus
D
Excess Supply
Qd
Demand
Q (L)
Qs
Qd
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Price Floor Minimize Producer Surplus
P
New Consumer Surplus
Supply
A
Price Floor Ie Min. Wage
C
B
P
Qs
New Producer Surplus
D
Excess Supply
Demand
Q
Qs
Qd
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Price Floor Minimize Producer Surplus
P
Supply
Price Floor Ie Min. Wage
X
P
Y
Deadweight LossY-X
Qs
Excess Supply
Demand
Q
Qs
Qd
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Policy Price Floor

• Therefore the attempt of a union to increase
  wages (create a price floor) has two effects
• Some workers receive a higher wage
• Some workers lose their jobs
• Note that there is a difference between
  negotiating a higher wage (a unions publicized
  goal) and ensuring wages keep up with inflation
  (often a unions achieved goal)

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Midterm 1

• 1 hour
• 50 multiple choice questions
• Includes all material previously covered
• Some questions will be quickly answered, others
  may take time
• Students should average 1 min per question
• Feel free to skip over troublesome questions
  until later