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the (4)
price, and the price at which producers are willing
to offer the legal market quantity is called the (S)
price.
• The price that consumers are willing to pay for the quantity allowed under a quota is
higher than the price at which producers are willing to offer it. This difference is known as
the quota (6)
Module Review
Regulating Quantity Versus Regulating Price
In this module, we examine what happens when government intervention directly restricts
the quantity of a good or service available in the market. There are similarities between this
analysis of quantity controls and our previous analysis of price controls. When price is restricted through a price control, we draw a horizontal line on our supply and demand graph,
at the level of the price ceiling or floor. When quantity is restricted, we draw a vertical line on
our supply and demand graph at the maximum quantity permitted under the restriction—
the quota limit. Note that we focus on maximum quantities (quotas) and do not talk about
minimum quantities. In the case of a price control, the restricted price creates a difference
between the quantity demanded and the quantity supplied. This leads to shortages or
surpluses. In the case of a quantity control, the restriction creates a difference between
the supply price and the demand price. This creates a wedge, or quota rent. While the terminology used to analyze quotas may be less familiar, the similarities with price controls can
help you understand quantity controls. In each case, government intervention leads to market inefficiencies.
• A quota, or quantity control, is a policy implemented by the government to set a maximum
amount of the good or service that can be sold in a market. A quota has no effect if it is set at
a level greater than the equilibrium quantity; to be effective, a quota must be set at a level
lower than the equilibrium quantity.
• With an effective quantity restriction, consumers are willing to pay more for each unit of the
good, while suppliers are willing to supply the good for less. This difference is referred to as a
wedge. This wedge corresponds to the quota rent the license holder of the good receives
when the quantity control is imposed in a market.
module 9 Supply and Demand: Quantity Controls
53
BEFORE YOU TAKE THE TEST:
•
Draw the Featured Graph: Supply and Demand
Graphing using data
Graph the supply and demand curves using the numbers in the table. Show equilibrium price and quantity on the axes.
y-axis label
0
8
0
2
6
6
4
4
12
x-axis label
iv
Graphing relationships without numbers
Graph supply and demand curves and show equilibrium price and quantity on the axes.
•
Graphs like the ones you drew above serve as the starting point when using supply and demand
analysis to determine the effects on price and quantity and when a determinant of supply or demand changes. Always start your analysis with one of these "starting point" graphs. Then follow
these steps:
(1) Determine which side of the market is affected, supply or demand, using the lists of factors
presented in previous modules, that affect supply and demand. Any single change will affect
supply or demand, not both.
(2) Determine whether supply or demand increases or decreases.
(3) Shift the supply or demand curve to the left for a decrease or to the right for an increase.
Draw the new equilibrium using the new curve to find your answer!
54
section
2 Supply and Demand
•
Complete the Exercises
Draw a correctly labeled graph showing the effect on equilibrium price and quantity in the market
for oranges when, ceteris paribus, each of the following changes occurs. (Use the steps shown above.)
a. There is a freeze in Florida that kills many of the orange groves.
5'
x-axis label
b. The wages of orange workers decrease.
y-axis label
c. Research finds oranges have additional health benefits.
y-axis label
•
St
x-axis label
Before You Take The Test
55
d. The price of tangerines decreases.
y-axis label
x-axis label
Problems
1. You are given the following information about quantity demanded in the competitive market for bicycles.
Price per bicycle
Quanbty
' of bicycles
demanded per week
$100
0
80
100
60
200
40
500
20
800
0
1,000
a. Graph this demand schedule.
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*i>
5
\.
b. Suppose the price is initially $40. If price rises by $20, what happens to the quantity
demanded?
3isc
c. Suppose the price is initially $40. If price falls by $40, what happens to the quantity
demanded?
coc
56 section
2 Supply and Demand
2. For each of the following situations in the table below, fill in the missing information. First,
determine whether the situation causes a shift of or a movement along the demand curve;
then, if it causes a shift, determine whether the demand curve shifts to the right or to the left.
Situation
Movement or shift
Specified market
People's income increases.
Market for exotic
vacations
People's income decreases.
Market for goods sold
in secondhand shops
Pric of bicycles increases.
Market for bicycles
frrice)of tennis balls
in-creases.
Market for tennis
racquets
Price of movie tickets
decreases.
Popcorn at movie
theatres
Popularity of music-playing
device increases.
Market for musicplaying device
Popularity of name-brand
clothing items decreases.
Market for brand-name
designer clothing
Winter clothing is expected
to go on sale next month.
Market for winter
clothing
Number of urban residents
increases.
Market for apartments
in urban areas
Rig htward or leftward
shift in demand
5
ic"
VIII
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ilik
L--
L.--12.........
5
3. The following graph represents the supply curve for the production of widgets in Town
Center.
Supply of Widgets
Price $ 60
_
---
-I-
T ---- —
--4 —
-
r-- 1
50
40
30
20
10
0
20
40
60
80
120
100
Quantity
a. At a price of $20, how many widgets are producers willing to supply?
0
b. At a price of $40, how many widgets are producers willing to supply?
•
g0
Problems
57
c. Suppose there are ten widget producers in Town Center and the price of widgets is $50. If
each producer produces the same number of widgets, how many widgets will each produce?
d. Suppose price is initially $30 but then falls to $20. What is the change in quantity supplied?
e. Suppose price is initially $30 but then rises to $50.What is the change in quantity supplied?
f. What price must suppliers receive in order to be willing to supply 80 widgets?
vi 0
g. What price must suppliers receive in order to be willing to supply 40 widgets?
h. What does the slope of a supply curve imply about the relationship between price and
quantity supplied?
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4. For each of the following situations in the table below, fill in the missing information: first,
determine whether the situation causes a shift or a movement along the supply curve; then,
if it causes a shift, determine whether the supply curve shifts to the right or to the left.
Situation
Labor costs for air travel
and cruise ships increase.
section
Movement or shift
shift in supply
Market for exotic
Market for call center
services
Price of bicycles increases.
Market for bicycles
Price of leather boots
increases.
Market for beef
products
S
Price of leather boots
increases.
Market for leather
belts
S
New technology for musicplaying device revealed.
Market for musicplaying devices
Price of brand-name
designer clothing increases.
Market for brand-name
designer clothing
2 Supply and Demand
Rightward or leftward
Rig
vacations
Prices of office equipment
and phone service rise
by 40%.
Number of coffee shop
owners in the metro area
increases.
58
Specified market
Market for coffee in
the metro area
L..
4
/1/
A4
—
L.....
L.
}1
4K.
A---
5. The demand and supply schedules for Healthy Snacks, Inc., is provided in the table below.
Price
Quantity demanded
$0
1,000
,
'' '. Quantity supplied • '
0
10
800
125
20
600
275
400
30
400
40
200
550
50
0
675
a. Sketch the demand and supply curves for Healthy Snacks, Inc. Don't worry about drawing
a precise graph. Focus on drawing the underlying relationships from the table. Your graph
should be accurate with regard to x-intercepts andy-intercepts, and indicate equilibrium.
S
b. What are the equilibrium price and quantity in this market? Show these on your graph.
17 ;-V3
OD
c. Fill in the following table based on the data given to you. Assume that for each row in the
table the price is as given and you are calculating the excess demand or excess supply. (Hint:
Some cells in the table are empty; e.g., if there is excess supply, there is no excess demand.)
Price
Excess demand
$0
Excess supply
se-
/ (3 " -)
),.
6 '7,LS—
10
20
30
x
A
Y.
40
3 Co
Cr 7 S--
•.),k
50
d. Why is a situation of excess demand referred to as a shortage?.
ri e
pa
a
ve--A
-
t) 4 (g-c
tr4 t‘
f
r.)4
Sktote-T
h kr-Lei" zit (4,1-4
e. Why is a situation of excess supply referred to as a surplus?.
cc
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Ile
5
1/11,a
0-4, r kit -ri-e-AA_
C
p Lti
Vs--e if 1
0 -f,
Problems
59
6. For each of the following situations, sketch a graph of the initial market demand (D 1), supply (S 1 ), equilibrium price (P1 ), and equilibrium quantity (Q 1 ). Then sketch any changes in
the market demand (D 2) and/or supply (S 2) curves, and indicate the new equilibrium price
(P2) and quantity (Q 2).
a. The price of gasoline increases by 40 percent. What happens in the market for bicycles?
Market for Bicycles
Price
Quantity
b. The price of gasoline increases by 40 percent. What happens in the market for fuelinefficient SUVs?
Market for SUVs
Price
Quantity
f. New technology for music-playing is developed. What happens in the market for the devices?
Market for Music-Playing Devices
Price
60
section
2
Supply and Demand
d. The price of labor decreases. What happens in the marke
t for fast-food restaurants?
Market for Fast-Food Restaurants
e. Income increases and good X is a normal good. What happen
s in the market for good X?
Market for Good X
Price
PZ-
Pk
f. Income increases and good X is an inferior good. What happens
in the market
for good X?
Market for Good X
Price
Problems
61
7. Use the graph below to answer the following questions:
a. Identify the equilibrium price and the equilibrium quantity.
Q3
Suppose a price floor of P3 is implemented by the government in this market. Describe
what will happen to the price and quantity once this price floor is implemented.
Suppose a price floor of P2 is implemented by the government in this market. Describe
hat will happen to the price and quantity once this price floor is implemented.
What must be true about a price floor in a market for a good or service in order for that
floor to be effective?
You are told that an effective price floor has been implemented in this market and that
the resultant surplus is greater than Q 4 — Qi . What do you know about the level of this
price floor?
62
section 2 Supply and Demand
8. Use the graph below to answer the following questions.
•
Q1 02
a.
03
04
05
Quantity
Identify the equilibrium price and the equilibrium quantity.
PI S ~ 3
Suppose a price ceiling of P2 is implemented by the government in this market. Describe
what will happen to the price and quantity once this price ceiling is implemented.
Suppose a price ceiling of P3 is implemented by the government in this market. Describe
what will happen to the price and quantity once this price ceiling is implemented.
What must be true about a price ceiling in a market for a good or service for it to be
effective?
You are told that an effective price ceiling has been implemented in this market and that
the resultant shortage is smaller than Q s Q2. What do you know about the level of this
price ceiling?
—
•
C onsider the market for housing in Metropolitan City, where all housing units are exactly
the same. Currently, the equilibrium price of housing is $2,000 a month and local residents
consume 1,500 units of housing. The local residents argue that housing is too expensive
and an effective price ceiling is implemented. When the price ceiling is implemented by the
local government council, only 1,200 units of housing are supplied. Is this an efficient level
of housing for Metropolitan City? Explain. To support your answer, provide two sketches:
Problems
63
in the first sketch, indicate the equilibrium quantity and price; in the second sketch, indicate the price ceiling and the quantity provided by the market. Is the price consumers are
willing to pay for the last unit equal to the price suppliers must receive to supply the last
unit? Explain.
The market for taxi rides in Metropolia this week is described in the following table. Asume that all taxi rides are the same in Metropolia.
Price of taxi rides
,
.
Quantltrof taxi.
rides:,. . -. Quantity of taxi
,, rides
supplied per week
deinanded per week
$1
200
40
2
180
60
3
160
80
4
140
100
5
120
120
6
100
140
7
80
160
8
60
180
9
40
200
20
220
10
a. What is the equilibrium price and quantity of taxi rides in Metropolia per week? Suppose
the government of Metropolia institutes a medallion system that limits the number of
taxi rides available in Metropolia per week to 80.
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rt-Lt kllrC i 4-+
( fit
7
ow-
b. At what price will consumers want to purchase 80 taxi rides per week?
I'
7
c. At what price will suppliers be willing to supply 80 taxi rides per week?
I3
. What price will a taxi medallion rent for in this market? Explain your answer.
(
64
section
2
Supply and Demand
eN_
J.
Draw a graph of the taxi ride market in Metropolia. On this graph, indicate the quota
limit, the demand price, the supply price, and the medallion's rental price.
What is the total value of the taxi medallions per week in Metropolia?
•
•