[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

Chapter 4
USING DEMAND
AND SUPPLY
∂
Why are doctors, on average, paid more than lawyers? And why are lawyers
paid more than schoolteachers? Why does your economics professor
probably make more than your literature professor? And why has the
wage gap between college graduates and those with only a high school education
widened in recent years? The concepts of demand and supply developed in the previous
chapter can help us answer these questions. Moreover, these concepts help
us predict what will happen if the government increases the tax on cigarettes or the
tax on gasoline. But economists are usually interested in more specific predictions.
They want to know how much the tax on gasoline would need to be raised if the goal
is to lower gasoline consumption by, say, 10 percent, or how much a frost in Florida
that reduces the orange crop will increase the price of orange juice.
In this chapter, we develop some of the concepts needed to make these sorts of
predictions. In addition, we examine what happens when governments intervene
with the workings of competitive markets. High rents and expensive food may seem
to block poor people’s access to adequate housing and nutrition, farmers may feel that
the prices of their crops are too low, and textile workers may object to competing with
laborers producing similar goods in low-wage countries. Political pressures are constantly
brought to bear on government to intervene on behalf of groups that feel
disadvantaged by the workings of the market. In the second part of this chapter, we
track some of the consequences of these political interventions.
The Price Elasticity of Demand
To predict the effects of a tax on gasoline on how much people drive or of a frost on
the price of orange juice, we must start by asking what substitutes exist for the good
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