Exam 4: Demand and Supply Applications

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The tax will increase the world price of rice to $14. Thus, the U.S. will import less rice.

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There is some price that will clear any market, even if supply is strictly limited. In an auction for a unique item, the price (bid) will rise to eliminate excess demand until there is only one bidder willing to purchase the single available painting. In the above graph the equilibrium quantity is one and the equilibrium price is $1,000,000 after all other bidders drop out of the auction.

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This is likely to have the effect of creating a shortage of organs. The reason is fairly simple. If organs were available for sale perhaps more people might be willing to offer the organs of their deceased family members on the market. Yet at a price of zero there are likely to be many eager customers without the corresponding number of organs available. Making them available for sale in the market might actually eliminate the shortage. The difficulty in applying this basic economic principle is that we do not as a society consider human organs to be a commodity that can be bought and sold. There is also the ethical problem that may arise when someone wishes to "hold out" for more money with an eager and willing patient who perhaps cannot "afford" the price. However, even under a system where organs cannot be legally traded there may be ways for richer patients to get around the rules by making donations to hospitals in a transparent attempt to influence their decision.