Draw market supply and market demand curves for a good or service consumed by nearly everyone, e.g. food, shelter, medical services, fuel. Show the equilibrium price and quantity.
Draw market supply and market demand curves for a good or service consumed by nearly everyone, e.g. food, shelter, medical services, fuel. Show the equilibrium price and quantity. Now assume a decrease in supply. Show the new equilibrium price and quantity.
1. What is the social usefulness of the new price? That is, what does the new price tell us about the change in the value of resources in alternative uses compared to their value in this use? Does the change in quantity in this market reflect an efficient response to that new information?
2. Now assume an increase in demand for this good. Show the new equilibrium price and quantity. What does the new price tell us about the change of the value of resources in this use compared to their value in alternative uses? Does the change in quantity in this market reflect an efficient response to that new information?
3. A candidate for public office declares that the price of this good has become “unaffordable” and that if she is elected to public office, she will fight for a legislated price ceiling on this good equal to the initial price of the good before the changes in supply and demand. Assume that she succeeds in wining electing and fulfilling her promise. Show the quantity supplied and the quantity demanded in this market at the affordable price. Who gains from the price ceiling? Who loses? Is the gain effectively targeted on those consumers for whom the price increases made the good unaffordable? Was the good unaffordable to some consumers before the first price increase? Did they gain from the price ceiling? Is the price ceiling efficient?
4. Might subsidized, or premium supported, insurance which pays for a hard ceiling on out-of-pocket expense as a variable share of income for a specific good or service be an alternative worth considering? What advantages would it have v. price ceiling? Disadvantages? (Just list one or two).
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