Applications in Demand and Supply

1. Applications of Demand and Supply
“The visible outcome of a government imposed price control is “the sight of
housewives and children standing in long lines before the groceries, a spectacle
familiar to everybody who has visited Europe in this age of price control.”
-Ludwig Von Mises
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2. 2 of 11
In the last module, we said that a market
will always find equilibrium…if left alone
For this market,
the equilibrium
price will be $5
For this market, the equilibrium
quantity will be 5 units
If left alone, 5
units of this good
will be sold for $5
each.
But in some
cases, markets
are not left
alone…

3. 3 of 11
Sometime markets are interfered with.
Here is how this might happen
That good is
too cheap...
…The people that
make it could
never make a
living…
…We should
pass a law
making it illegal
to sell it below a
certain price!
And a price floor is born!

4. 4 of 11
What is a price floor?
If a price floor
is set at $7
Then Qs>Qd resulting in a surplus.
A price floor
occurs when a
government or
some other
agency
requires sellers
to sell at a
price above
equilibrium
In this case Qd = 3 and Qs = 7. We have a 4 unit surplus.A great example of a price floor is minimum wage.

5. 5 of 11
Real world price floor example:
minimum wage
In this case of minimum wage,
there is a surplus of unskilled
labor which manifests itself as
much higher unemployment
rates for younger workers.
Notice that workers aged
16-19 (that may have little
skill and may be
candidates for minimum
wage) have a much higher
unemployment rate.
There is a surplus of them!
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6. 6 of 11
What is a price ceiling?
If a price ceiling
is set at $4
Then Qd>Qs resulting in a shortage.
A price ceiling
occurs when a
government or
some other
agency
requires sellers
to sell at a
price below
equilibrium
In this case, Qd=6 and Qs=4. We have a 2 unit shortage.A good example of this is concert or sports events tickets.
The market would bear a higher cost, but scalping is illegal

7. 7 of 11
Real world price ceiling example: rent control
Look at these rents for an
apartment in Manhattan!
If a price ceiling of
$1,500 per unit were
imposed, landlords
would not be as excited
about renting their
apartments.
So what would happen?
Nine grand for a
one bedroom
apartment…are
you serious?!

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When markets are interfered
with…strange things can happen
•1. New construction would be discouraged
•2. Existing housing would deteriorate
•3. Mobility for consumers would decrease
•Renters within rent controlled programs are less
likely to move given other criteria. This can cause
increased traffic congestion and misallocate
housing resources.
•6. Consumer entry costs would increase
•Housing scarcity may result in finders' fees.
Programs may require proof of eligibility which
requires resources.
•7. May lead to discrimination
•Without the price mechanism to “clear the market”,
other factors are considered.
Source: Primarily from National Multi-housing Council
Note: Qd > Qs
New construction would not occur
and existing buildings would become
dilapidated!

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In summary
Markets act as rationing mechanisms
allowing output to be distributed.
Those who want a good badly enough
can pay the equilibrium price for it.
However, if some authority like a government
prevents a market from reaching equilibrium,
then the market cannot clear.
In these cases, shortages (or surpluses) will
develop as prices are artificially low (or high).

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Individual Exercise –
click to see the answers
D
S What is the equilibrium price and
quantity in this market?
What would happen if a price
ceiling of $4 were implemented?
What would happen if a price floor
of $5 were implemented?
$6 and 2 units
A shortage of 4 units
would result
Nothing! That floor is below
the equilibrium price!
Remember – only floors and
ceilings that prevent the market
from reaching equilibrium have an
impact!

11. 11 of 11
Individual Exercise –
click to see the answers
D
S
What is the equilibrium price and
quantity in this market?
What would happen if a price
ceiling of $3 were implemented?
What would happen if a price floor
of $6 were implemented?
$4 and 4 units
A shortage of 2 units
would result
A surplus of 4 units would
result.