Ch. 4: Supply and Demand: Practice

Del Mar College, John Daly©2003 South-Western Publishing, A Division of Thomson Learning

Why Do Colleges Use GPAs, ACTs, and SATs for Purposes of

Admission?• The tuition that students pay to attend

college is usually less than the equilibrium tuition.

• The college is likely to ration its available space by a combination of money price and some other non-price rationing device, such as GPA, SAT, TASP, and ACT.

Can Prejudice Affect Wages?

• Discriminatory employers do not want to hire certain groups of worker.

• As a result, the demand for this group of workers falls – and the demand curve shifts downwards, resulting in lower wages

• Some economists point out in competitive markets, the discriminator employer might be forced out of business by nondiscriminatory employers.

What Would Happen If Marijuana Were Legalized?

• Assume the purchase and sale of marijuana were legalized. What would happen to the price?

• Supply would increase, as farmers began to grow marijuana instead of corn or other products.

• Demand would increase, as the number of people who want to buy and consume Marijuana increases.

• The Supply curve shifts to the right, and the Demand curve shifts to the right.

The Minimum Wage Law• At a higher minimum

wage, more unskilled workers want to work, but only a few are hired.

• Additionally, fewer workers are paid at minimum wage than at the equilibrium wage.

• In a competitive market setting, the forces of supply and demand determine equilibrium wages.

Minimum Wage Law (cont.)

• If labor markets are competitive and the demand for labor is downward-sloping, a minimum wage (above equilibrium wage) will reduce employment.

• The important question is: How much will it reduce employment? A $1 raise at the expense of 1 labor hour is different than a $1 raise at the expense of 1,000,000 labor hours.

Price Ceiling In The Kidney Market

• Kidneys are currently donated as there is no free market for Kidneys.

• Assuming that some people are unwilling to donate a kidney for $0 but would for some other amount of money, Kidneys would fall on a standard supply and demand curve.

• At $0 compensation, there should be a large demand and a small supply, exactly the case we see today in the United States.

Crisis in the Electricity Market

• In 2001, some California residents suffered electrical blackouts for one to two hours a day. An Electrical Blackout is a shortage in the supply of Electricity.

• In CA, a power generator creates power and a power distributor sends the power to homes and businesses. Two Power Markets exist in CA, a “retail market” consisting of consumers creating demand and distributors creating supply, and a “Wholesale market” consisting of distributors creating demand and power generators creating supply.

Crisis in the Electricity Market Part 2

• In 1996, the CA Legislature passed a law setting a ceiling on the RETAIL price of electricity, but let the WHOLESALE price be determined by supply and demand.

• Increased demand in the retail market lead to increased demand in the wholesale market. Increased demand lead to higher prices on the wholesale market, while the retail market prices remained fixed.

If Gold Prices Are The Same Everywhere, Then Why Aren’t

House Prices?• If gold prices were different, sellers would buy in

one area, and sell in another.• As time went on, the lack of gold would drive up

prices in some areas, while the deluge of gold would drive down prices in other areas until the prices of gold is fixed across the world.

• However, since we can not pick up a house and land and transplant them in a new area, house prices vary across the country.

Gas Prices After the Attack on 9/11

• Immediately after the events of 9/11/01, gas prices at some gas station began to increase dramatically.

• Why did the prices rise? Because some owners might have thought the demand for gas would increase – future expectation of price can alter the demand curve.

• Why did prices return to “pre-attack” levels? Some argue threats with fines and lawsuits lowered the price. But not lowering the price would have invited economic loss.

Health Care and the Right to Sue Your HMO

• Some people argue you should be able to sue your HMO.

• Consider two settings: one where you can sue your HMO, and one where you cannot.– An HMO’s liability costs are lower if patients

cannot sue. These costs will be passed on to consumers, raising HMO rates for everyone.

Do You Pay For Things Even When There Is No Explicit

Price?• There is no weather market.• But to enjoy the weather in San Diego, CA,

you must be there, either living there or visiting.

• If there were only bad weather in San Diego, the demand to live there would be lower and the cost of living there would be lower.

Paying All Professors The Same Salary

• Professors have different salaries. Should they all have the same salary?

• Using supply and demand, there are different levels of supply of history teachers versus the supply of computer science teachers. As a result, the equilibrium wage for computer science teachers is higher than for history teachers.

Are New Car Companies Hurt by the Used Car Market?

• Implies fewer buyers for new cars• Implies a stronger preference for new cars• Some companies offer rebates for the goods

they sell. The companies argue that this effectively reduces the price (after rebate). Are there similarities between rebates and being able to sell your old car on the used car market?

Supply and Demand on the Freeway

• The supply of freeway space remains the same, but the demand for space fluctuates.

• Some people have proposed tolls to control the demand for freeway space (since it is free).

• If the driving population increases in an area, and the supply of freeway space remains the same, what will happen to freeway congestion?

What Does Price Have to do with Getting to Class on Time?

• Price and Parking Places conspire to delay students.

• Students pay in money or in time to get to classes.

• Some suggest auctioning off parking spaces on a yearly basis.

• Just because someone doesn’t pay the price doesn’t mean there isn’t a price to pay.

Aisle Seats on Commercial Airlines

• The supply curve for aisle seats and middle seats are equal straight lines, while the demand is anything but equal.

• But airlines charge the same price for middle and aisle seats.

• The result is the late comers get the middle seats.

10 O’Clock Classes in College

• Supply for classes is constant, they are offered at different times.

• Demand varies based off of preferences.

• Even though the demand for various classes at various times may be different, there is some set of prices that will make the quantity demanded of each class the same.

Tipping in a Vegas Show

• The show has two markets: a market for good seats, and a market for bad seats.

• The hotel-casino sells all of the seats for the same price

• The people who wait to get good seats can only do one thing while they wait: gamble.