Chapter 4IntroductionLearning ObjectivesLearning Objectives (cont'd)Chapter OutlineChapter Outline (cont'd)Did You Know That...The Price System and MarketsThe Price System and Markets (cont'd)Slide 10Slide 11Slide 12Policy Example: Profiting by Lowering Transaction Costs of Junking ComputersChanges in Demand and SupplyFigure 4-1 Shifts in Demand and in Supply: Determinate Results, Panel (a)Figure 4-1 Shifts in Demand and in Supply: Determinate Results, Panel (b)Figure 4-1 Shifts in Demand and in Supply: Determinate Results, Panel (c)Figure 4-1 Shifts in Demand and in Supply: Determinate Results, Panel (d)Changes in Demand and Supply (cont'd)Slide 20Slide 21Slide 22Slide 23Example: Why Gasoline Prices Have IncreasedFigure 4-2 The Effects of a Simultaneous Decrease in Gasoline Supply and Increase in Gasoline DemandPrice Flexibility and Adjustment SpeedPrice Flexibility and Adjustment Speed (cont'd)The Rationing Function of PricesThe Rationing Function of Prices (cont'd)Slide 30Slide 31The Policy of Government-Imposed Price ControlsThe Policy of Government-Imposed Price Controls (cont'd)Slide 34Figure 4-3 Black MarketsExample: Preventing Price Gouging Promotes Black Markets in FloridaThe Policy of Controlling RentsThe Policy of Controlling Rents (cont'd)Slide 39Slide 40Slide 41Price Floors in AgricultureFigure 4-4 Agricultural Price SupportsPrice Floors in Agriculture (cont'd)International Policy Example: The High Cost of European Sugar SubsidiesPrice Floors in the Labor MarketFigure 4-5 The Effect of Minimum WagesQuantity RestrictionsQuantity Restrictions (cont'd)Issues and Applications: Coping with a Growing Global Demand for Fresh WaterFigure 4-6 How to Generate a Water ShortageSummary Discussion of Learning ObjectivesSummary Discussion of Learning Objectives (cont'd)Slide 54Slide 55Slide 56Slide 57Slide 58End of Chapter 4Chapter 4Extensions of Demand and Supply AnalysisCopyright © 2008 Pearson Addison Wesley. All rights reserved.4-2IntroductionWater covers 71% of the Earth, but only 2.5% is fresh water.People in many locales complain of “shortages” of safe drinking water.In this chapter you will learn more about shortages.Copyright © 2008 Pearson Addison Wesley. All rights reserved.4-3Learning Objectives•Discuss the essential features of the price system•Evaluate the effects of changes in demand and supply on the market price and equilibrium quantity•Understand the rationing function of pricesCopyright © 2008 Pearson Addison Wesley. All rights reserved.4-4Learning Objectives (cont'd)•Explain the effects of price ceilings•Explain the effects of price floors•Describe various types of government-imposed quantity restrictions on marketsCopyright © 2008 Pearson Addison Wesley. All rights reserved.4-5Chapter Outline•The Price System and Markets•Changes in Demand and Supply•The Rationing Function of Prices•The Policy of Government-Imposed Price ControlsCopyright © 2008 Pearson Addison Wesley. All rights reserved.4-6Chapter Outline (cont'd)•The Policy of Controlling Rents•Price Floors in Agriculture•Price Floors in the Labor Market•Quantity RestrictionsCopyright © 2008 Pearson Addison Wesley. All rights reserved.4-7Did You Know That...•The inflation-adjusted value of the U.S. minimum wage peaked at about $8 in 1964?•We can use supply and demand analysis to analyze effects of the minimum wage?•The model of supply and demand can explain instances of a gap between quantity supplied and quantity demanded?Copyright © 2008 Pearson Addison Wesley. All rights reserved.4-8The Price System and Markets•Price System or Market SystemAn economic system in which relative prices are constantly changing to reflect changes in supply and demandPrices signal what is relatively scarce and relatively abundant.Prices provide information to individuals and businesses.Copyright © 2008 Pearson Addison Wesley. All rights reserved.4-9The Price System and Markets (cont'd)•MarketsEmphasize voluntary exchangeDetermine the terms of exchangeFacilitate exchangeCopyright © 2008 Pearson Addison Wesley. All rights reserved.4-10The Price System and Markets (cont'd)•Voluntary ExchangeActs of trading between individuals that make both parties to the trade subjectively better off•Terms of ExchangeThe prices we pay for the desired itemsCopyright © 2008 Pearson Addison Wesley. All rights reserved.4-11The Price System and Markets (cont'd)•Transaction CostsThe costs associated with exchangeExamplesPrice shoppingDetermining qualityDetermining reliabilityService availabilityCost of contractingCopyright © 2008 Pearson Addison Wesley. All rights reserved.4-12The Price System and Markets (cont'd)•The role of middlemenMiddlemen (intermediaries) or brokers reduce transaction costs by providing information to buyers and sellersExamplesReal estate brokersStock brokersConsignment shopsCar dealershipsCopyright © 2008 Pearson Addison Wesley. All rights reserved.4-13Policy Example: Profiting by Lowering Transaction Costs of Junking Computers•Transaction costs can be lowered by middlemen (intermediaries).Consumers and businesses can dispose of old computer equipment. •Intermediaries can refurbish old computers.Useable parts and computer upgrades can be resold.Copyright © 2008 Pearson Addison Wesley. All rights reserved.4-14Changes in Demand and Supply•Changes in supply and demand create a disequilibrium.•The market price and quantity adjust to a new equilibrium.Copyright © 2008 Pearson Addison Wesley. All rights reserved.4-15Figure 4-1 Shifts in Demand and in Supply: Determinate Results, Panel (a)Copyright © 2008 Pearson Addison Wesley. All rights reserved.4-16Figure 4-1 Shifts in Demand and in Supply: Determinate Results, Panel (b)Copyright © 2008 Pearson Addison Wesley. All rights reserved.4-17Figure 4-1 Shifts in Demand and in Supply: Determinate Results, Panel (c)Copyright © 2008 Pearson Addison Wesley. All rights reserved.4-18Figure 4-1 Shifts in Demand and in Supply: Determinate Results, Panel (d)Copyright © 2008 Pearson Addison Wesley. All rights reserved.4-19Changes in Demand and Supply (cont'd)•SummaryIncreases in demand increase equilibrium price and quantity.Decreases in demand decrease equilibrium price and quantity.Copyright © 2008 Pearson Addison Wesley. All rights reserved.4-20Changes in Demand and Supply (cont'd)•SummaryIncreases in supply decrease equilibrium price and