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Chapter 5 Notes - [ChapterFive LearningObjectives After...

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[Chapter Five] Using Supply and Demand Learning Objectives After reading the material in this chapter, you will be able to do the following: 1. Explain real-world events using supply and demand. 2. Discuss how exchange rates are determined using supply and demand. 3. Demonstrate the effect of a price ceiling and a price floor on a market. 4. Explain the effect of excise taxes and tariffs on equilibrium price and quantity. 5. Explain the effect of a third-party-payer system on equilibrium price and quantity. Chapter Outline Real-World Supply and Demand Applications Three events are described and students are asked to match each event with a diagram from Figure 5-1. Cyclone Larry The first event is a cyclone that destroyed banana crops in Australia. It should be matched with Figure 5-1(b), which shows a decrease in supply. The result is a higher price for bananas and a lower equilibrium quantity. Sales of SUVs The second event is a switch from SUVs to more efficient cars in response to high gas prices. The market in question is the market for used SUVs. It should be matched with Figure 5-1(a), which shows a decrease in demand. The result is a lower price and a lower quantity. Edible Oils The third event has two parts: a growing middle class in China and India that wants soy oil, and a switch by U.S. farmers away from growing soy (toward corn for ethanol). These events should
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be matched with Figure 5-1(c), which shows an increase in demand and a decrease in supply. The result is a sharply higher price but no change in quantity. The Price of a Foreign Currency The market for currencies is called the foreign exchange (forex) market. Exchange rates: “the price of one country's currency in terms of another's currency.” A table with exchange rates from April 3, 2009. One riyal and one rand exchanged for 27 cents and 11 cents respectively. Whenever a foreign good is bought, currency must be traded, usually by the importer. Example: a Hyundai costs 12.793 million South Korean won; 1 won costs $0.0007479, so the 12.793 million won costs $9,567.88. Euro: “the currency used by 13 of the members of the European Union.” The price of a Euro went from $0.85 to $1.50 in the early 2000s because of supply and demand. The suppliers of euros are Europeans who want to buy U.S. goods and assets. The demanders of euros are U.S. citizens who want to buy European goods and assets. Figure 5-2 shows the market for euros. The U.S. entered a recession and U.S. interest rates fell, so Europeans bought fewer U.S. financial assets, so the supply of euros fell. At the same, Americans wanted more European assets because their interest rates were higher, so the demand for euros increased.
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