Another interesting example of joint supply occurs in the transport industry. An outward journey cannot be supplied without supplying an inward journey. This means that, on many return journeys, vehicles are running empty. A petrol tanker almost certainly return empty to the oil refinery, and lorries which have carried coal will return empty to the pits. ‘Empty running’ raises the costs of transporting goods and people. The transport charges for the outward journey must cover the costs of any return journey which does not have a paying load.
1.9 Demand and supply – some real examples
· Holding down food prices during an emergency
In times of a severe shortage, for example in wartime, the government will fix the prices of essentials, such as certain foodstuffs, at levels which the great majority of the population can afford to pay. It does this because, owing to the shortage, the free market price of the goods would be so high that many people would not be able to buy the goods. However, fixing prices below the true market or equilibrium prices can cause problems, as Figure 1.8 demonstrates.
The true market price for the commodity in Figure 1.8 is OP, but the government makes an order fixing the price at OP1. Unfortunately, at the price OP1, the quantity demanded (OQ2) is greater than the quantity supplied (OQ1). People are willing and able to buy more than is being supplied.
Unless some further action is taken, there will be a situation of ‘first come, first served’. There will be queues and waiting lists, and some people will be left without any supplies of this good. In these circumstances, the government will be obliged to introduce some form of rationing.
Everyone will receive coupons which entitle them a certain amount of the good. In most cases, however, the amounts they receive will be much less than they would like to buy, and can afford to buy, at the price.
· Offering farmers a guaranteed price higher than the free market price
In the European Economic Community (EEC) and in many other parts of the world, government guarantee minimum prices for certain agricultural products. These guaranteed prices are often higher than the prices the farmers would receive if they had to sell the products on a free market. When this is the case, the government has to deal with the problem of surpluses. Figure 1.9 shows how these surpluses are created.
In Figure 1.9, the free market price of the product (say, wheat), is OP, but the government guarantees that farmers will receive a minimum price of OP1. At this guaranteed price, however, farmers supply more than the quantity demanded. There is a surplus equal to Q1Q2. At the price OP1, households and firms will buy a quantity equal to OQ1. The excess supply, equal to Q1Q2, will be purchased by the government and stored in granaries. It may hold these stocks in the hope of releasing them if there is a shortage in the near future, or it may sell them in overseas markets, most probably at a lost.
1.9.2 A fixed supply – Cup Final tickets
This is another example of price fixing, but in this case the price is not fixed by the government. The supply of Cup Final tickets is strictly limited to the capacity of Wembley Stadium. The supply curve, therefore, will be a vertical line because the supply of seats cannot change, no matter what happens to the price. The price of tickets, which is fixed by the Football Association, is held well below the true market price. Figure 1.10 shows how this creates an annual problem for the FA.
In Figure 1.10, the true market price of tickets is OP, where the quantity demanded is equal to the quantity supplied (OQ). The price fixed by the FA is OP1 and at this price the quantity demanded (OQ1) greatly exceeds the number of tickets available. There is a shortage equal to OQ1. The FA is obliged to introduce some form of rationing which means, of course, that there are many thousand of disappointed football fans.
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