A famous economist once said that if supply and

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Unformatted text preview: ice cream manufacturers that they shouldn’t produce as much fat-free ice cream. A famous economist once said that if “supply and demand” or “the market” didn’t naturally exist, it would have to be invented—and then it would be hailed as the greatest invention the world had ever seen. Of course, the market was not invented, it just is. Who feeds Cleveland, New York, Chicago, New Orleans, London, Buenos Aires, and Paris? And who feeds you? THINK ABOUT IT If the market had been invented, how would it compare to inventions such as the wheel and fire? the country, the price is zero; most freeways do not have tolls.1 In Exhibit 6-7(a), you will notice that zero price is the equilibrium price at 11 p.m. on Monday. The demand curve for freeway space and the supply curve of freeway space intersect at zero price at 1 People do pay taxes to build freeways, but this fact is not relevant here. People are not paying a price to drive on freeways, at least not nontoll freeways. 06 (128-153) EMC Chap 06 11/21/05 3:14 PM Page 145 11 p.m. on Monday. In other words, at this time neither a shortage nor a surplus of freeway space exists. People are using the freeway. Traffic is moving freely without congestion. Now look at the situation at 8 a.m. At zero price—no toll—the quantity demanded of freeway space is greater than the quantity supplied, resulting in a shortage of freeway space. In everyday language, the freeway is congested. If you have ever been in a major traffic jam, you can probably understand that a congested freeway means a shortage of freeway space. What is the solution to freeway congestion? Two common solutions are building more freeways and having people carpool. One solution deals with the supply side of the freeway market, and the other with the demand side. When people say that we ought to build more freeways, they want to push the supply curve (of freeway space) to the right, shown in Exhibit 6-7(b). If the supply of freeway space shifts from S1 to S2, freeway space is able...
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This document was uploaded on 01/16/2014.

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