Lecture 8 - Announcement s We will be doing an exper iment...

Announcements
•
We will be doing an experiment in Aplia
on Friday – bring your laptops.
•
The experiment itself will not be graded
so if you do not have a laptop, don’t worry
– just follow along with someone else.
•
For the 10:10 class- the experiment is
limited to 500 participants. If you are
unlucky enough to not get in, just follow
along with a neighbor.
•
Do both “Preparing for Experiment”
assignments on Aplia by 8:45am on
Friday! This is graded as a homework!
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iClicker
If the supply curve shifts back (supply
decreases) and the demand curve shifts
back (demand decreases), then what
happens to the equilibrium quantity of
the good?
A. Nothing
B. Can’t tell (could rise or fall)
C. Rises
D. Falls
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EXCESS DEMAND
(Shortage).
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THE PRICE SYSTEM: RATIONING
AND ALLOCATING RESOURCES
price rationing The process by
which the market system
allocates goods and services to
consumers when quantity
demanded exceeds quantity
supplied.

THE PRICE SYSTEM:
RATIONING
AND ALLOCATING
RESOURCES
•
The adjustment of price is the rationing
mechanism in free markets. Price
rationing means that whenever there is a
need to ration a good (when a shortage
exists) in a free market, the price of the
good will rise until quantity supplied equals
quantity demanded (until the market
clears).
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Lumber
•
Lumber Example from last time. D out and S back
made prices increase a lot.
•
Not good for the economy to have prices change so
much.
•
What can the government do?
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P
Q
S 1972
D 197
2
A
B
S 1970
D 197
0
$26.70
$56.76

Lumber Example
•
The government could try to shift the
curves back to where they were before and
let the market adjust on its own (move
back to a point near the old equilibrium).
1.To shift demand back , the government
could increase taxes on new housing
projects or put limits or taxes on exports of
lumber.
2.To shift supply out , the government could
lower tariffs (taxes on imports) or get rid of
quotas (limits on imports) on lumber from
Canada.
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Lumber (continued)
•
OR, the government could just put a
limit on how much people can charge for
lumber. This is called a “price ceiling”.
•
If they do this, there will be a shortage
of lumber and the lumber must be
rationed somehow (or divided up among
the people that want the lumber).