Chapter 5: Using supply and demand. In this chapter you will learn: Apply the supply and demand model to real-word events, demonstrate the effect of a price ceiling and a price floor on a market, explain the effect of excise taxes and tariffs on a market, explain the effect of quantity restrictions on a market, explain the effect of a third-party payer system on equilibrium price and quantity. | Using Supply and Demand It is by invisible hands that we are bent and tortured worst. — Nietzsche Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 1 Chapter Goals Apply the supply and demand model to real-word events Explain the effect of excise taxes and tariffs on a market Demonstrate the effect of a price ceiling and a price floor on a market Explain the effect of quantity restrictions on a market Explain the effect of a third-party payer system on equilibrium price and quantity 2 Application: Apples in the United States D0 Quantity The hurricane damage caused the supply curve to shift left Hurricane Irene destroyed a significant portion of the apple crop in the northeastern . S1 Price rose from P0 to P1 where quantity demanded = quantity supplied Q1 P1 S0 Price P0 Q0 Apples Excess demand 3 Application: Sales of SUVs in the . P0 Q1 P1 Increasing gas costs causes the demand curve to shift left Gasoline in the . is increasingly . | Using Supply and Demand It is by invisible hands that we are bent and tortured worst. — Nietzsche Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 1 Chapter Goals Apply the supply and demand model to real-word events Explain the effect of excise taxes and tariffs on a market Demonstrate the effect of a price ceiling and a price floor on a market Explain the effect of quantity restrictions on a market Explain the effect of a third-party payer system on equilibrium price and quantity 2 Application: Apples in the United States D0 Quantity The hurricane damage caused the supply curve to shift left Hurricane Irene destroyed a significant portion of the apple crop in the northeastern . S1 Price rose from P0 to P1 where quantity demanded = quantity supplied Q1 P1 S0 Price P0 Q0 Apples Excess demand 3 Application: Sales of SUVs in the . P0 Q1 P1 Increasing gas costs causes the demand curve to shift left Gasoline in the . is increasingly expensive Price for SUVs fell from P0 to P1 where Q demanded = Q supplied S0 D0 Price Quantity Q0 SUVs Excess supply D1 4 Application: Edible Oils in the World S0 D0 Price Quantity Growing middle class in Asia has increased demand for oils S1 At the same time, . farmers are growing more corn and less soy (less soy oil) Edible Oils P0 P1 D1 The result is increased prices for edible oils 5 A Review of Changes in Supply and Demand No change in Supply Supply increases Supply decreases No change in Demand P same Q same P down Q up P up Q down Demand increases P up Q up P ambiguous Q up P up Q ambiguous Demand decreases P down Q down P down Q ambiguous P ambiguous Q down 6 Government Intervention Price ceilings and price floors Third-party-payer markets Excise taxes and tariffs Quantity restrictions The invisible hand is not the only factor in determining prices; social and political forces also determine price. Other factors include: 7 Government Intervention: Price Ceilings When a government
