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Working with Supply and
Demand
ECONOMICS: Principles and Applications 3e
HALL & LIEBERMAN
© 2005 Thomson Business and Professional Publishing
Figure 1 A Price Ceiling in the
Market for Maple Syrup
Price per
Bottle
5. With a black market, the
lower quantity sells for a
higher price than initially.
S
3. and decreases
quantity supplied.
T
$4.00
3.00
R
2.00
4. The result is a shortage
– the distance between
R and V.
E
V
2. increases quantity
demanded
D
40,000 50,000 60,000
1. A price ceiling lower than
the equilibrium price . . .
Number of Bottles of
Maple Syrup per Period
Figure 2 A Price Floor in the
Market for Nonfat Dry Milk
Price
per
Pound
2. decreases quantity
demanded . . .
1. A price floor higher
than the equilibrium
price . . .
3. and increases
quantity supplied.
S
J
K
$0.81
A
0.65
4. The result is a surplus
the – distance between
K and J – which
government must buy.
D
180
200
220
Millions of Pounds
Figure 3 Calculating Price
Elasticity of Demand
Figure 4 Elasticity and StraightLine Demand Curves
Price
Since equal dollar increases (vertical
arrows) are smaller and smaller
percentage increases . . .
3
2
and since equal quantity decreases
(horizontal arrows) are larger and
larger percentage decreases . . .
1
demand becomes more and more
elastic as we move leftward and
upward along a straight-line
demand curve.
D
Quantity
Figure 5 Extreme Cases of
Demand
(a)
Price
per
Unit
(b)
Price
per
Unit
D
$4
3
2
$4
Perfectly Inelastic
Demand
1
3
Perfectly Elastic
Demand
2
D
1
20 40 60 80 100
Quantity
20 40 60 80 100
Quantity
Table 1 Effects of Price Changes
on Revenue
Table 2 Effects of Price Changes
for Laptop Computers
Figure 6 Elasticity and Total
Revenue
Price
per
Laptop
$3,500
3,000
2,500
2,000
1,500
1,000
2. At point B, revenue
is $750 million.
1. At point A , where
price is $1,000 and
600,000 laptops are
demanded, revenue
is $600 million.
3. Moving from A to B,
expenditure increases,
so demand must be
inelastic over that range.
B
A
D
500
100,000 200,000 300,000 400,000 500,000 600,000
Quantity of
Laptops
Table 3 Some Short-Run Price
Elasticities of Demand
Table 4 Adjustments After a Rise
in the Price of Gasoline
Figure 7 The War on Drugs
(a)
Price per
Unit
S1
A
P1
D1
Q1
Quantity
Figure 7 The War on Drugs
(b)
Price per
Unit
S2
B
S1
P2
A
P1
D1
Q2 Q1
Quantity
Figure 7 The War on Drugs
(c)
Price per
Unit
S1
A
P1
P3
C
D1
D2
Q3
Q1
Quantity
Table 5 Some Income Elasticities
Table 6 Income and Spending on Economic
Necessities and Economic Luxuries
Table 7 Some Cross-Price
Elasticities
Figure 8 Extreme Cases of Supply
(a)
(b)
Price
per
Unit
Price
per
Unit
S
P2
Perfectly Inelastic
Supply
Perfectly Elastic
Supply
S
P1
Quantity per Period
Quantity per Period
Figure 9 The Tax on Airline Travel
Figure 10 The Effect of an Excise
Tax on Airlines
2. The $60 tax shifts the
supply curve up by $60.
Price per Ticket
SAfter Tax
B
$340
3. In the new
equilibrium,
buyers pay
$340.
SBefore Tax
$300
A
1. Before the tax,
the supply curve
is SBefore Tax and
the price is $300.
$280
4. And, net of the
tax, sellers
receive $280.
D
Millions of Tickets per Year
Figure 11 Tax Incidence and
Demand Elasticity
(a)
Price per
Ticket
D
(b)
Price per
SAfter Tax Ticket
SAfter Tax
SBefore Tax
SBefore Tax
B
$360
$300
A
10
$300
Millions of
Tickets per Year
B
A
2
10
D
Millions of
Tickets per Year
Figure 12 Tax Incidence and
Supply Elasticity
(a)
Price per
Ticket
(b)
SBefore and After Tax
Price per
Ticket
$360
$300
A
$240
B
SAfter Tax
A
$300
D
10
Millions of
Tickets per Year
SBefore Tax
D
8
10
Millions of
Tickets per Year
Figure 13 The Market for Food
(a)
(b)
Price per
Unit of
Food
SOld
Technology
Price per
Unit of
Food
A
Weather
A
SNew
P1
P2
SBad
Technology
SGood
P1
Weather
B
B
P2
D
Q1 Q2
D
Quantity of
Food
Q1 Q2
Quantity of
Food
Table 8 U.S Winter Wheat
Production
Figure 14 The Market for Health
Care with Coinsurance
Price per D
After Insurance
Examination
$100
S
DBefore Insurance
B
70
50
A
100,000 150,000
Examinations per Year