Chapter 5 USING SUPPLY AND DEMAND Review of
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Chapter 5 USING SUPPLY AND DEMAND
Review of Changes in Supply and Demand No change in supply Supply shifts out No change in demand No change. Price falls; Price rises; Quantity rises. Quantity falls. Demand shifts out Quantity rises; Price rises; Quantity could Quantity rises. Price could be high or lower. rise or fall. Price falls; Quantity falls; Price falls; Quantity falls Quantity could Price could rise or fall. Demand shifts in 5 -2 Supply shifts in
Government Intervention in the Market • Buyers look to the government for ways to hold prices down. • A price ceiling is a government-imposed limit on how high a price can be charged. • Sellers look to the government for ways to hold prices up. • A price floor is a government-imposed limit on how low a price can be charged. 5 -3
Rent Controls S $17. 00 Rental Price (per month) • A rent control is a price ceiling on rents set by the government. • Rent control set at $2. 50 per month in Paris after World War II created a housing shortage. • The shortage would have been eliminated if rents had been allowed to rise to $17 per month. Shortage 2. 50 D QS 5 -4 QD Quantity of apartments
Minimum Wage S Wmin Wage per hour We D Q 2 Qe Q 1 Quantity of Workers 5 -5 • The minimum wage, a price floor, is set by government specifying the lowest wage a firm can legally pay. • A minimum wage, Wmin, above the equilibrium wage, We, helps those who are employed, Q 2, but hurts those who would have been employed at We, but can no longer find employment, Qe- Q 2.
Review Question 5 -1 Use a graph to explain the likely impact on the price of gasoline of a decrease in OPEC oil production due to instability in Iraq and an increase in vacation travel during the summer. P S 1 The decrease in production will decrease supply from S 0 to S 1. The increase in demand for gasoline for vacation travel will increase demand from D 0 to D 1. Price increases from P 0 to P 1. S 0 P 1 P 0 D 0 5 -6 D 1 Q
Review Question 5 -2 Given the following demand supply of pizza: Price Quantity per Pizza Supplied $8 7 6 5 4 Quantity Demanded 200 150 100 50 0 60 80 100 120 140 What is the effect of a price floor of $8? A price floor of $8 will create a surplus of 200 – 60 = 140 pizzas. 5 -7