CHAPTER 5

Supply,
Demand,
and Price:
Application
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or duplicated, or posted to a publicly accessible website, in whole or in part.
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 5-1 Application 1: Tickets to The Big Bang
INTHISCHAPTER Theory
5-2 Application 2: Easier-to-Obtain Loans
and Higher Housing Prices
5-3 Application 3: The Price of an Aisle Seat
5-4 Application 4: What Will Happen to the
Price of Marijuana if the Purchase and
Sale of Marijuana are Legalized?
5-5 Application 5: Speculators, Price
Variability, and Patterns
5-6 Application 6: Why is Medical Care So
Expensive?
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 5-7 Application 7: Why Do Colleges Use
GPAs, ACTs, and SATs for Purposes of
Admission?
INTHISCHAPTER
5-8 Application 8: Supply and Demand on a
Freeway
5-9 Application 9: Are Renters Better Off?
5-10 Application 10: Do You Pay for Good
Weather?
5-11 Application 11: College Superathletes
5-12 Application 12: 10 A.M. Classes in College
5-13 Application 13: Salsa, Chips, and Beer
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 5-1 Application 1:
Tickets to The Big Bang Theory (1 of 2)

● If you go to tvtickets.com, you can request tickets to

view the taping of tv shows; there is no charge; the price
is zero
● Is a zero price the market equilibrium price?
• You would think the market equilibrium price would
be positive and expect it to be higher for some shows
than for others
• Suppose we track 3 shows; there will be a shortage of
tickets for each show, with the shortage being larger
for some than others (Exhibit 1)
• How will the shortage manifest itself, and how will we
know whether the shortage is different for each show?
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 EXHIBIT 1
The Supply and Demand for Viewing
the Taping of Different TV Shows

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 5-1 Application 1: Tickets to The Big Bang Theory (2 of 2)

● The answer depends on how hard it is to get a ticket to a

show; some are sold out, and some not
• Getting tickets for The Big Bang Theory (CBS) is very
difficult
• When tickets become available, they are rationed on a
first-come, first-served basis (except for those who know
someone in the cast)
● The demand for tickets to new shows is sometimes less than
supply
• When this happens, the market equilibrium price might
actually be negative (Exhibit 2); the producers would
actually have to pay people to watch
• But more likely, they ask friends and family members to
come to the taping
• As the show gains real fans, the demand will rise, and the
surplus will fall
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 EXHIBIT 2
A Negative Price: We’ll Pay You to
View the Taping of the Show

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 5-2 Application 2: Easier-to-Obtain
Loans & Higher Housing Prices
► To make it easier for people to buy houses, the federal
government could push for lowered lending standards
• Most lenders require 20% down payment; suppose the
government passed a law saying no lender could require
more than 5% down; would this make it easier to buy a
home? Not necessarily
• The interest rate on a loan that requires only 5% down may
be higher than the rate on one that requires 20% down; so
are buyers better off?
• By making mortgage loans easier to get the government has
indirectly increased the demand for houses; as the demand
rises, so do house prices

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 5-3 Application 3:
The Price of an Aisle Seat (1 of 2)

► Most airlines will reserve an assigned seat for you when you
buy a ticket, but Southwest does not
• On Southwest, you choose a seat when you board the plane
• If you are one of the first to board, you have many seats to
choose from
• If you are one of the last, you have few seats to choose from
► Aisle seats are more popular than middle seats
• Assuming 3 seats on each row on one side, the supply of
middle seats is equal to the supply of aisle seats, but the
demand for aisle seats is higher
• If price were to equilibrate, we would expect a higher price
for an aisle seat than a middle seat (Exhibit 3)
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©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ©iurii/Shutterstock 10
 5-3 Application 3: The Price of an Aisle Seat (2 of 2)

► Does Southwest charge more for an aisle seat?

► If you asked the airline, its answer would be no
► But Southwest does charge more for priority boarding
► If you want to board before others, you must choose
the Business Select option, at an added charge of $20
► In effect, on the day we checked, Southwest was
charging $20 more for an aisle seat than a middle
seat

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 EXHIBIT 3
The Market for Middle and Aisle Seats
on Airline Flights

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 5-4 Application 4: What Will Happen to the
Price of Marijuana if the Purchase &
Sale of Marijuana are Legalized? (1 of 2)
► In most of the U.S., the purchase and sale of marijuana are
unlawful, but there is still a demand for it, a supply of it, & an
equilibrium price
• If tomorrow, the purchase and sale of marijuana became
legal, will P1 rise, fall or remain the same?
• Of course, the answer depends on what we think will
happen to the demand for and supply of marijuana
• Some people producing corn and wheat will likely to
choose instead to produce marijuana, so the supply will
rise; if nothing else changes, the price will fall
• But something else is likely to change; the number of people
who wants to buy and consume marijuana will likely rise,
increasing demand

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 5-4 Application 4: What Will Happen to the Price of Marijuana if
the Purchase & Sale of Marijuana are Legalized? (2 of 2)

► Decriminalizing the purchase and sale of marijuana is

likely to shift both the marijuana demand and supply
curves to the right
► What happens to the price then depends on how
much the curves shift; three possibilities arise:
1. the demand curve shifts to the right by the same
amount as the supply curve shifts to the right; the
price will not change
2. the demand curve shift to the right is greater than the
supply curve shift to the right; the price of marijuana
will rise
3. the supply curve shift to the right is greater than the
demand curve shift to the right; the price will fall
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 5-5 Application 5: Speculators, Price
Variability, and Patterns (1 of 2)
► Suppose good that the price of good X varies over a month;
sometimes it is $10, other times, it is $13, and other times $12
• Speculators will enter the market when prices fluctuate, because
there is profit to be made by buying low and selling high (buy at
$10, sell at $13)
• Speculators are trying to make themselves better off, but it does
not necessarily follow that others will be made worse off
• Suppose that Monday-Wednesday, the price of good X is $10, and
on Thursday, it rises to $14; speculators will buy Monday-
Wednesday, and sell on Thursday
• But their buying on Monday-Wednesday will drive up the price on
those days, and their selling on Thursday will drive down the
price on that day
• Speculators will continue to buy and sell until the price is the
same every day

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 5-5 Application 5: Speculators, Price Variability, and Patterns (2 of 2)

► The speculators have done three things:

1. bought low and sold high
2. changed the pattern of price from $10 on three days and
$14 on one day to $11 for each of four days, and
3. moved some of the supply of good X from certain days to
other days
► With this in mind, a possible real-world scenario:
• Suppose unusually bad weather for growing crops
threatens the Midwest
• High prices for food are expected as a result, and
speculators will likely buy certain food crops today (before
bad weather hits) and sell it after the bad weather hits
• Their actions will make food a little more expensive today
and a little less expensive later, spreading out the “pain” of
the weather on food crops
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 5-6 Application 6: Why is Medical
Care So Expensive? (1 of 3)
► When you buy groceries, 2 parties are involved, you
(buyer) and the grocery store (seller)
► When you buy health care, 3 parties are involved, you,
the medical facility, and your insurance company
• The existence of a third party separates the buying of
something from the paying for something
• Although you pay insurance premiums, what happens
is like being at a buffet; you pay a set price for the
buffet, and then can eat all you want; the same often
happens with medical care

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 5-6 Application 6: Why is Medical Care So Expensive? (2 of 3)

► You don’t buy medical care as you buy food; you buy
food you like, but not medical care:
• True, but this begs the question; you would think
differently about tests a doctor recommended if you
had to pay for them out of pocket
► Let’s link the quantity demanded for medical care in
general (high if the price is 0) with the demand for
specific items that make up medical care
• If the quantity demanded is higher at price 0 than at
some positive price, we would expect the demand for
specific items that make up medical care to be higher
than it would be if the quantity demanded of medical
care were lower (Exhibit 4)
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 EXHIBIT 4
The Price of Medical Care and the
Demand for X-rays

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 5-6 Application 6: Why is Medical Care So Expensive? (3 of 3)

► The lower the price of medical care, the higher the

quantity demanded of medical care and the
demand for X-rays will be:

► The higher the price of medical care, the lower the

quantity demanded of medical care and the
demand for X-rays will be:

► What does a high demand for X-rays do the price of

an X-ray? It pushes the price upward; think buffet
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 5-7 Application 7: Why Do Colleges
Use GPAs, ACTs, and SATs for
Purposes of Admission?
► At many colleges, students pay part of the price of their
education (tuition payments) and taxpayers and private donors
pay part
• Thus, the tuition students pay is less than the equilibrium tuition
► Suppose a student pays T1 at a given college or university
• As shown in Exhibit 5, T1 is below the equilibrium tuition TE
• At T1 the number of students who want to attend the university
(N1) is greater than the number of openings at the university (N2);
the university receives more applications than there are places
available
• What can be done?
• Colleges and universities typically use GPAs, ACTs and SATs as
rationing devices

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 EXHIBIT 5
College and University Admissions

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 5-8 Application 8: Supply and
Demand on a Freeway
► The supply of freeway space is fixed, but the demand
fluctuates
• Demand will be higher at 8 am than at 11 pm, but the
money price is always the same – zero
• Exhibit 6 shows two demand curves for driving on the
freeway: D8a.m. and D11p.m.
• One way to eliminate the shortage at D8a.m. is through
an increase in the money price of driving on the
freeway at that time; three alternatives:
• Tolls
• Building more freeways
• Encouraging carpooling
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 EXHIBIT 6
Freeway Congestion and Supply
and Demand

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 5-9 Application 9:
Are Renters Better Off?
► Suppose two laws related to the eviction of a renter:
• Law 1: a renter has 30 days to vacate an apartment after
being served with an eviction notice (landlord loses 30
days’ rent)
• Law 2: the renter has 90 days to vacate (landlord loses 90
days’ rent)
► Landlords will find it less expensive to rent apartments
under law 1 than under law 2
• Under law 1, a renter pays lower rent (good) and has
fewer days to vacate (bad)
• Under law 2, a renter pays a higher rent (bad) and has
longer to vacate (good)
► Who pays for the additional days to vacate? The renter
does by paying a higher rent

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 EXHIBIT 7
Apartment Rent and the Law

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 5-10 Application 10: Do You Pay
for Good Weather?
► Some places in the country are considered to have better
weather than others; but is the good weather truly free?
• Weather in San Diego, CA, is better than weather in
Fargo, North Dakota
• There is no weather market, but people pay indirectly
• To enjoy good weather in San Diego, you must live there
• There is a demand for housing in San Diego which is
higher than it would be if the weather were not so good
(See Exhibit 8)
• Because of higher demand, it follows that the price of
housing is higher, too (P2 as opposed to P1)
► Thus, San Diegans indirectly pay for their good weather
because they pay higher housing prices than they would
if the area had bad weather
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 EXHIBIT 8
The Price of Weather and the
Price of Housing

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 5-11 Application 11:
College Superathletes
► Suppose a superathlete, a football player, who will be
recruited by many colleges and universities
• He decides to attend college A, where he receives a full
scholarship
• We consider tuition of $30,000 as a 2-step process where
the college gives him $30,000, then charges him the same
amount as tuition
1. Can the college pay him more than the full tuition?
2. Is he being paid what he is worth?
• Per NCAA rules, the answer to question 1 is no; but how
does this affect question 2?
• The NCAA Rule is actually a price ceiling (Exhibit 9); it
essentially transfers part of the athlete’s income to the
college in the form of greater consumers’ surplus
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 EXHIBIT 9
The College Athlete

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 5-12 Application 12:
10 A.M. Classes in College
► Suppose an econ class is offered in the same classroom
twice a day, at 10 am and at 8 pm
• Most students would prefer the 10 am class, so in Exhibit
10, the supply of seats in the class is the same at each
time but the demand is greater for the 10 am class
• The equilibrium price for the morning class is higher than
for the evening class, but the university doesn’t charge a
higher tuition for the 10 am class
• In Exhibit 10, the quantity of seats for the morning class
will be greater than the quantity supplied
• How will the university allocate the available seats?
• It may be first-come, first-served, or first to register, or by
giving upper-class students first priority
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 EXHIBIT 10
The Supply of and Demand for
College Classes at Different Times

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