Intro - Chptr 5/Using Supply&Demand Flashcards
Foreign exchange market?
Market for foreign currencies (forex).
Exchange rates?
The price of one country’s currency in terms of another’s currency.
What is the determination of exchange rates?
It is the same as the determination of price: Supply and demand.
A currency is just another good.
Why do people demand currencies of other countries?
To buy those countries’ goods & assets.
What is a price ceiling?
A government imposed limit on how high a price can be charged. That limit is generally below the equilibrium price which can result in a shortage. If above equilibrium price, the price ceiling will not have any effect. IMAGE?: RENT CONTROL IN PARIS.
What is a price floor?
Government imposed limits on how low a price can be charged. The floor is generally above the existing price which can result in a surplus. A price floor below equilibrium price would be ineffective. IMAGE: MINIMUM WAGE.
What is an excise tax?
A tax levied on a specific good.
What is a tariff?
An excise tax on an imported good paid by the producer.
Types of government interventions in a market?
(1) Price ceilings; (2) price floors; (3) excise taxes; (4) quantity restrictions; (5) third-party payer markets.
Describe a quantity restriction?
Typically done by requiring a license and restricting the number of licenses that will be issued. This limits supply and increases the price people will pay to obtain a license and the price that the license holder will charge.
Quantity Restriction Graph: Taxi Licenses
IMAGE: TAXI LICENSIS.
Describe third-party-payer markets:
The person receiving the good differs from the person paying for the good. In third-party-payer market, equilibrium quantity and total spending are much higher; this is because quantity demanded will be higher than it otherwise would be. e.g. U.S. healthcare system.
Third-party-payer markets: U.S. healthcare system
IMAGE: THIRD-PARTY-PAYER MARKETS
Algebraic representation of supply, i.e. a supply equation:
Qs = -5 + 2P, where Qs is units supplied and P is the price of each unit in dollars per unit.
Algebraic representation of demand, i.e. a demand equation:
Qd = 10 - P, where Qd is units demanded and P is the price of each unit in dollars per unit.
