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Chapter 4 Applications of Demand and Supply. Personal Computer Shipments, Market Percentage Shares by Vendors, World and United States 2011. The Personal Computer Market. Supply increases due to Δ in technology Product becomes more useful due to network effects and improved quality - PowerPoint PPT Presentation
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Chapter 4Applications of
Demand and Supply
Personal Computer Shipments, Market Percentage Shares by Vendors, World and United States 2011
The Personal Computer Market
• Supply increases due to Δ in technology
• Product becomes more useful due to network effects and improved quality• Network effect: when a
product becomes more valuable as more people have it…telephones, etc
• Demand increases because of improved network effect and quality• Increased demand spurs
continued investment/improvement…
Increasing Demand for Crude Oil
Clicker: In this graph, Demand increases from D1 to D2. What happens to Supply?A. Supply increasesB. Supply is
unchangedC. Supply decreasesD. Huh???
Increasing Demand for Crude Oil
Clicker: In this graph, Demand increases from D1 to D2. What happens to Quantity Supplied?A. Quantity Supplied
increasesB. Quantity Supplied is
unchangedC. Quantity Supplied
decreasesD. Huh???
Quick Market Terms:
• 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
Reports suggest rising profits for Intel corp.
Seller Expectations?
Buyer Expectations?
A Change in Expectations Affects the Price of Corporate Stock
CLICKERIn this graph, after both supply and demand effects have taken place what is the result in comparison to the initial equilibrium?A. Price and quantity both
increasedB. Price increasedC. Quantity increasedD. Price and quantity
decreasedE. We’re not sure what the
net effect is.
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.
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Price Floors and Ceilings Price Floor: price is not allowed to decrease below
a certain level. Examples: minimum wage, agricultural price supports.◦ If the floor is above the equilibrium price, then it results
in a surplus.◦ In the labor market, a “surplus” means unemployment.
But how much? Price Ceiling: price is not allowed to increase
above a certain level. Example: rent controls.◦ If the ceiling is below the equilibrium price, then it results
in a shortage.
Price Support for Milk:A Price Floor
With demand curve in position D1, the market would be in equilibrium at a price of $13
With a price support (minimum price) of $13 and demand curve D2, there would be a surplus of milk
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Another Price Floor / Price support
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Another Price Floor / Price support
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A Price Floor
Price Floors in Wheat Markets
Rental Price Ceilings
• The purpose of rent control is to make rental units cheaper for tenants than they would otherwise be
• Rent control is an example of a price ceiling– Price ceiling a maximum allowable price set
below the equilibrium price.
Effects of Rent Control Rent control (establishing a limit on maximum rent)
on housing will cause a shortage of rental housing The shortage will be greater in the long run, when
there is time to adjust the quantity of housing supplied
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Rent Controls:A price ceiling
The Unintended Consequences of Rent Control
• Side payments• Cost-cutting
discrimination• Smokers?• Children?• Pets?• College men?
• Poor maintenance• Ghetto???• …. Etc ???
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.
THE MARKET FOR HEALTH-CARE SERVICES
• There has been much discussion over the past three decades about the health-care problem in the United States.
• Much of this discussion has focused on rising spending for health care
Health -Care Spending as a Percentage of U.S. Output, 1960–2009
3.1 The Demand and Supply for Health Care
• To assess the market forces affecting health care, we will focus first on just one of these markets: the market for physician office visits.
Total Spending for Physician Office Visits
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.
• Consumers use more than they would in the absence of third-party payers
• Providers are encouraged to supply more than they otherwise would.
• The result is increased total spending.
Total Spending for Physician Office Visits Covered by Insurance
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