Summary: Main Points on

Applications of Supply and Demand

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Topic (1) -- Government Spending

An increase in government demand for a good raises total demand for that good, raising its price. At the higher price, non-government buyers buy less (their quantity demanded falls when the price rises). As a result, the equilibrium quantity increases by less than the increase in government demand for the good.

See Figure 6.1 on pages 134-5 for the case of a decrease in government demand for a good.

Topic (2) -- Government Budget Deficits

The demand for loans shows the behavior of borrowers. Higher interest rate => people want to borrow less.
The demand for loans shows the behavior of lenders. Higher interest rate => Lenders want to lend more.

When the government has a higher budget deficit it borrows more. So the demand for loans increases.
The equilibrium interest rate rises.

An increase in government demand for loans raises total demand for loans, raising the interest rate. At the higher interest rate, non-government borrowers borrow less (their quantity of loans demanded falls when the interest rate rises). So more government borrowing crowds out (decreases) borrowing by people (for houses, cars, vacations, etc.) and business firms (for new machinery and equipment, factories, office buildings, laboratories, research and development spending, etc.). (See Figure 6.3 on page 137.)

EXAMPLE: In the following graph, the government budget deficit increases by $100. This raises the interest rate, raises TOTAL lending from 200 to 225 billion dollars, but DECREASES PRIVATE BORROWING (by people and businesses) by 75 (from 200 to 125).

Government borrowing CROWDS OUT (decreases) private borrowing.

Because government budget deficits crowd out borrowing for new machinery and equipment, and so on, they decrease the amount of machinery, equipment, technical knowledge (and so on) that the economy will have in the future. In this way, government budget deficits can harm future generations.

Topic (3) -- Government Farm Policies

Government price supports for farm products prevent their prices from falling below a certain level. The government does this by agreeing to buy any amount of the product that is available at that level. This makes demand for the product perfectly elastic at that level, as in Figure 6.4 on page 140 of the textbook. When the price would otherwise fall below the critical price set by government, the government buys the amount that would otherwise become a surplus of the product at that price.

Other government policies affect supply of farm products (see pages 140-141 of the text).

Topic (4) -- Time Prices

Many goods have both a money price AND a time price. In this case, buyers may care only about the TOTAL price = money price + money value of time price.

In this case, a change in the composition of the price (higher money price and lower time price, or lower money price and higher time price) would not affect the quantity demanded at that total price.

Economists often graph the money price on vertical (y) axis of a supply-and-demand graph. So when the money value of time price increases by $1, the demand curve shifts downward by $1.

Similarly, when the money value of time price decreases by $1, the demand curve shifts upward by $1. (In the example below, this raises the equilibrium money price by 75 cents. (Buyers end up paying $1 less in a time price and 75 cents more in a money price, so the total price falls by 25 cents.)

MORE EXPLANATION

Decrease in Time Price by $1 causes Demand Curve to shift upward by $1.

People pay a time price for many activities, including sleep -- the higher your wage rate, the more money you sacrifice for an extra hour's sleep! People can also buy extra time by spending money for time-saving goods and services -- microwave ovens; home delivery of pizzas and other goods; cellular phones to use while doing other things such as driving, jogging, taking a shower; house-cleaning, car-washing, and various repair services; dating and matchmaking services, and so on.

Topic (5) -- Punishments, Social Pressures, and Bribes

Some goods have both a money price AND an expected-punishment price or social-pressure price. These prices work like time prices --- changes in expected-punishment prices and social-pressure prices cause shifts in demand curves (or, depending on the situation, shifts in supply curves).

When the expected-punishment (or social-pressure) price increases by $1, the demand curve shifts downward by $1. See Figure 6.8 on page 148 of the text.

Similarly, when the expected-punishment (or social-pressure) price decreases by $1, the demand curve shifts upward by $1.

Bribes are also part of the price for some goods and services. Like changes in time prices or expected-punishment prices, changes in bribes cause changes in demand (or, depending on the situation, changes in supply).

Topic (6) -- Safety, Lifestyles, Values, Dowries, and Children

Supply and demand analysis can be applied to many intangible goods, including risk and safety. People buy more safety when they make safer choices in medications, drugs, diet, exercise, use of various products that may cause injury, use of seatbelts and airbags, and so on. People usually pay a price to buy more safety.

Supply and demand analysis can be applied to choices of lifestyles -- some people buy a more peaceful life style by choosing locations and jobs that spare them from pressures of modern "life in the fast lane." This affects equilibrium wages for various types of jobs, land and housing prices in different locations, etc.

Supply and demand analysis can be applied to exchanges between people or families in many types of relationships. One example is dowries and bride prices (which are negative dowries). While affected by many cultural forces, the sizes of dowries or bride prices are also affected by the supply and demand for suitable marriage partners. For example, changes in the relative number of young males and females in a society can change the equilibrium dowry or bride price.

Supply and demand analysis can be applied to decisions about having children. The cost of children to parents includes both money prices and time prices. These have increased as social changes have provided females with more opportunities for work outside the home. (See pages 156-7 of the text.)

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