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Lecture On Demand and Supply Applications

This document summarizes key concepts from a lecture on demand and supply applications. It discusses how price rationing allocates goods when demand exceeds supply. Alternative rationing mechanisms besides prices, like quotas or rationing, can result in shortages and black markets. The optimal allocation of resources occurs when prices allow supply and demand to clear markets, maximizing the sum of consumer and producer surplus. Government interventions, like price floors or ceilings, can reduce this surplus and create deadweight loss.

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Doha Abbas
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84 views21 pages

Lecture On Demand and Supply Applications

This document summarizes key concepts from a lecture on demand and supply applications. It discusses how price rationing allocates goods when demand exceeds supply. Alternative rationing mechanisms besides prices, like quotas or rationing, can result in shortages and black markets. The optimal allocation of resources occurs when prices allow supply and demand to clear markets, maximizing the sum of consumer and producer surplus. Government interventions, like price floors or ceilings, can reduce this surplus and create deadweight loss.

Uploaded by

Doha Abbas
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Lecture 4

Demand and Supply Applications


The Price System: Rationing and Allocating Resources Price Rationing Constraints on the Market and Alternative Rationing Mechanisms Prices and the Allocation of Resources Price Floors Supply and Demand Analysis: An Oil Import Fee Supply and Demand and Market Efficiency Consumer Surplus Producer Surplus Competitive Markets Maximize the Sum of Producer and Consumer Surplus Potential Causes of Deadweight Loss from Under- and Overproduction

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THE PRICE SYSTEM: RATIONING AND ALLOCATING RESOURCES

price rationing The process by which the market system allocates goods and services to consumers when quantity demanded exceeds quantity supplied.

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THE PRICE SYSTEM: RATIONING AND ALLOCATING RESOURCES


PRICE RATIONING

FIGURE 4.1 The Market for Lobsters


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THE PRICE SYSTEM: RATIONING AND ALLOCATING RESOURCES

The adjustment of price is the rationing mechanism in free markets. Price rationing means that whenever there is a need to ration a good that is, when a shortage existsin a free market, the price of the good will rise until quantity supplied equals quantity demandedthat is, until the market clears.

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THE PRICE SYSTEM: RATIONING AND ALLOCATING RESOURCES

FIGURE 4.2 Market for a Rare Painting


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THE PRICE SYSTEM: RATIONING AND ALLOCATING RESOURCES


CONSTRAINTS ON THE MARKET AND ALTERNATIVE RATIONING MECHANISMS
On occasion, both governments and private firms decide to use some mechanism other than the market system to ration an item for which there is excess demand at the current price.
Regardless of the rationale, two things are clear: 1. Attempts to bypass price rationing in the market and to use alternative rationing devices are much more difficult and costly than they would seem at first glance. 2. Very often, such attempts distribute costs and benefits among households in unintended ways.

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THE PRICE SYSTEM: RATIONING AND ALLOCATING RESOURCES


Oil, Gasoline, and OPEC price ceiling A maximum price that sellers may charge for a good, usually set by government.

FIGURE 4.3 Excess Demand (Shortage) Created by a Price Ceiling

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THE PRICE SYSTEM: RATIONING AND ALLOCATING RESOURCES

queuing Waiting in line as a means of distributing goods and services: a nonprice rationing mechanism. favored customers Those who receive special treatment from dealers during situations of excess demand.

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THE PRICE SYSTEM: RATIONING AND ALLOCATING RESOURCES

ration coupons Tickets or coupons that entitle individuals to purchase a certain amount of a given product per month.

black market A market in which illegal trading takes place at marketdetermined prices.

Even when trading coupons is declared illegal, it is virtually impossible to stop black markets from developing. In a black market, illegal trading takes place at marketdetermined prices.
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THE PRICE SYSTEM: RATIONING AND ALLOCATING RESOURCES


NCAA March Madness: College Basketballs National Championship

FIGURE 4.4 Supply of and Demand for a Pair of Final Four Tickets in 2003

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THE PRICE SYSTEM: RATIONING AND ALLOCATING RESOURCES


PRICES AND THE ALLOCATION OF RESOURCES

Thinking of the market system as a mechanism for allocating scarce goods and services among competing demanders is very revealing, but the market determines much more than just the distribution of final outputs. It also determines what gets produced and how resources are allocated among competing uses.

Price changes resulting from shifts of demand in output markets cause profits to rise or fall. Profits attract capital; losses lead to disinvestment. Higher wages attract labor and encourage workers to acquire skills. At the core of the system, supply, demand, and prices in input and output markets determine the allocation of resources and the ultimate combinations of things produced.
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THE PRICE SYSTEM: RATIONING AND ALLOCATING RESOURCES


PRICE FLOORS price floor A minimum price below which exchange is not permitted.

minimum wage A price floor set under the price of labor.

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SUPPLY AND DEMAND ANALYSIS: AN OIL IMPORT FEE


The basic logic of supply and demand is a powerful tool of analysis.

FIGURE 4.5 The U.S. Market for Crude Oil, 1989

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SUPPLY AND DEMAND AND MARKET EFFICIENCY


CONSUMER SURPLUS consumer surplus The difference between the maximum amount a person is willing to pay for a good and its current market price.

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SUPPLY AND DEMAND AND MARKET EFFICIENCY

FIGURE 4.6 Market Demand and Consumer Surplus

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SUPPLY AND DEMAND AND MARKET EFFICIENCY


PRODUCER SURPLUS producer surplus The difference between the current market price and the full cost of production for the firm.

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SUPPLY AND DEMAND AND MARKET EFFICIENCY

FIGURE 4.7 Market Supply and Producer Surplus

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SUPPLY AND DEMAND AND MARKET EFFICIENCY


COMPETITIVE MARKETS MAXIMIZE THE SUM OF PRODUCER AND CONSUMER SURPLUS

FIGURE 4.8 Total Producer and Consumer Surplus


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SUPPLY AND DEMAND AND MARKET EFFICIENCY


deadweight loss The net loss of producer and consumer surplus from underproduction or overproduction.

FIGURE 4.9 Deadweight Loss


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SUPPLY AND DEMAND AND MARKET EFFICIENCY


POTENTIAL CAUSES OF DEADWEIGHT LOSS FROM UNDER- AND OVERPRODUCTION When supply and demand interact freely, competitive markets produce what people want at least cost, that is, they are efficient.

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REVIEW TERMS AND CONCEPTS

black market consumer surplus deadweight loss favored customers minimum wage price ceiling

price floor producer surplus price rationing queuing ration coupons

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