1. PUTTING DEMAND AND SUPPLY TO WORK Learning Objectives 1.Learn how to apply the model of demand...

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