Kinh tế học vĩ mô - Chapter 5: Using supply and demand

Using Supply and DemandChapter 5Laugher CurveQ. How many economists does it take to screw in a lightbulb? A. None. If the government would just leave it alone, it would screw itself in. The Power of Supply and DemandChanges in supply and demand will change equilibrium price and quantity.The Power of Supply and DemandA shift in demand that moves the demand curve to the right causes equilibrium price and quantity to rise.The Power of Supply and DemandA shift in supply that moves the supply curve to the left causes equilibrium price to rise and equilibrium quantity to fall.Price (per cassette)AS0Quantity of cassettes (per week)$2.502.2509810Excess demandD1A Shift in Demand Fig. 5-1a, p 105D0B(a)AA Shift in Supply Fig. 5-1b, p 105Price (per cassette)Quantity of cassettes (per week)$2.502.2509810D0S1S0CBExcess demand(b)Six Real World Examples of Supply and Demand changesSupply and demand can shed light on a variety of real-world events:Brazil freeze.Financial assets and the baby boomers.Twenty percent excise tax.Rice in Indonesia.Farm labourers.Christmas toys.Sugar Shock in BrazilThe crop-damaging freeze shifted the supply curve to the left.At the original price, quantity demanded exceeded quantity supplied.Price rose until the quantity demanded equaled the quantity supplied.Brazil Freeze Fig. 5-2c, p 107DemandS0(c)P1QeP0QDQSS1Financial Assets and the Baby BoomersDemographic changes among baby boomers moved the demand curve for financial assets to the right.At the original price, quantity demanded exceeded quantity supplied.Price rose until the quantity demanded equaled the quantity supplied.Financial Assets and the Baby Boomers Fig. 5-2f, p 107S(f)D0P1Q1Q0P0D1QDHousing Market and the Baby BoomersThe same phenomenon occurred in the surging demand for housing among this group during the 1980s.Excise TaxesKorean Government imposed a 20 percent luxury tax on imported golf clubs.Excise TaxesA 20 percent tax levied on suppliers shifts the supply curve to the left.After the tax is imposed, the quantity of imported clubs demanded drops.Excise Taxes Fig. 5-2e, p 107S0D0P1Q1P0Q0S1(e)Rice in IndonesiaDrought, pestilence, and the financial crisis shifted the supply curve to the left.The steep demand curve means that the quantity demanded does not change much with changes in price.Rice in IndonesiaResponding to high prices, the government imported rice and distributed it to the market, causing the supply curve to shift to the right.Rice in Indonesia Fig. 5-2a, p 107(a)S0DemandP1Q1P2Q2P0Q0S1S2Farm LabourersThe compressed harvesting season increased the demand and increased authority border patrols decreased supply of labour.Demand shifted to the right and supply shifted to the left.Farm LabourersAt the original price, the quantity of workers demanded exceeded the quantity supplied.Farm LabourersPrice rises until the quantity demanded equals the quantity supplied.Farm LabourersThe effect on the number of labourers hired depended on the relative size of the supply shift.Farm Labourers Fig. 5-2b, p 107(b)S0D0P1S1D1P0QeChristmas ToysA Christmas craze for Furbies shifts demand to the right.A shortage ensued along with a black market.Christmas ToysFinally the supplier produced more, shifting the supply curve to the right, causing the price to drop.Christmas Toys Fig. 5-2d, p 107(d)P1P0QS0S0D0S1D1QD0QD1Effects of Shifts of Demand and Supply on Price and Quantity, Table 5-1, p 110Government InterventionsBuyers look to government for ways to hold prices down.Sellers look to government for ways to hold prices up.Price CeilingsA price ceiling is a government-imposed limit on how high a price can be charged.Rent ControlsRent control is a price ceiling on rents set by government.An example is rent control in Paris following World War I and World War II.Rent ControlsThe following were the consequences of rent control in Paris:A huge shortage of living quarters.New housing construction stopped.Existing housing was allowed to deteriorate.Rent ControlsThe following were the consequences of rent control in Paris:For many, the only way to get living quarters was to offer a huge bribe to the landlord.Many families had to double up with other family members.Rent Controls Fig. 5-3, p 111QSQDSupplyDemandRental Price (per month)Quantity of apartments2.50$17.00ShortageRent ControlsWith price ceilings, existing goods are no longer rationed entirely by priceNon-price rationing occursRent Controls Over TimeShort run supply for rental units is relatively fixed (inelastic).In the long run supply is more elastic, indicating that landowners will increase the quantity of apartments supplied if rents rise, over time.Rent Controls Over TimeRent controls will set the price below equilibrium and create shortages.This will cause the short run supply to decrease.If rent controls are removed, the short run supply will increase again.Rent Controls Over Time, Fig. 5-4, p 113SLDRental Price ($ / month)Quantity of rental unitsSSS’SABC50025010007501250When Rent Controls WorkIf a temporary increase in the demand for housing is expected, rent controls may be effective.This would create a temporary shortage of housing, but it would prevent high prices and a windfall to landlords.When Rent Controls Work, Fig. 5-5, p 114Rental PriceQuantity of rental unitsSLDSSABD’R0R1Price FloorsA price floor is a government-imposed limit on how low a price can be charged.Minimum WageThe minimum wage is an example of a price floor.A minimum wage is set by government specifying the lowest wage a firm can legally pay an employee.Minimum WageThe minimum wage creates winners and losers:Those who can find work earn a higher wage.Others become unemployed.Production costs increase.Consumers pay higher prices.Minimum WageEconomists disagree about the effects of the minimum wage.A Minimum Wage, Fig. 5-6, p 115Wage (per hour)Quantity of workersSDWeWminQeQ2Q1Taxes, Tariffs, and QuotasAn excise tax is a tax that is levied on a specific good.A tariff is an excise tax on an imported good.Taxes and tariffs raise prices and reduce quantity exchanged.The Effect of an Excise Tax on Price and QuantityA luxury tax on jewellery manufactured in Canada is imposed.The Effect of an Excise Tax on Price and QuantityBecause the luxury tax was imposed on the jewellery manufacturers, the supply curve shifted up by the amount of the tax.The Effect of an Excise Tax on Price and QuantityAt a price equal to the original price plus the tax there was excess supply.The price for rings rose by less than the tax, while quantity supplied and demanded fell.$610510S1420$620 DS0Quantity of rings0Price of ringsThe Effect of an Excise Tax Fig. 5-7, p 116 The supply curve shifts up by the $20 tax$600600Quantity Restrictions: QuotasA quota is a quantitative restriction on the amount that can be bought or sold. In international trade, it is a restriction on the amount one nation can export to another.Quantity Restrictions: QuotasThe Canadian government restricted imports of Japanese cars.The effect was to raise the prices of Japanese automobiles in Canada.5 SupplyDemand20,0008$27,00016,000Japanese exports of cars (in millions)Quantity Restrictions: Quotas Fig. 5-8a, p 117QuotaThe Relationship Between a Quota and a TariffTariffs and quotas can both be used to reduce quantity and raise prices.The Relationship Between a Quota and a TariffThere is a difference between imposing a tariff and imposing a quota.In the case of a quota, the profits from a higher price goes to the manufacturer.In the case of the tariff, the tax goes to the government.The Relationship Between a Quota and a TariffAs a consequence, once quotas are instituted, Japanese firms competed intensely to get them.The Relationship Between a Quota and a Tariff Fig. 5-8b, p 117Japanese exports of cars S1DemandPrice of Japanese carsS0Tariff revenue 20,0008 $11,00016,000$27,0005The Limitations Of Supply And Demand AnalysisIt is not enough to be able to explain what happens when supply or demand curves shift.It is necessary to understand the assumptions underlying the analysis.The Limitations Of Supply And Demand AnalysisOther things don't remain constant.Sometimes supply and demand are interconnected.Supply/demand analysis is the first step to analysis, not the complete analysis. The Limitations Of Supply And Demand AnalysisDeciding whether the effects are significant to consider requires a knowledge of the structure of the economy because all actions have ripple or feedback effects.The Limitations Of Supply And Demand AnalysisThe other-things-constant assumption will likely not hold true when one analyses the goods which represent a large percentage of the entire economy.The Fallacy of CompositionThe fallacy of composition is the false assumption that what is true for a part will also be true for the whole.The Fallacy of CompositionThousands of small effects taken together add up to a large effect.The Fallacy of CompositionWhen analyzing the aggregate, small effects that can be put aside in micro economic analysis, can add up, and hence cannot be forgotten.The Roles of GovernmentProviding a stable institutional framework.Promoting effective and workable competition.Correcting for externalities.Ensuring economic stability and growth.Providing public goods.Adjusting for undesired market results.Provide a Stable Set of Institutions and RulesThe government must create a stable institutional framework and enforce contracts through its legal system.Provide a Stable Set of Institutions and RulesWhen governments do not provide a stable environment, as is now happening in Russia, economic growth is difficult - usually such economies are stagnant.Promote Effective and Workable CompetitionGovernment promotes competition and protects against monopolies. Monopoly power is the ability of individuals or firms currently in business to prevent other individuals or firms from entering the same kind of businessPromote Effective and Workable CompetitionMonopoly power gives existing firms or individuals the power to raise prices.Promote Effective and Workable CompetitionMany players in the market insist on open competition except when it comes to themselves:Farmers like competition but still want price supports.Lawyers and architects like competition but still want licensing to prevent others from entering the market.Correct for ExternalitiesUnless they are required to do so, parties to any exchange are unlikely to take into account any externality.Correct for ExternalitiesAn externality is the effect that an action may have on a third party that the decision maker did not take into account.Correct for ExternalitiesThe externality may be positive in which case society benefits even more than the two parties – an example is education.Correct for ExternalitiesThe externality may be negative in which case society as a whole benefits less than the two parties – an example is pollution.Correct for ExternalitiesWhen there are externalities, government has the potential role to change the rules so that the parties must take into account the effect of their actions on others.Ensure Economic Stability and GrowthMost people agree that government should:Prevent large fluctuations in economic activity.Maintain a relatively constant price level.Provide an economic environment conducive to economic growth.Ensure Economic Stability and GrowthMost economists support these goals since they involve macroeconomic externalities.Macroeconomic externalities are externalities that affect the levels of unemployment, inflation,or growth in the economy as a whole.Provide for Public GoodsPublic goods are those goods whose consumption by one individual does not prevent their consumption by others – an example is a public park; another is national defense.Provide for Public GoodsIn contrast, a private good is one that, when consumed by one individual, cannot be consumed by other individuals – an example is an apple.Provide for Public GoodsA free rider is a person who participates in something without having to pay for it.Provide for Public GoodsSince most everyone would enjoy having public parks without having to pay for them, government requires that the public be taxed to pay for public parks, thereby reducing the free rider problem.Adjust for Undesired Market ResultsThe government, through taxes and expenditures, redistributes income among households.Adjust for Undesired Market ResultsIn trying to be fair, which type of tax should the government use? This issue may be controversial.Adjust for Undesired Market ResultsA progressive tax, such as the Canadian income tax is one whose rates increase as a person's income increases.Adjust for Undesired Market ResultsA regressive tax such as a sales tax is one whose effect decrease as income rises.Adjust for Undesired Market ResultsA proportional tax is one whose rates are constant at all income levels, regardless of the taxpayer's total annual income.Adjust for Undesired Market ResultsAnother controversial role for government involves deciding what is best for people independently of their desires.Adjust for Undesired Market ResultsShould government prohibit demerit goods and activities?Adjust for Undesired Market ResultsDemerit goods and activities are those considered to be bad for a person, although one may like them.Addictive drugs are a demerit good; using addictive drugs is a demerit activity.Adjust for Undesired Market ResultsMerit goods and activities are things believed to be good for a person, although one may not engage in them.Motorcycle helmets are a merit good; using helmets while driving a motorcycle is a merit activity.Market Failures and Government FailuresMarket failures are reasons for government intervention.Market failures are situations where the market does not lead to a desired result.Market Failures and Government FailuresGovernment intervention, however, need not improve the outcome.Market Failures and Government FailuresGovernment failures are situations where the government intervenes and makes the situation worse.Market Failures and Government FailuresReal-world policy makers are left with the choice of selecting that which is least bad -- market failure or government failure.Using Supply and DemandEnd of Chapter 5