Slide 1Slide 2Slide 3Slide 4Slide 5Slide 6Slide 7Slide 8Slide 9Slide 10Slide 11Slide 12Slide 13Slide 14Slide 15Slide 16Slide 17Slide 18Slide 19Slide 20Slide 21Slide 22Slide 23Slide 24CHAPTER 4 Demand and Supply Applications© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster1 of 22PowerPoint Lectures for Principles of Macroeconomics, 9eBy Karl E. Case, Ray C. Fair & Sharon M. Oster ; ;CHAPTER 4 Demand and Supply Applications© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster2 of 22PART I INTRODUCTION TO ECONOMICS4© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and OsterDemand and SupplyApplicationsFernando & Yvonn QuijanoPrepared by:CHAPTER 4 Demand and Supply Applications© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster4 of 224PART I INTRODUCTION TO ECONOMICSDemand and SupplyApplicationsThe Price System: Rationing and Allocating ResourcesPrice RationingConstraints on the Market and Alternative Rationing MechanismsPrices and the Allocation of ResourcesPrice FloorsSupply and Demand Analysis: An Oil Import FeeSupply and Demand and Market EfficiencyConsumer SurplusProducer SurplusCompetitive Markets Maximize the Sum of Producer and Consumer SurplusPotential Causes of DeadweightLoss from Under- and OverproductionLooking AheadCHAPTER OUTLINECHAPTER 4 Demand and Supply Applications© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster5 of 22The Price System: Rationing and Allocating Resourcesprice rationing The process by which the market system allocates goods and services to consumers when quantity demanded exceeds quantity supplied.Price Rationing FIGURE 4.1 The Market for LobstersSuppose in 2008 that 15,000 square miles of lobstering waters off the coast of Maine are closed. The supply curve shifts to the left. Before the waters are closed, the lobster market is in equilibrium at the price of $11.50 and a quantity of 81 million pounds. The decreased supply of lobster leads to higher prices, and a new equilibrium is reached at $16.10 and 60 million pounds (point B).CHAPTER 4 Demand and Supply Applications© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster6 of 22The Price System: Rationing and Allocating ResourcesThe 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 exists—in a free market, the price of the good will rise until quantity supplied equals quantity demanded—that is, until the market clears. FIGURE 4.2 Market for a Rare PainingThere is some price that will clear any market, even if supply is strictly limited. In an auction for a unique painting, the price (bid) will rise to eliminate excess demand until there is only one bidder willing to purchase the single available painting. Some estimate that the Mona Lisa would sell for $600 million if auctioned.Price RationingCHAPTER 4 Demand and Supply Applications© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster7 of 22The Price System: Rationing and Allocating ResourcesConstraints on the Market and Alternative Rationing MechanismsOn 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.CHAPTER 4 Demand and Supply Applications© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster8 of 22The Price System: Rationing and Allocating ResourcesOil, Gasoline, and OPECprice ceiling A maximum price that sellers may charge for a good, usually set by government.Constraints on the Market and Alternative Rationing Mechanisms FIGURE 4.3 Excess Demand (Shortage) Created by a Price CeilingIn 1974, a ceiling price of $0.57 cents per gallon of leaded regular gasoline was imposed. If the price had been set by the interaction of supply and demand instead, it would have increased to approximately $1.50 per gallon. At $0.57 per gallon, the quantity demanded exceeded the quantity supplied. Because the price system was not allowed to function, an alternative rationing system had to be found to distribute the available supply of gasoline.CHAPTER 4 Demand and Supply Applications© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster9 of 22The Price System: Rationing and Allocating Resourcesqueuing 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.Constraints on the Market and Alternative Rationing Mechanismsration 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 market-determined prices.CHAPTER 4 Demand and Supply Applications© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster10 of 22The Price System: Rationing and Allocating ResourcesNCAA March Madness: College Basketball’s National ChampionshipConstraints on the Market and Alternative Rationing Mechanisms FIGURE 4.4 Supply of and Demand for a Concert in 2007The face value of a ticket to the Justin Timberlake concert on September 16, 2007, at the Staples Center in Los Angeles was $50. The Staples Center holds 20,000. The supply curve is vertical at 20,000.At $50, the quantity supplied is below the quantity demanded. The diagram shows that the quantity demanded and the quantity supplied would be equal at $300.The Web shows that one ticket could be worth $16,000.CHAPTER 4 Demand and Supply Applications© 2009 Pearson Education, Inc.