Apllications of Bus. Econs Topics

APPLICATION 1: HOW DOES KNOWING ABOUT SUPPLY AND DEMAND HELP ME?

Knowledge of supply and demand can be used both to explain and to predict. Let’s look at the issue of prediction first. Suppose you learn that the federal government is going to impose a quota on imported television sets. What will happen when the quota is imposed? With your knowledge of supply and demand, you can predict that the price of television sets will rise. In other words, you can use your knowledge of supply and demand to predict what will happen. Stated differently, you can use your knowledge of supply and demand to see into the future. Isn’t the ability to see into the future useful?

Supply and demand also allows you to develop richer and fuller explanations of events. To illustrate, suppose there is a shortage of apples in country X. The cause of the shortage, someone says, is that, apple growers in the country are simply growing too few apples. Well, of course, it’s true that apple growers are growing “too few” apples compared to the number of apples consumers want to buy. But does this explanation completely account for the shortage of apples? Your knowledge of supply and demand will prompt you to ask why apple growers are growing too few apples. When you understand that quantity supplied is related to price, you understand that apple growers will grow more apples if the price of apples is higher. What is keeping the price of apples down? Could it be a price ceiling? Without a price ceiling, the price of apples would rise, and apple growers would grow (and offer to sell) more apples. The shortage of apples will vanish.

In other words, without knowledge of supply and demand, you may have been content to explain the shortage of apples by saying that, apple growers are growing too few apples. With your knowledge of supply and demand, you delve deeper into why apple growers are growing too few apples.

APPLICATION 2: WHERE WILL HOUSE PRICES CHANGE THE MOST

At one point in time you notice that house prices are rising. You also notice that house prices rise more in some areas of the country than in other areas. You wonder why. At another point in time you notice that house prices are falling. You also notice that house prices fall more in some areas of the country than in other areas. You wonder why, your knowledge of why prices change might lead you to say this: Obviously supply and demand changes are different in different areas of the country and that is why price changes are different too. To illustrate, in one area of the country the demand for houses rises by more than in another area and this explains why house prices rise by more in one area than in another area.

But suppose the demand for houses rises by the same in all areas of the country. What then? Well, the answer may have to do with the supply curve. To illustrate, look at the two supply curves in Exhibit 2. You will notice that we have drawn S1 as steeper than S2. Suppose S1 represents the supply of houses in area 1 of the country and S2 represents the supply of houses in area 2. Obviously, if the demand for houses rises in both areas by the same amount—identified by a shift in the demand curve from D1 and D2—we notice