Applications of Demand and Supply

Read this chapter and attempt the "Try It" exercises. This chapter will help you gain familiarity and competencies with regard to basic demand and supply concepts. At a minimum, you should be able to list the factors that shift the demand curve and those that shift the supply curve after completing these chapters. This will help you prepare for similar types of analyses in the units ahead.

Start Up: A Composer Logs On

"Since the age of seven, I knew that I would be a musician. And from age fourteen, I knew that I would be a composer," says Israeli-born Ofer Ben-Amots. What he did not know was that he would use computers to carry out his work. He is now a professor of music at Colorado College, and Dr. Ben-Amots's compositions and operas have been performed in the United States, Europe, and Japan.

For over 20 years, he has used musical composition software in creating his music. "The output is extremely elegant. Performers enjoy looking at such a clear and clean score. The creation of parts out of a full score is as easy as pressing the <ENTER> key on the keyboard". Changes can easily be inserted into the notation file, which eliminates the need for recopying. In addition, Dr. Ben-Amots uses computers for playback. "I can listen to a relatively accurate 'digital performance' of the score at any given point, with any tempo or instrumentation I choose. The sound quality has improved so much that digital files sound almost identical to real performance". He can also produce CDs on his own and create podcasts so that anyone in the world can hear his music. He engages in self-publication of scores and self-marketing. "In my case, I get to keep the copyrights on all of my music. This would have been impossible ten to twelve years ago when composers transferred their rights to publishers. Home pages on the World Wide Web allow me to promote my own work". Professor Ben-Amots also changed the way he teaches music composition. New application software, such as GarageBand, has opened the way for anyone interested to try to compose music. Whereas his music composition classes used to have music theory prerequisites, today his classes are open to all.

Dr. Ben-Amots started out in 1989 with a Macintosh SE30 that had 4 megabytes of random access memory (RAM) and an 80-megabyte hard drive. It cost him about $3,000. Today, he uses a Macintosh MacBook Pro with 4 gigabytes of memory (a bit in a computer has a value of 0 or 1, a byte is 8 bits, a megabyte is slightly more than 1 million bytes, and a gigabyte is slightly more than 1,000 megabytes), built-in DVD/CD burner, and wireless Internet connections. His new computer cost about $2,200. Put another way, his first computer had a cost per megabyte of RAM of about $750. His present computer costs about $0.75 per megabyte of RAM and is far more powerful. The dramatic rise in the power of personal computers as they fell so steeply in price is just one of the stories about markets we will tell in this chapter, which aims to help you understand how the model of demand and supply applies to the real world.

In the first section of this chapter, we will look at several markets that you are likely to have participated in or be familiar with - the market for personal computers, the markets for crude oil and for gasoline, and the stock market. You probably own or have access to a computer. We have all been affected by the sharp swings in the prices of oil and gasoline in recent years. The performance of the stock market is always a major news item and may affect you personally, if not now then in the future. The concepts of demand and supply go a long way in explaining the behavior of equilibrium prices and quantities in all of these markets. The purpose of this section is to allow you to practice using the model of demand and supply and to get you to start thinking about the myriad ways the model of demand and supply can be applied.

In the second part of the chapter we will look at markets in which the government plays a large role in determining prices. By legislating maximum or minimum prices, the government has kept the prices of certain goods below or above equilibrium. We will look at the arguments for direct government intervention in controlling prices as well as the consequences of such policies. As we shall see, preventing the price of a good from finding its own equilibrium often has consequences that may be at odds with the intentions of the policy makers who put the regulations in place.

In the third section of the chapter we will look at the market for health care. This market is important because how well (or poorly) it works can be a matter of life and death and because it has special characteristics. In particular, markets in which participants do not pay for goods directly but rather have insurers who then pay the suppliers of the goods, operate somewhat differently from those in which participants pay directly for their purchases. This extension of demand and supply analysis, while only scratching the surface on the issues associated with the market for health care, reveals much about how such markets operate. This analysis has become particularly important in the wake of the passage of the Patient Protection and Affordable Care Act in the United States in 2010 - sometimes referred to (especially by opponents) as "Obamacare".

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