chapter 4 - CHAPTER 4 Supply and Demand Practice Chapter 4...

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CHAPTER 4 Supply and Demand: Practice Chapter 4 continues the discussion of supply and demand, this time with the emphasis on teaching students to apply the concepts to help explain things or to make predictions. The author analyzes 17 different situations that can be better understood using the model of supply and demand. h CHAPTER OBJECTIVES After completing this chapter, your students should be able to: 1. Use supply and demand to explain events and to predict future outcomes. 2. Apply the tools of supply and demand to everyday life. 3. Better explain how economists think. h KEY TERMS There are no newly defined key terms in Chapter 4. The key terms from Chapter 3 are used throughout the applications. h CHAPTER OUTLINE The following 17 applications have all been chosen to see how supply and demand can be used to either explain or predict things. I.APPLICATION 1: WHY DO COLLEGES USE GPAs, ACTs, AND SATs FOR PURPOSES OF ADMISSION? —Tuition at most universities and colleges is subsidized by the state and/or private donors. This means that tuition is lower than the equilibrium tuition. This will create a shortage of spaces for university students (see Exhibit 1). The college or university will have to allocate the scarce resource of spaces. Generally this will occur through two means: money price and nonprice rationing devices. Most schools use entrance standards as a form of nonprice rationing. By setting minimum levels of GPA, and/or test scores (ACT, SAT) for admission, the school automatically lowers the demand for its limited spaces. II. APPLICATION 2: CAN PREJUDICE AFFECT WAGES? —If there are two groups (B and C) of equally productive employees, then we would expect them to earn identical wages. Discrimination by some employers who favor C types and are prejudiced against B types will increase demand for and equilibrium wages for C types, 44
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45 Chapter 4 while lowering those for B types (see Exhibit 2). While this obviously harms the B types, it also drives up labor costs for the discriminator employer who may face competition from nondiscriminating firms who snap up the lower wage, but equally productive B types. Thus prejudice may well be costly to both the group being discriminated against and to the discriminator employer. III.APPLICATION 3: WHAT WILL HAPPEN TO THE PRICE OF MARIJUANA IF THE PURCHASE AND SALE OF MARIJUANA ARE LEGALIZED —Legalizing marijuana will have two effects on supply and demand. First, with legality the number of suppliers will rise, which will shift the supply curve to the right. Second, legality will cause more people to consume marijuana, which will shift demand to the right. Therefore, the equilibrium quantity bought and sold will rise for sure. The price change will, however, depend on the relative sizes of the above shifts. If the demand curve shifts more than the supply curve, then the price will rise. If the supply curve shifts more than the demand curve, then the price will fall. Equal shifts will leave the price unchanged.
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This note was uploaded on 09/22/2009 for the course BUSINESS Economics taught by Professor Richard during the Fall '08 term at Florida State College.

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chapter 4 - CHAPTER 4 Supply and Demand Practice Chapter 4...

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