OSU ECON 2002.01 - Chapter 4: Extensions of Demand and Supply Analysis

Unformatted text preview:

Macroeconomics Notes 2Chapter 4: Extensions of Demand and Supply Analysis The 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 The prices are signals as to what is relatively scarce and relatively abundant Prices provide information to individuals and businesses Voluntary Exchange: An act of trading between individuals in the price system Makes both parties to the trade subjectively better off Transaction Costs: All of the costs associated with exchange Including:- The informational costs of finding out the price and quality, service record, and durability of a product- The cost of contracting and enforcing that contract The role of middlemen Middlemen (intermediaries) or brokers reduce transaction costs by providing information to buyersand sellers- Examples: Internet!! Real estate brokers, Stock brokers, Consignment shops, Car dealerships Changes in Demand and Supply Changes in supply and demand create disequilibrium. The market price and quantity adjust to a new equilibrium. Price Flexibility Prices quite flexible in some markets can be less flexible in other market scenarios.- May take the form of subtle adjustments such as hidden payments, quality changes- May not reach equilibrium right away Adjustment speed Market characteristics influence adjustment speed Markets may overshoot in the adjustment process Markets are subject to energy shocks, labor strikes, severe weatherSupply Increase Supply Decrease Supply No ChangeDemandIncreaseEquilibrium Price:IndeterminateEquilibrium Quantity:Increases UnambiguouslyEquilibrium Price: IncreasesEquilibrium Quantity:UncertainEquilibrium Price & Quantity:IncreaseDemandDecreaseEquilibrium Price: DecreasesEquilibrium Quantity:UncertainEquilibrium Price:IndeterminateEquilibrium Quantity:Decreases UnambiguouslyEquilibrium Price & Quantity:DecreaseDemand No ChangeEquilibrium Price & Quantity:DecreaseEquilibrium Price & Quantity:IncreaseNo Change The Rationing Function of Prices Synchronization of decisions of buyers and sellers that leads to equilibrium is called the rationing function of prices Methods of non-price rationing  Rationing by queues (waiting in line) Rationing by random assignment or coupons The essential role of rationing  Implied by the presence of scarcity Price vs. non-price rationing mechanism:- Price rationing leads to the most efficient use of available resources- All gains from mutually beneficial trade are captured in a freely rationing price system The Policy of Government-Imposed Price Controls Price Controls: Government-mandated minimum or maximum prices Price Ceiling: A legal maximum price Below Equilibrium  Rent control in New York Price Floor: A legal minimum price (Price Support) Above Equilibrium  Minimum wage or agriculture  Price ceiling and black markets A price ceiling may prevent the equilibrium price from being achieved if it is above the ceiling price A price ceiling that is set below the market clearing price creates a shortage Non-Price Rationing Devices: All methods used to ration scarce goods that are price-controlled- Black Market: A market in which price-controlled goods are sold at an illegally high price The Policy of Controlling Rents The functions of rental prices 1. Promote the efficient maintenance and construction of housing 2. Allocate existing housing 3. Ration the use of housing Rent controls and construction Controls discourage construction- With a 16% vacancy rate and no controls, Dallas recently built 11,000 new rental units- With a 1.6% vacancy rate and controls, San Francisco recently built 2,000 new rental units Effects on the existing supply of housing and current use of housing Property owners cannot recover costs- Maintenance, repairs, capital improvements Rations the current use of housing- Reduces mobility, e.g., New York’s “housing gridlock” Attempts to evade rent controls Forcing tenants to leave Tenants subletting apartments Housing courts Who wins and who loses from rent controls? Losers: Property owners, Low-income individuals, Winners: Upper-income professionals Price Floors in Agriculture Support Price: The government chooses a price floor for a product and then acts to ensure that the price of the product never falls below the support level Associated with many agricultural products A price floor that is set above the market clearing price results in a surplus.  Price Floors in the Labor Market Minimum Wage: A wage floor, legislated by government, setting the lowest hourly wage rate that firms may legally pay their workers  Quantity Restrictions Governments can impose quantity restrictions, most obvious—banning ownership or trading of a good Human organs, Drugs, Hospital beds, Gold from 1933 to 1973 Government Prohibitions and Licensing Requirements Some commodities cannot be purchased at all legally; others require a license Import Quota: Supply restriction that prohibits the importation of more than a specified quantity of a particular good Appendix B Consumer Surplus: The difference between the total amount thatconsumers would have been willing to pay for an item and the totalamount that they actually pay Producer Surplus: The difference between the total amount thatproducers actually receive for an item and the total amount thatthey would have been willing to accept for supplying that item  Gains from trade: The sum of consumer surplus and producersurplus How do price controls affect gains from trade? Consumer surplus and producer surplus are both lower Either a price ceiling or a price floor reduces gains from tradeChapter 7: The Macroeconomy: Unemployment, Inflation, and Deflation Unemployment Unemployment: Total number of adults (aged 16 years or older) willing and able to work and who are actively looking for work but have not found a job Unemployment creates a cost to the entire economy in terms of lost output – often ranging in the billions of dollars Labor Force: Individuals aged 16 years or older who either have jobs or who are looking and available for jobs; the number of employed plus the number of unemployed  The unemployment rate is the percentage of the measured labor force that is unemployed

View Full Document

OSU ECON 2002.01 - Chapter 4: Extensions of Demand and Supply Analysis

Download Chapter 4: Extensions of Demand and Supply Analysis
Our administrator received your request to download this document. We will send you the file to your email shortly.
Loading Unlocking...

Join to view Chapter 4: Extensions of Demand and Supply Analysis and access 3M+ class-specific study document.

We will never post anything without your permission.
Don't have an account?
Sign Up

Join to view Chapter 4: Extensions of Demand and Supply Analysis 2 2 and access 3M+ class-specific study document.


By creating an account you agree to our Privacy Policy and Terms Of Use

Already a member?