Chapter 4: Applications of Supply and Demand

Overview of Chapter 4: Applications of Supply and Demand

• Focuses on efficiency in markets and how government interventions can impact them.

Government Interventions

• Price Ceilings:
  • Definition: A legal maximum price a seller can charge.
  • Example: Rent control.
• Price Floors:
  • Definition: A legal minimum price that a seller can accept.
  • Example: Minimum wage.

Types of Efficiency

• Allocative Efficiency:
  • Occurs when resources are distributed in such a way that maximizes the total benefit to society.
• Productive Efficiency:
  • Achieved when goods are produced at the lowest cost.
• Equilibrium:
  • When a market is in equilibrium, it achieves both allocative and productive efficiency.

Inefficiencies Caused by Price Controls

• Price ceilings and floors can cause market inefficiencies, leading to shortages (from price ceilings) and surpluses (from price floors).
• Examples provided include rent control causing shortages of rental housing due to prices being held below equilibrium.

Labor Markets vs. Financial Markets

• Labor Markets:
  • Households are the suppliers of labor (workers).
  • Firms are the consumers (employers).
  • Example: Minimum wage affects the job supply and demand.
• Financial Markets:
  • Both businesses and households contribute to demand and supply curves.
  • Terms: Borrowers (demanders), Lenders (suppliers), Rate of return (in lieu of price).

Analyzing Economic Impact of Price Controls

• Ability to analyze economic effects of binding price ceilings and floors on equilibrium price and quantity.
  • Example of a binding price ceiling: Will create a shortage of goods or services.
  • Example of a binding price floor: Will create a surplus.

Surplus and Shortage Calculations

• The demand-supply framework helps visualize how price ceilings and floors can lead to surplus (price floors) and shortage (price ceilings).
• Key to compute quantities demanded and supplied under different price scenarios.

Benefits of Voluntary Trade

• Voluntary Trade is beneficial as it allows both parties to achieve greater satisfaction thus leading to allocative efficiency.
  • Example illustrated with two parties valuing an apple differently.

Surplus Types Explained

• Consumer Surplus: The difference between what consumers are willing to pay and what they actually pay.
• Producer Surplus: The difference between what producers are willing to accept versus the actual price received from selling.
• Total (Social) Surplus: The sum of consumer and producer surplus, maximized at market equilibrium.

Applications to Labor Markets

• Economic events (like technology) can shift labor supply and demand, impacting wages for high-skill versus low-skill workers.

Financial Markets and Economic Conditions

• A change in confidence (like increased U.S. public debt) affects demand/supply in financial markets, altering equilibrium interest rates and quantities.

Real-World Application Examples

• Impact of natural disasters on labor markets and demand for home repair services demonstrating shifts in market dynamics.