Download o Concerts are notorious among

Macroeconomics
Econ 231
Assignment 6.1 Answer Key
______________________________________________
o Concerts are notorious among Economists for one very specific reason.
Concert Tickets are almost always priced too low. When a concert sells out
in 15 minutes it is a pretty fair assumption that ticket prices could have
been increased and still resulted in a sell out.
This is not a government controlled price restriction like all our examples
in class but it acts the very same way. Draw a Supply and Demand Curve
for Concert Tickets and show the outcomes of pricing tickets below the
Equilibrium Price. Use this graph to show the Winners and Losers that
result from the inefficient price. Describe the likely outcome of this
situation in regards to people who really want to attend the concert and
would be willing to pay higher than the ticket price.
o After natural disasters (hurricanes, tornados, earthquakes, etc…)
resources are quickly depleted. This creates room for a secondary market
for essential goods like heaters, food items, ice, and other basic necessities.
The Black Market prices will often be substantially higher than original
retail prices. Is this price gouging? Explain thoroughly why it is or isn’t.
This is not Price Gouging, because Price Gouging DOESN’T EXIST. Prices
must be able to adjust in order to clear the market. What this means is
that if prices can’t rise and fall we don’t have any way of allocating these
resources to those individuals who NEED them the most. If prices are
held constant some people would purchase them who aren’t in need of
them right now; that would be one less unit available for a person who
does need it right now. Prices are the best incentive we have for people to
purchase only the things they are in need of.
It is true that if you can’t afford to pay the higher price, and you do need
the item, that you will be unable to attain it. What you must remember
though, is that those people wouldn’t be able to acquire these items at the
lower price anyways. At the lower price, people who don’t necessarily
need the item continue to make purchases drastically limiting the chances
of it being available.
o The U.S. government actively administers a media campaign aimed at
making the public aware of the dangers of smoking through
advertisements and labeling requirements. At the same time, the
Department of Agriculture maintains price supports for tobacco farmers.
Under this program, the supported price is above the true market value.
Are these two programs at odds? Include a Supply and Demand curve for
tobacco products in your answer.
The two different programs are not working against each other with
respect to reducing the number of people who quit/never start smoking.
There are two aspects of the policies that aren’t necessarily effective
however. The two programs are working against each other in the price
of cigarettes. In Graph A (price support) the price is artificially raised,
while in Graph B (Media campaign) the price is pushed down. You will
also see that the number of people who have stopped smoking is roughly
the same for both programs. This means that you haven’t doubled the
number of people who quit smoking, they simply convinced the same
people to quit smoking twice.
Graph A:
Graph B:
o The following two statements contain common errors in Economics.
Identify and explain each:
a. Demand increases, causing prices to rise. Higher prices in turn
causes demand to fall. Therefore prices will fall back to their
original levels.
b. The supply of meat in Russia increases, causing meat prices to
fall. Lower prices always mean that Russian households spend
more on meat products.
a. “Demand increases, causing prices to rise” is a description of a rightward
shift in Demand which is the only possible way to increase price and
quantity. “Higher prices cause demand to fall” this is true but only when
price is the only thing changing. We know that a rightward shift is caused
by one of the shifting factors causing a change in the amount people will
buy and the price they will pay. Additional support to this answer comes
from the fact that Changes in Price move you along the Demand Curve,
which wouldn’t take you back to the original point, it would move you to
some point out in space (moving along the Demand Curve to lower price
would take you to the left, not back along the Supply Curve).
b. “The supply of meat in Russia increases, causing meat prices to fall.
Lower prices always mean that Russian households spend more on meat”.
This implies a rightward shift in Supply, decreasing the price and
increasing the quantity sold. This increase in quantity sold doesn’t
“ALWAYS MEAN” they are spending more on meat. They could be
spending the same amount by purchasing more meat at a lower price.
They could also purchase the same amount of meat and spend less due to
the reduced price. We cannot conclude anything about the amount spent
on meat through the Supply and Demand Curve with this information.