Download The Price System, Demand and Supply, and Elasticity Chapter 4

The Price System,
Demand and Supply, and
Elasticity
Chapter 4
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1
The Price System:
Rationing and Allocating Resources
•
The market system, also called the price
system, performs two important and closely
related functions:
1. Resource allocation: the market system
determines the allocation of resources among
produces and the final mix of outputs.
2. Price rationing: the market system, an
automatic mechanism, distributes scarce goods
and services to consumers when quantity
demanded exceeds the quantity supplied on the
basis of willingness and
ability to pay.
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Price Rationing
• The price system
eliminates a shortage
as shown in the figure
on the left.
• A decrease in supply
creates a shortage at
the original price.
• The lower supply is
rationed to those who
are willing and able to
pay the higher price
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Price Rationing
• Suppose in 2003 that 15.000
square miles of lobstering
waters off the coast of Maine
are closed. The supply curve
shifts to the left.
• Before the waters are closed,
the lobster market is in
equilibrium at the price of $3.27
and a quantity of 81 million
pounds.
• The decreased supply of
lobster leads to higher prices,
and a new equilibrium is
reached at $4.50 and 60 million
pounds (point B) so the
shortage is automatically
ch4eliminated by price mechanism.
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Price Rationing
• The adjustment of price is the rationing
mechanism in free market.
• Price rationing means that whenever there
is need to ration a good-that is, when a
shortage exist- in a free market, the price
of the good will rice until quantity supplied
equals quantity demanded- that is, until
the market clears.
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Price Rationing
• There is some price that will
clear any market.
• Consider the market for a
famous painting such as Van
Gogh’s.
• At a low price, there would be
an enormous excess demand
for such as important painting.
• The price of a rare painting will
eliminate excess demand until
there is only one bidder willing
to buy the single available
painting.
• If the product is in strictly scarce
supply, as a single painting is, its
price is, its is price is said to be
demand determined. That is,
its price is determined solely
and exclusively by the amount
that the highest bidder are
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willing to pay.
Constraints on the Market
• On occasion, both governments and private firms
decided to use some mechanism other than the market
system to ration an item for which there is excess
demand at the current price.
• Policies designed to stop price rationing are commonly
justified in a number of ways.
• Various schemes to keep price from rising to
equilibrium are based on several perceptions of
injustice, among them:
– that price-gouging is bad,
– that income is unfairly distributed, and
– that some items are necessities, and everyone should be able
to buy them at a “reasonable” price.
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Constraints on the Market
•
Regardless of the rationale, the following
examples will make two things clear:
1. Attempts to by pass rationing in the market
and to use alternative rationing devices are
much more difficult and costly than they
would seem first glance.
2. Very often, such attempts distribute costs
and benefit among households in unintended
ways.
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Constraints on
the Market
• A price ceiling is a
maximum price that
sellers may charge for a
good, usually set by
government.
• In 1974, the government
set a price ceiling to
distribute the available
supply of gasoline.
• At an imposed price of 57
cents per gallon, the
result was excess
demand or supply
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shortage.
Alternative Rationing Mechanisms
• Because the price system was not allowed to function,
an alternative rationing system had been found to
distribute the available supply of gasoline. Several
devices were tried that are:
– Queuing is a nonprice rationing system that uses
waiting in line as a means of distributing goods and
services.
– Favored customers are those who receive special
treatment from dealers during situations when there
is excess demand.
– Ration coupons are tickets or coupons that entitle
individuals to purchase a certain amount of a given
product per month or a given period.
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Alternative Rationing
Mechanisms
• Attempts to restrict
prices often result in the
evolution of a black
market.
• A black market is a
market in which illegal
trading takes place at
market-determined
prices.
• Thus the “real” price of
the good will rise to the
market-clearing price
that is higher than
restricted price.
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Alternative Rationing Mechanisms
• Even it is illegal, it is virtually impossible to stop
black market from developing.
• The problem with rationing systems is that excess
demand is created but not eliminated.
• No matter how good the intentions of private
organizations and governments, it is very difficult to
prevent the price system from operating and to stop
the willingness to pay from asserting itself.
• Every time an alternative is tried, the price system
seams to sneak in the back door. With favored
consumers and black markets, the final distribution
may be even more unfair than that which would
result from simple price rationing.
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Prices and the Allocation of Resources
• Thinking of the market system as a mechanism for
allocating scarce goods and services among
competing demanders is very revealing, but the
market determines much more than just the
distribution of final outputs.
• It also determines what gets produced and how
resources are allocated among competing uses.
• Consider a change in consumer preferences that
leads to a shift in demand for a specific good or
service and also a change in price.
• Price changes resulting from shifts of demand
cause profits to rise or fall.
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Prices and the Allocation of Resources
• The price changes leads to changes in profits.
• Profits attract capital; losses lead to disinvestment.
• Higher wages attract labor and encourage workers
to acquire skills.
• At the core of the system, supply, demand, and prices
in input and output markets determine the allocation of
resources and the ultimate combinations of things
produced.
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Price Floors
• A price floor is a minimum price below which
exchange is not permitted.
– The most common example of a price floor is
the minimum wage, which is a floor set
under the price of labor.
• Whenever a price floor is set above equilibrium,
an excess supply or higher quantity supplied
than quantity demanded will be on the market.
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Supply and Demand Analysis: An Oil Import Fee
The basic logic of supply and demand is a powerful tool of
analysis. As an extended example of the power of this logic, we
will consider a case to impose a tax on imported oil.
• At a world price of $18,
imports are 5.9 million barrels
per day.
• The tax on imports causes an increase in
domestic production, quantity imported
falls
ch4 and a tax revenue for the
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government is generated ($x3.2=$19.2).
Supply and Demand and Market Efficiency
• Clearly, supply and demand curves help explain
the way that markets and market price work to
allocate scarce resources. Recall that when we try
to understand “how the system works,” we are
doing “positive economics.”
• Supply and demand curves can be used to
illustrate the idea of market efficiency, an important
aspect of “normative economics.”
• To understand the ideas we first must understand
the concepts of consumer and producer surplus.
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Consumer Surplus
• Consumer surplus is
the difference between
the maximum amount a
person is willing to pay
for a good and its current
market price.
• Some consumers are
willing to pay as much as
$5 each for hamburgers.
• Since the price is only
$2.50, they receive a
consumer surplus of
$2.50.
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Consumer Surplus
• Others (all from point B
to E) are willing to pay
something less than
$5.00 but more than
$2.50. They also receive
surplus as the difference
between they are willing
to pay and the market
price.
• Those at point E who are
willing to pay as much
market price receive no
surplus.
• Consumer surplus is the
area below the demand
curve and above the
market price level (the
blue triangle in the figure
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on the left).
Producer Surplus
• Producer surplus is
the difference between
the maximum amount a
producer is willing to
accept to supply a good
and its current market
price.
• Some producers are
willing to accept as little
as 75 cents each for
hamburgers.
• Since the price is
$2.50, they receive a
producer surplus of
$1.75 per hamburger.
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Producer Surplus
• Others producers (all from
point B to E) are willing to
receive something less
than $5.00 but higher than
75 cents.
• They also receive surplus
as the difference between
they are willing to receive
and the market price.
• Those at point E who are
willing to receive as much
market price receive no
surplus.
• Producer surplus is the
area above the supply
curve and below the price
level (the brown triangle in
ch4 the figure on the left).
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Markets Maximize the Sum of Producer and
• The quantity of supplied and
Consumer Surplus
demanded are equal at market
equilibrium (point C in the figure
on the left).
• The total net benefit (or total
surplus) that is the sum of
producer surplus (the brown
area) and consumer surplus
(the blue area) is
highest/maximized where
supply and demand curves
intersect at equilibrium.
• Consumers receive benefits in
excess of what they pay and
producers receive
compensation in excess of 22
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costs.
Markets Maximize the Sum of Producer and
Consumer Surplus
• If the market produces too
little, say 4 million instead
of 7 million hamburgers
per month, total producer
and consumer surplus is
reduced. This reduction
(triangle ABC) is called a
deadweight loss.
• The under production of
hamburger (less
production than
equilibrium quantity) leads
to loss in total benefit. 23
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Potential Causes of Deadweight Loss From
Under- and Overproduction
• Deadweight losses, that is
the net loss of producer and
consumer surplus, can
occur from underproduction
and overproduction.
• If the market produces 10
million instead of 7 million
hamburgers per month, the
cost of production rises
above the willingness of
consumers to pay, resulting
in a deadweight loss.
• This reduction (triangle ABC)
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is also a deadweight loss. 24
Elasticity
• Elasticity is a general concept that can be used to quantify
the response in one variable when another variable
changes.
• If some variable A changes in response to changes in
another variable B, the elasticity of A with respect to B is
equal to the percentage change in A divided by the
percentage change in B.
• We may speak of the elasticity of demand or supply with
respect to price.
% A
elasticity of A with respect to B 
% B
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Price Elasticity of Demand
• Recall that, ceteris paribus, when price rise,
quantity demanded can be expected to decline.
When prices fall, quantity demanded can be
expected to rise. The normal negative relationship
between price and quantity demanded is reflected
in the downward slope of demand curves.
• The slope of a demand curve may in a rough way
reveal the responsiveness of the quantity
demanded to price changes, but slope can be quite
misleading. In fact, it is not a good formal measure
of responsiveness.
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Slope and Elasticity
23
1
slope 

10  5
5
23
1
slope 

160  80
80
Changing the units of measure yields a very different
value of the slope, yet the behavior of buyers in both
diagrams is identical. The only difference between the
two is that quantity demanded is measured in pounds on
the graph left and in the ounces
in the graph on the right.
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Slope and Elasticity
• When we calculate the numerical value of each slope,
however, we get very different answers.
• The curve on the left has a slope of -1/5, and the curve on
the right has a slope of -1/80, yet the two curves represent
the exact same behavior. If we had changed dollars to cents
on the Y axis, the two slopes would be -20 and -1.25,
respectively.
• The problem is that numerical value of slope depends on the
unit used to measure the variables on the axes. To correct
this problem, we must convert the changes in price and
quantity to percentage.
• We define price elasticity of demand simply as the ratio of
the percentage of change in quantity demanded to
percentage change in price.
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Price Elasticity of Demand
• A popular measure of elasticity is price elasticity
of demand measures how responsive consumers
are to changes in the price of a product.
% change in quantity demanded
price elasticity of demand 
% change in price
• The value of demand elasticity is always negative,
but it is stated in absolute terms.
• The value of the slope of the demand curve and the
value of elasticity are not the same.
• Unlike the value of the slope, the value of elasticity
is a useful measure of responsiveness.
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Types of Elasticity
Hypothetical Demand Elasticities for Four Products
PRODUCT
% CHANGE IN
% CHANGE
QUANTITY
IN PRICE
DEMANDED
(%P)
(%QD)
ELASTICITY
(%QD d %P)
Insulin
+10%
0%
Basic telephone service
+10%
-1%
Beef
+10%
-10%
-1.0 Unitarily elastic
Bananas
+10%
-30%
-3.0 Elastic
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0.0 Perfectly inelastic
-0.1 Inelastic
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Types of Elasticity
• Perfectly inelastic demand: Demand in which quantity
demanded does not respond at all to a change in price.
• Inelastic Demand: Demand that responds somewhat, but
not a great deal, to change in price. Inelastic demand
always has a numerical value between zero and -1.
• Unitary Elasticity: A demand relationship in which the
percentage change in quantity of a product demanded is the
same as the percentage change in price in absolute value (a
demand elasticity of -1).
• Elastic Demand: A demand relationship in which the
percentage change in quantity demanded is larger in
absolute value than the percentage change in price (a
demand elasticity with an absolute value greater than 1).
• Perfectly Elastic Demand: Demand in which quantity
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drops to zero at the slightestch4
increase in price.
Perfectly Elastic and
Perfectly Inelastic Demand Curves
• When demand does not
respond at all to a change
in price, demand is
perfectly inelastic.
• Demand is perfectly elastic
when quantity demanded
drops to zero at the slightest
increase in price.
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Calculating Elasticities
• Calculating percentage changes:
P2  P1
% change in price 
x 100%
P1
• P1: The initial price of the good (base price)
• P2: Price of the good after the change
• ΔP: Change in price (ΔP=P2- P1)
Q2  Q1
% change in quantity demanded 
x 100%
Q1
• Q1: The initial quantity demanded of the good (base quantity)
• Q2: Quantity demanded of the good after the change
• ΔP: Change in quantity demanded
ch4 (ΔQ=Q2- Q1)
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Calculating Elasticities
Price per pound ($)
P
P1=3
A
P2=2
B
D
0
Q1=5
Q2=10
• Elasticity is a ratio of
percentages.
• Using the values on the
graph to compute elasticity,
using percentage changes
yields the following result:
Q
Pounds of steak per month
% change in quantity demanded 
Q 2  Q1
ΔQ
10 - 5
5
x100% 
x100% 
x 100 %  x 100 %  100 %
Q1
Q1
5
5
P2  P1
P
2-3
-1
% change in price 
x100% 
x100% 
x 100 %  x 100 %  - 33 %
P1
P
3
3
Note that we will arrive at exactly the same result if we change
the unit of price (as cents) and/or
ch4 quantity (as ounces).
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Calculating Elasticities
• Recall the formal definition of elasticity:
% change in quantity demanded
price elasticity of demand 
% change in price
• Substituting the preceding percentages, we see that a
33.3 percent decrease in price (from $3 to $2) leads to
100 percent increase in quantity demanded (from 5 ponds
to 10 pounds) thus:
 100%
price elasticity of demand 
  3.0
 33.3%
• According to these calculations, the demand for steak is
elastic.
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• The use of the initial values of P
and Q as the bases for
P
calculating percentage changes
may be misleading.
P2=3
B
• The values in the figure are the
P1=2
A
same, but only initial values are
substituted. So, price increases
D
from 2 to 3 and quantity
decreases from 10 to 5.
0
Q2=5
Q1=10
Q
• With the same formula we used
Pounds of steak per month
earlier, we get:
Price per pound ($)
Calculating Elasticities
% change in quantity demanded 
% change in price 
ΔQ
5 - 10
-5
x100% 
x 100 % 
x 100 %  - 50 %
Q1
10
10
ΔP
3- 2
1
x100% 
x 100 %  x 100 %  50 %
P
2
2
- 50%
Price elasticity of demand ( ) 
 -1
ch4
 50%
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Calculating Elasticities
• Thus, % change in quantity demanded, and % change in price take
different values as a result of different initial values of Q and P as
the bases for calculating percentages.
• Elasticity of demand also takes different value as a result of
changing the values of % change in quantity demanded, and %
change in price.
• This does not make much sense because in both cases we are
calculating elasticity on the same interval on the same demand
curve.
• Changing the “direction” of calculation should not change the
elasticity.
• To describe percentage changes more accurately, a simple
convention has been adopted. Instead of using the initial values of
Q and P as the bases for calculating percentages, we use these
value midpoints as the bases.
• A more accurate way of computing elasticity than percentage
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changes is the midpoint formula
Calculating Elasticities
• Midpoint formula: It is more
precise way of calculating the
percentages using the value
halfway between P1 and P2 for the
base in calculating the percentage
change in price, and the value
halfway between Q1 and Q2 as the
base for calculating the percentage
change in quantity demanded.
• Changing the “direction” of
calculation does not change the
value of elasticity.
Q2
%  Qd
(Q1 

P2
% P
( P1 
10  5
5
x 100%
x 100%
%  Qd
(5  10) / 2
7
.
5


2

3
-1
% P
ch4
x 100%
x 100%
( 3  2) / 2
2.5
 Q1
x 100%
Q2 ) / 2
 P1
x 100%
P2 ) / 2
=
66.7%
  1.67
-40.0%
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Calculating Elasticities
• Here is how to interpret two different values of
elasticity:
– When  = 0.2, a 10% increase in price leads
to a 2% decrease in quantity demanded.
– When  = 2.0, a 10% increase in price leads
to a 20% decrease in quantity demanded.
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Elasticity Changes along a
Straight-Line Demand Curve
• Price elasticity of demand
decreases as we move
downward along a
straight line demand
curve.
• Demand is elastic in the
upper range and inelastic
in the lower range of the
line.
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Elasticity Changes along a
Straight-Line Demand Curve
 6.4
• Along the elastic range, elasticity
values are greater than one as
calculated in the next page. Between
points A and B, demand is quite elastic
at -6.4
• Along the inelastic range,
elasticity values are less
than one. Between points C
and D, demand is quite
inelastic at -0.29
 .29
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Calculating Elasticities
• Along the elastic range, for example between points A and B
in the figure in the preceding page, elasticity values are
greater than one as calculated down:
% change in quantity demanded 
Q 2  Q1
4-2
2
x100% 
x 100 %  x 100 %  66.7 %
Q 1  Q2
24
3
2
2
P2  P1
9 - 10
-1
% change in price 
x100% 
x 100 % 
x 100 %  - 10.5 %
P1  P2
10  9
9.5
2
2
66.7%
Price elasticity of demand ( ) 
 - 6.4
- 10.5%
• Along the inelastic range, for example between points C and
D in the figure in the preceding page, elasticity values are
less than one that can be seen when it is calculated in the
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same way above.
Elasticity and Total Revenue
• In any market:
Price per pound ($)
P
Total Revenue = Price x Quantity
P
A
TR = P x Q
• When price increases in a
TR = P x Q
0
market, quantity demanded
declines, vice versa.
D
Q
P↑→ QD↓
Q
P↓→ QD↑
Pounds of steak per month
• Because TR is the product of P and Q, whether TR rises or fall in
response to a price increase depends on which is bigger, the
percentage increase in price or the percentage decrease in
quantity demanded. If the percentage decrease in quantity
demanded is smaller than the percentage increase in price, TR will
rise. This occurs when demand is inelastic. In this case, the
percentage price rice simply outweighs the percentage quantity
decline, and PxQ rises:
(Inelastic demand: ε>1):
↑ PxQ ↓=TR ↑
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Elasticity and Total Revenue
Price per pound ($)
P
D elastic range ε>1: ↑PxQ↓=TR↓ (P4DQ40<P3CQ30)
P4
P3
C
B inelastic range ε<1: ↑PxQ↓=TR↑ (P2BQ20>P1AQ10)
P2
P1
A
0 Q4
Q3
Q2
Q1
Q
Pounds of steak per month
• If however, the percentage decline in quantity demanded
fallowing a price increase is larger than the percentage
increase in price, total revenue will fall. This occurs when
demand is elastic. The percentage price increase is
outweighed by the percentage quantity decline:
(elastic demand ε>1):
↑ PxQ ↓=TR ↓
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Elasticity and Total Revenue
• The apposite is true for a price cut. When demand is elastic,
a cut in price increases total revenues:
(elastic demand ε>1):
↓ PxQ ↑ =TR ↑
• When demand is inelastic, a cut in price reduces total
revenues:
(Inelastic demand: ε<1):
↓ PxQ ↑ =TR ↓
• With this knowledge, we can easily see why the OPEC
cartel was so effective. The demand for oil is inelastic.
Restricting the quantity of oil available led to a huge
increase in the price of oil. The percentage increase in the
price of oil was larger in absolute value than the percentage
decrease in the quantity of oil demanded. Hence, OPEC’s
total revenues went up.
• In contrast, an OBEC cartel would not be effective because
the demand for bananas is elastic.
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Elasticity and Total Revenue
Type of
demand
Value of Ed
Change in
quantity versus
change in price
Effect of an
increase in price
on total revenue
Effect of a
decrease in
price on total
revenue
Elastic
Greater than 1.0
Larger percentage
change in quantity
Total revenue
decreases
Total revenue
increases
Inelastic
Less than 1.0
Smaller
percentage
change in quantity
Total revenue
increases
Total revenue
decreases
Unitary elastic
Equal to 1.0
Same percentage
change in quantity
and price
Total revenue
does not change
Total revenue
does not change
• When demand is elastic, price increases generate lower
revenues.
• When demand is inelastic, price increases generate higher
revenues.
• When demand is unitary elastic, price increases or decreases
ch4 total revenue.
do not generate any changes in
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The Determinants of Demand Elasticity
• Availability of substitutes -- demand is more elastic when
there are more substitutes for the product. For example,
demand for insulin is less elastic than demand for chocolate
due to availability of their substitutes.
• Importance of the item in the budget -- demand is more
elastic when the item is a more significant portion of the
consumer’s budget. For example, demand for a car are
more elastic than demand for bicycle due to importance of
these items in the budget.
• Time dimension -- demand becomes more elastic over
time. In the longer run, demand is likely to become more
elastic, or responsive, simply because households make
adjustment over time and producers develop substitute
goods.
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Other Important Elasticities
• Income elasticity of demand – measures the
responsiveness of demand to changes in income.
% change in quantity demanded
income elasticity of demand 
% change in income
• Income elasticity of demand is positive for normal goods and
negative for inferior goods.
• Cross-price elasticity of demand: A measure of the
response of the quantity of one good demanded to a change
in the price of another good.
% change in quantity of Y demanded
cross- price elasticity of demand 
% change in price of X
• Cross-price elasticity is positive for substitute goods (tea and
coffee) and negative for complement goods (tea and sugar).
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Other Important Elasticities
• Elasticity of supply: A measure of the response of quantity
of a good supplied to a change in price of that good. Likely to
be positive in output markets. Higher price leads to an
increase in quantity supplied, ceteris paribus.
% change in quantity supplied
elasticity of supply 
% change in price
• Elasticity of labor supply: A measure of the response of
labor supplied to a change in the price of labor. Likely to be
positive in the most of labor markets. However, it is quite
possible that an increase in the wages to some groups and
above some level will lead to a reduction in the quantity of
labor supplied since they may need more leisure time instead
of working. Thus, it may be negative in the higher wages.
% change in quantity of labor supplied
elasticity of labor supply 
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% change in the wage rate
Terms and Concepts
black market: karaborsa, yasa dışı alım/satım işlemleri
consumer surplus: üretici fazlası-artığı-rantı
cross-price elasticity of demand: talebin çapraz fiyat
esnekliği
deadweight loss: dara kaybı, toplumsal kayıp
elastic demand: esnek talep
Elasticity: esneklik
elasticity of labor supply: emek-işgücü arzı esnekliği
elasticity of supply: arz esnekliği
favored customers: ayrıcalıklı-tercihli müşteriler-alıcılar
income elasticity of demand: talebin gelir esnekliği
inelastic demand: esnek olmayan talep
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Terms and Concepts:
midpoint formula: orta nokta formülü
minimum wage: asgari-en düşük ücret
perfectly elastic demand : tam esnek talep
perfectly inelastic demand: tam esnek olmayan talep
price ceiling: tavan fiyat
price elasticity of demand: talebin fiyat esnekliği
price floor: taban fiyat
price rationing: fiyat yoluyla dağıtım-bölüşüm-tahsisat-tayın
verme
rationing function of price: fiyatların dağıtım fonksiyonu
producer surplus: üretici fazlası-artığı-rantı
Queuing: kuyruk-sıra yöntemi
ration coupons: yiyecek-benzin-vs karnesi-kuponu-vesikası
unitary elasticity: birim elastikiyet
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Problems:
1) Use supply and demand curves to explain why "scalping" occurs
for tickets to major sporting events when the ticket price is set below
the market equilibrium.
2) In 1973 and 1974 OPEC imposed an embargo on shipments of
crude oil to the United States. This resulted in a drastic reduction in
the quantity of gasoline available, and in response Congress imposed
a price ceiling, which restored equilibrium in the market.
3) On those occasions when both governments and private firms
decide to use some mechanism other than the market system to
ration an item, the rationale most often is
A) price gouging.
B) willingness to pay.
C) queuing.
D) fairness.
E) None of the above
4) The market system serves as a price rationing device because it
A) provides an automatic mechanism for distributing scarce goods
and services.
B) results in the most "fair" distribution of goods and services.
C) determines the allocation of resources among producers.
D) determines the final mix of outputs.
E) All of the above
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Problems :
5)Governments and private firms only use the price system to ration
items for which there is excess demand.































d
d


















d
















The Table above indicates the demand and supply schedules for oil in
the US. Suppose also that the world price of oil is $16 per barrel and
that the United States can buy all the oil it wants at that price.
6) Refer to the Table allowing for free trade, Americans would pay
__________ per barrel for their oil.
A) $18
B) $20
C) $22
D) $16
E) None of the above
7) "Willingness to pay" means that
A) everything has its price.
B) only the very rich will be able to buy certain goods.
C) reduced supply causes the price of a good to rise.
D) the distribution of available supply will depend on consumers'
tastes and preferences and their incomes.
E) None of the above
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53
Problems :
8) Supply, demand, and prices in input and output markets determine
the allocation of resources and the ultimate combination of things
produced.
9) Which of the following statements is TRUE?
A) "Willingness to pay" means that only the very rich will
continue to buy some goods when their prices rise.
B) One example in which the market does not work is the case of
items with sentimental value.
C) If a product is in fixed supply changes in its price will be
determined solely and exclusively by demand.
D) To say that there is some price that will clear any market is to
say that everything has its price.
E) None of the above
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54
Problems :
The Table indicates the demand and supply schedules for oil in the
United States.

































d
d




















d


















Suppose also that the world price of oil is $16 per barrel and that the
United States can buy all the oil it wants at that price.
10) Refer to the Table. Which of the following statements is TRUE
about the impact of an oil import tax?
A) The U.S. government gains additional tax revenue.
B) Domestic producers benefit from the tax because they can
charge a higher price and sell more.
C) It reduces U.S. dependence on foreign oil.
D) Consumers pay higher prices for oil than they would under free
trade.
E) All of the above
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55
Problems :
11) The most common of all nonprice rationing systems is
A) ration coupons.
B) the black market.
C) favored customers.
D) queuing.
E) a price ceiling.
Refer to the information provided in the Figure below to answer the
question that follow.
12) Refer to the Figure which of the following areas represents
deadweight loss?
A) A
B) B
C) C
D) There is no deadweight loss
in this market.
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Problems :
13) Every year during the holidays one toy seems to become
extremely popular and hard to find. Parents have been known to
attempt to bribe toy store employees to call them as soon as a new
shipment arrives. This is an example of
A) queuing.
B) a surplus.
C) ration coupons.
D) favored customers.
E) the price rationing function at work.
14) A strategy to raise the price of an item by cutting its production is
more likely to be successful if the demand for that item is elastic.
15) A "black market" is a market in which
A) illegal trading takes place at market-determined prices.
B) coupons entitle individuals to purchase a certain amount of a
given product per month.
C) some customers receive special treatment from dealers in
times of excess demand.
D) the price is not based on willingness to pay.
E) None of the above
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57
Answers:
1) The graph should show that with the equilibrium price above the
stated one, consumers are willing to pay more than the set price for a
ticket. This price may be more than a ticket holder is willing to pay;
she, therefore, sells her ticket at the higher price.
2) FALSE
3) D
4) A
5) FALSE
6) D
7) D
8) TRUE
9) C
10) E
11) D
12) D
13) D
14) FALSE
15) A
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