Notes #4Extensions of Supply and DemandI. The Price System: an economic system in which relative prices constantly change to reflect changes in demand and supply. Prices act as signals of relative scarcity to everyone in the system.II. Exchange and Markets: Exchanges in markets are voluntary. Voluntary exchange is the act of trading between individuals on a voluntary basis, making both parties subjectively better off. The terms of exchange is usually the price paid and is determined by supply and demand.A. Transactions Costs: the cost of negotiating and enforcing contracts and of acquiring and processing information about alternatives.B. The Role of Middlemen: specialize in lowering transactions costs. They are good!!!III. Changes in Supply and Demand: When one or both curves shift, equilibrium price and/or quantity change. DRAW VARIOUS GRAPHS 1. Increase in demand, 2. Increase in supply, 3. Decrease in demand, 4. Decrease in supply, and 5. Shift bothIV. The Rationing Function of PricesA. Rationing means a process or mechanism for determining who gets what. Price is the most common way in a market economy. B. Some people say that using $ to ration is not fair. Okay…there could be other ways, but you might not like the rationing device!V. Government InterventionA. Price Control1. Floor2. CeilingB. Results1. Surplus2. ShortageDRAW GRAPHVI. Examples of Price ControlsA. Rent Control (Floor or Ceiling?)B. Unintended Consequences of R.C.1. Discourages Construction2. Effects on Current Housing (Quality, incentive for arson)3. Lowers Cost of Discrimination by LandlordC. Minimum Wage (Floor or Ceiling?)D. Unintended Consequences of MW1. Unemployment2. DiscriminationE. Agricultural Supports (Price
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