ECON-UA 2 PRINCIPLES OF ECONOMICS II CHAPTER 03 HANDOUT
DR. ANDREW PAIZIS – NYU
1
NEW YORK UNIVERSITY
Department of Economics
THE AVIAN FLU
In 2005, both in the United States and Europe the market for chicken had about the same price, as it can be seen from the following Figure 1:
In 2006, the chicken flu epidemic affected Europe and Asia.
This generated considerable fear among consumers in Europe, and the demand curve shifted drastically to the left in 2006. The fear was such that in early 2006, chicken consumption fell by 20% in France and 70% in Italy. This is shown in Figure 2 below (right panel).
At the same time, governments had to fight the virus by killing tens of millions of chickens, not to mention the millions of chickens who died on their own from the flu. But since the world supply of chickens numbered in the trillions at the time (around 16 trillion to be exact), the chickens that were killed or died in Europe were only a small percentage of the total.
ECON-UA 2 PRINCIPLES OF ECONOMICS II CHAPTER 03 HANDOUT
DR. ANDREW PAIZIS – NYU
2
Therefore, the supply curve in Europe shifted to the left only by a little, as in can be seen in the right panel of Figure 2 below.
In the US, the demand for chicken sifted moderately to the right for two reasons: First, there was no chicken flue in the US to scare American consumers. Second, the American population was growing along with American income at a healthy pace. These factors shifted the US demand for chicken to the right (see the left panel of Figure 2 below).
American producers or chicken do not sell only in the US to American consumers. They sell chicken in the international market, including Europe. Seeing the dramatically falling prices for chicken in Europe, they instead decided to sell what was intended for Europe to the domestic US market. This shifted the US supply curve drastically to the right, driving the price down (Figure 2, left panel).
So the new equilibrium is B in the U.S., and B’ in Europe, driving the price down in both cases.
ECON-UA 2 PRINCIPLES OF ECONOMICS II CHAPTER 03 HANDOUT
DR. ANDREW PAIZIS – NYU
3
ILLEGAL GOODS
Illegal goods, such as drugs, prostitution, and alcohol (during the period of Prohibition in the
U.S.) can be analyzed like any other commodity or good using the familiar Supply-Demand framework.
The difference is that the good in question is being supplied illegally.
The illegal nature of the goods in question results in particular complications in these markets but without invalidating the Supply-Demand framework.
The market for an illegal good brings together two sides: A willing buyer and a willing seller.
As far as these two parties are concerned, there is mutually beneficial exchange.
Government authorities that want to crack down on the market for the illegal good have two options: 1) Go after the buyer or 2) Go after the seller (supplier).
It is much more cost effective for government authorities to go after the suppliers: A drug dealer services hundreds of clients. The same is true for prostitution. A speakeasy (illegal saloon during Prohibition) could serve alcohol to dozens of clients.
Going after the supplier increases his or her cost of doing business. As such, the supply curve
for
