PART I Introduction to Economics © 2012 Pearson Education, Inc. Publishing as Prentice Hall Prepared by: Fernando Quijano & Shelly Tefft CASE FAIR OSTER P R I N C I P L E S O F MACROECONOMICS T E N T H E D I T I O N * of 26 PART I Introduction to Economics © 2012 Pearson Education, Inc. Publishing as Prentice Hall * of 26 PART I Introduction to Economics © 2012 Pearson Education, Inc. Publishing as Prentice Hall 4 Demand and Supply Applications CHAPTER OUTLINE The Price System: Rationing and Allocating Resources Price Rationing Constraints on the Market and Alternative Rationing Mechanisms Prices and the Allocation of Resources Price Floors Supply and Demand Analysis: An Oil Import Fee Supply and Demand and Market Efficiency Consumer Surplus Producer Surplus Competitive Markets Maximize the Sum of Producer and Consumer Surplus Potential Causes of Deadweight Loss from Under- and Overproduction Looking Ahead * of 26 PART I Introduction to Economics © 2012 Pearson Education, Inc. Publishing as Prentice Hall price rationing The process by which the market system allocates goods and services to consumers when quantity demanded exceeds quantity supplied. The Price System: Rationing and Allocating Resources * of 26 PART I Introduction to Economics © 2012 Pearson Education, Inc. Publishing as Prentice Hall The adjustment of price is the rationing mechanism in free markets. Price rationing means that whenever there is a need to ration a good—that is, when a shortage exists—in a free market, the price of the good will rise until quantity supplied equals quantity demanded—that is, until the market clears. It is very important to distinguish between the price of a product and total expenditure from that product. Total revenue or expenditure in a market is simply the number of units sold multiplied by the price. Prices and Total Expenditure: A Lesson from the Lobster Industry in 2008-2009 E C O N O M I C S I N P R A C T I C E Lobster Prices Plummet As Maine Fishermen Catch Way Too Many Business Insider * of 26 PART I Introduction to Economics © 2012 Pearson Education, Inc. Publishing as Prentice Hall On occasion, both governments and private firms decide to use some mechanism other than the market system to ration an item for which there is excess demand at the current price. Regardless of the rationale, two things are clear: Attempts to bypass price rationing in the market and to use alternative rationing devices are more difficult and more costly than they would seem at first glance. 2. Very often such attempts distribute costs and benefits among households in unintended ways. The Price System: Rationing and Allocating Resources Constraints on the Market and Alternative Rationing Mechanisms * of 26 PART I Introduction to Economics © 2012 Pearson Education, Inc. Publishing as Prentice Hall queuing Waiting in line as a means of distributing goods and services: a nonprice.