Working with Supply and Demand PPT

Working with Supply and Demand PPT - Working with Supply...

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Working with Supply and Demand 1
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2 Price Ceilings Government-imposed maximum price that prevents the price of a good from rising above a certain level in a market Short side of the Market – Smaller of quantity supplied and quantity demanded at a particular price – When quantity supplied and quantity demanded differ, short side of market will prevail Price ceiling creates a shortage and increases the time and trouble required to buy the good – While the price decreases, the opportunity cost may rise Black Market – A market created by unintended consequences of government intervention • Goods are sold illegally at a price above the legal ceiling
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3 Figure 1: A Price Ceiling in the Market for Maple Syrup 60,000 50,000 40,000 T E V R D S $4.00 3.00 2.00 2. increases quantity demanded 3. and decreases quantity supplied. 4. The result is a shortage – the distance between R and V. Number of Bottles of Maple Syrup per Period Price per Bottle 1. A price ceiling lower than the equilibrium price . . . 5. With a black market, the lower quantity sells for a higher price than initially.
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4 Price Floors Government imposed minimum amount below which price is not permitted to fall – Price floors for agricultural goods are commonly called price support programs When sellers produce more of the good than buyers want at the price floor – Remaining goods become a surplus that no one wants at the imposed price Government responds by maintaining price floors – Uses taxpayer dollars to buy up entire excess supply of the good in question – Prevents excess supply from doing what it would ordinarily do • Drive price down to its equilibrium value
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5 Figure 2: A Price Floor in the Market for Nonfat Dry Milk 2. decreases quantity demanded . . . 200 180 220 $0.81 0.65 K J S D A 4. The result is a surplus the – distance between K and J – which government must buy. Millions of Pounds Price per Pound 1. A price floor higher than the equilibrium price . . . 3. and increases quantity supplied.
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6 Limiting Surplus • A price floor creates a surplus of goods – In order to maintain price floor, government must prevent surplus from driving down market price • Government often accomplishes this goal by purchasing surplus with taxpayers dollars • Price floors often get government deeply involved in production decisions – Rather than leaving them to the market
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9 The Problem with Rate Change • Rate of change of quantity demanded compared to the change in price is not a good measure of price sensitivity – Doesn’t tell whether a change in price or a change in quantity demanded is a relatively large or relatively small change • Relative means compared to value of price or quantity before change
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10 The Elasticity Approach Elasticity approach improves on the problems with rate of change – By comparing percentage change in quantity demanded with percentage change in price Price elasticity of demand (E D ) for a good is percentage change in
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Working with Supply and Demand PPT - Working with Supply...

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