Chapter_4_Micro_S09

Chapter_4_Micro_S09 - Chapter 4 Demand and Supply...

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4 Chapter Demand and Supply Applications
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2 Demand and SupplyApplications Overview Price Rationing Other mechanisms for rationing goods Objectives/Costs and Benefits Welfare Analysis/ Measuring the gains from trade Consumer surplus Producer surplus Supply and Demand and Market Efficiency Dead weight loss Examples
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3 Rationing and Allocating Resources How do goods get allocated? How is it decided who is able to acquire/buy goods when there is a shortage? Rationing: Method for limiting the purchase or usage of an item when the quantity demanded of the item exceeds the quantity available at a specific price
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4 THE PRICE SYSTEM: RATIONING AND ALLOCATING RESOURCES In a free market, adjustment of price is the rationing mechanism. price rationing The process by which the market system allocates goods and services to consumers when quantity demanded exceeds quantity supplied. Whenever there is a shortage, prices will rise until quantity supplied exactly equals quantity demanded.
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5 THE PRICE SYSTEM: RATIONING AND ALLOCATING RESOURCES FIGURE 3.9 Excess Demand, or Shortage *Price adjustment guarantees that only the people with the highest value (those willing to pay the most) for the goods get them.
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6 Rationing and Allocating Resources What if prices are not allowed to adjust? How is it decided who is able to acquire/buy goods when there is a shortage? What might prevent prices from rising? Government might forbid prices from rising ( price controls like rent control, price gouging laws) Firms may also not want prices to serve as the rationing mechanism (ex. College sports events tickets)
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7 Rationing and Allocating Resources Regardless of the rationale for attempting to prevent price from serving as the rationing system, two things are clear: 1. Very difficult and costly to bypass price rationing in the market and to use alternative rationing devices. 1. Often, such attempts to prevent price as being the rationing mechanism distribute costs and benefits among households in unintended ways.
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8 Rationing and Allocating Resources Price Controls (price ceilings and price floors) price ceiling A maximum price that sellers may charge for a good, usually set by government. example: price gouging laws, rent control Binding price ceilings are when the price ceiling of a good is below the equilibrium price such that it results in excess demand for goods. price floor A minimum price below which exchange is not permitted. example: minimum wage Binding price floors are when the price floor of a good exceeds the equilibrium price such that it results in excess supply.
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Example: The effects of price ceilings in the 1970’s on gas prices Creation of OPEC resulted in large decreases in the supply of gas and consequently large increases in the price of gas. Government response: price ceiling (.57 per gallon)
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Chapter_4_Micro_S09 - Chapter 4 Demand and Supply...

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