Chapter 4Applications of

Demand and Supply

Personal Computer Shipments, Market Percentage Shares by Vendors, World and United States 2011

The Personal Computer Market

• Supply increases due to Δ in technology

• Product becomes more useful due to network effects and improved quality• Network effect: when a

product becomes more valuable as more people have it…telephones, etc

• Demand increases because of improved network effect and quality• Increased demand spurs

continued investment/improvement…

Increasing Demand for Crude Oil

Clicker: In this graph, Demand increases from D1 to D2. What happens to Supply?A. Supply increasesB. Supply is

unchangedC. Supply decreasesD. Huh???

Increasing Demand for Crude Oil

Clicker: In this graph, Demand increases from D1 to D2. What happens to Quantity Supplied?A. Quantity Supplied

increasesB. Quantity Supplied is

unchangedC. Quantity Supplied

decreasesD. Huh???

Quick Market Terms:

• A sole proprietorship is a situation in which one individual owns a firm.

• A partnership is a situation in which several individuals own a firm.

• A corporation is a situation in which shareholders own stock in a firm.

• Corporate stocks are shares in the ownership of a corporation.

• A stock market is a set of institutions in which shares of stock are bought and sold.

• Retained earnings are profits not paid out in dividends.

• Dividends are profits distributed to shareholders.

Demand and Supply in the Stock Market

A Change in Expectations Affects the Price of Corporate Stock

Reports suggest rising profits for Intel corp.

Seller Expectations?

Buyer Expectations?

A Change in Expectations Affects the Price of Corporate Stock

CLICKERIn this graph, after both supply and demand effects have taken place what is the result in comparison to the initial equilibrium?A. Price and quantity both

increasedB. Price increasedC. Quantity increasedD. Price and quantity

decreasedE. We’re not sure what the

net effect is.

2. GOVERNMENT INTERVENTION IN MARKET PRICES: PRICE FLOORS AND

PRICE CEILINGS

Learning Objectives1. Use the model of demand and supply to explain

what happens when the government imposes price floors or price ceilings.

2. Discuss the reasons why governments sometimes choose to control prices and the consequences of price control policies.

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Price Floors and Ceilings Price Floor: price is not allowed to decrease below

a certain level. Examples: minimum wage, agricultural price supports.◦ If the floor is above the equilibrium price, then it results

in a surplus.◦ In the labor market, a “surplus” means unemployment.

But how much? Price Ceiling: price is not allowed to increase

above a certain level. Example: rent controls.◦ If the ceiling is below the equilibrium price, then it results

in a shortage.

Price Support for Milk:A Price Floor

With demand curve in position D1, the market would be in equilibrium at a price of $13

With a price support (minimum price) of $13 and demand curve D2, there would be a surplus of milk

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Another Price Floor / Price support

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Another Price Floor / Price support

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A Price Floor

Price Floors in Wheat Markets

Rental Price Ceilings

• The purpose of rent control is to make rental units cheaper for tenants than they would otherwise be

• Rent control is an example of a price ceiling– Price ceiling a maximum allowable price set

below the equilibrium price.

Effects of Rent Control Rent control (establishing a limit on maximum rent)

on housing will cause a shortage of rental housing The shortage will be greater in the long run, when

there is time to adjust the quantity of housing supplied

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Rent Controls:A price ceiling

The Unintended Consequences of Rent Control

• Side payments• Cost-cutting

discrimination• Smokers?• Children?• Pets?• College men?

• Poor maintenance• Ghetto???• …. Etc ???

3. THE MARKET FOR HEALTH-CARE SERVICES

Learning Objectives1. Use the model of demand and

supply to explain the effects of third-party payers on the health-care market and on health-care spending.

THE MARKET FOR HEALTH-CARE SERVICES

• There has been much discussion over the past three decades about the health-care problem in the United States.

• Much of this discussion has focused on rising spending for health care

Health -Care Spending as a Percentage of U.S. Output, 1960–2009

3.1 The Demand and Supply for Health Care

• To assess the market forces affecting health care, we will focus first on just one of these markets: the market for physician office visits.

Total Spending for Physician Office Visits

3.1 The Demand and Supply for Health Care

• A third party payer is an agent other than the seller or the buyer who pays part of the price of a good or service.

• Consumers use more than they would in the absence of third-party payers

• Providers are encouraged to supply more than they otherwise would.

• The result is increased total spending.

Total Spending for Physician Office Visits Covered by Insurance