Supply, Demand and Government policies C Chapter 6
Supply, Demand and Government Policies Chapter 6
Importance of Supply-Demand Analysis A little knowledge goes a long way Price Control, taxation and other policies e Market welfare: Normative analysis International Trade Externality(Market Failure) Market Power(Market Failure) Other markets: Financial market Labor market ● Macroeconomics
Importance of Supply-Demand Analysis A little knowledge goes a long way: • Price Control, Taxation and other policies. • Market welfare: Normative Analysis • International Trade • Externality (Market Failure) • Market Power (Market Failure) • Other markets: Financial Market, Labor Market. • Macroeconomics
Supply, demand and Government policies In a free, unregulated market system, market forces establish equilibrium prices and exchange quantities While equilibrium conditions may be efficient, it may be true that not everyone is satisfied One of the roles of economists is to use their theories to assist in the development of policies
Supply, Demand and Government Policies • In a free, unregulated market system, market forces establish equilibrium prices and exchange quantities. • While equilibrium conditions may be efficient, it may be true that not everyone is satisfied. • One of the roles of economists is to use their theories to assist in the development of policies
Price control ●●● Are usually enacted when policymakers believe the market price is unfair to buyers or sellers o Result in government-created price ceilings and floors
Price Control… • Are usually enacted when policymakers believe the market price is unfair to buyers or sellers. • Result in government-created price ceilings and floors
Price ceilings price floors Price Ceiling A legally established maximum price at which a good can be sold Price floor e A legally established minimum price at which a good can be sold
Price Ceilings & Price Floors Price Ceiling • A legally established maximum price at which a good can be sold. Price Floor • A legally established minimum price at which a good can be sold
Price ceilings Two outcomes are possible when the governmentimposes a price ceiling The price ceiling is not binding if set above the equilibrium price The price ceiling is binding if set below the equilibrium price, leading to a shortage
Price Ceilings Two outcomes are possible when the government imposes a price ceiling: • The price ceiling is not binding if set above the equilibrium price. • The price ceiling is binding if set below the equilibrium price, leading to a shortage
A Price Ceiling That Is Not binding ●●● Price of I Ice-Cream C one Supply $4 Price ceiling 3…… Equilibrium p 卫ice Demand 0 100 Quantity of Equilibrium Ic ce-cream quantity Cones
A Price Ceiling That Is Not Binding... $4 3 Quantity of Ice-Cream Cones 0 Price of Ice-Cream Cone Demand Supply Price ceiling Equilibrium price 100 Equilibrium quantity
A Price Ceiling That Is Binding Ice-Cream Cone Supply Equilibrium price 3 2 Price ceiling Shortage: Demand 0 75 125 Quantity of Quantity Quantity Ice- Cream supplied demanded Cones
A Price Ceiling That Is Binding... $3 Quantity of Ice-Cream Cones 0 Price of Ice-Cream Cone 2 Demand Supply Equilibrium price Price ceiling Shortage 125 Quantity demanded 75 Quantity supplied
Effects of Price Ceilings a binding price ceiling creates shortages because Qp> Qs Example: Gasoline shortage of the 1970s nonprice rationing Examples: Long lines, Discrimination by sellers
Effects of Price Ceilings • A binding price ceiling creates ... …shortages because QD > QS . – Example: Gasoline shortage of the 1970s … nonprice rationing – Examples: Long lines, Discrimination by sellers
Lines at the Gas Pump In 1973 OPEC raised the price of crude oil in world markets. Because crude oil is the major input used to make gasoline, the higher oil prices reduced the supply of gasoline. What was responsible for the long gas lines? Economists blame government regulations that limited the price oil companies could charge for gasoline
Lines at the Gas Pump In 1973 OPEC raised the price of crude oil in world markets. Because crude oil is the major input used to make gasoline, the higher oil prices reduced the supply of gasoline. What was responsible for the long gas lines? Economists blame government regulations that limited the price oil companies could charge for gasoline