Download Chapter 5: Using Supply and Demand

Chapter 5: Using Supply and Demand
Chapter 5: Using Supply and Demand
Questions for Thought and Review
If price fell and quantity remained constant, a possible cause would be a shift out of the
supply curve and a shift of the demand curve in to the left. Another possibility would be a
shift of the demand curve in to the left with a vertical supply curve.
4.
See the accompanying graph. A price ceiling of Pc below Pe
will cause a shortage shown by the difference between Qd
and Qs.
Price
2.
S
Pe
Pc
D
6.
See the accompanying graph. A price floor of Pf above Pe
will cause a surplus shown by the difference between Qs
and Qd.
Price
Qs
Qd
Quantity
S
Pf
Pe
D
Qd
Qs
Quantity
A $4 per unit tax on suppliers shifts the supply curve up by
$4 shown as a shift in the supply curve from S0 to S1.
Equilibrium price will rise by $4 only if the demand curve is
perfectly vertical. In the case of a vertical demand curve,
quantity would not change. Otherwise, equilibrium price
rises by less than $4 and equilibrium quantity falls as shown
in the accompanying graph. The price increases from P0 to
P1 and quantity declines from Q0 to Q1
S1
Price
8.
P1
S0
$4
P0
D
Q1 Q0
10.
Excess supply in U.S. agricultural markets is caused by the government’s policy of
agricultural price supports, or price floors on agricultural products. Political forces
prevent the invisible hand from working.
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Quantity
Chapter 5: Using Supply and Demand
Import disruptions shifted the supply curve for rice
to the left. Equilibrium price rose and quantity fell
as the accompanying graph shows.
S1
Price
12.
S0
P1
P0
Demand
Q1 Q0
14.
Quantity
Public post-secondary education is an example of a third-party payer market because it is
heavily subsidized by state government and in most cases, a student’s parents. Those
consuming the good, students, do not pay the entire cost of the education they receive.
This likely leads to greater expenditures on post-secondary education than if students had
to pay the entire cost of their education.
Chapter 5: Problems and Exercises
Price of sugar
16. a. An import quota will increase the price of imported
sugar. The accompanying graph shows how a higher
Domestic
imported sugar price increases the price that
supply
domestic producers can charge and increase the
quantity they can supply to the market. For
example, at P0, domestic consumers demand the
P1
quantity C-B from importers and quantity B from
domestic producers After the quotas, the import
P0
price is P1. Domestic consumers demand the
D
quantity D-A from importers and quantity A from
domestic producers.
B A
D C
b. The government could have imposed a tariff on
Quantity of sugar
imported sugar. This would also have raised the
price of imported sugar.
c. A minimum required import level of 1.25 million will limit the ability of the United
States to support domestic sugar prices.
Rent per month
18. a. As shown in the accompanying graph, the
S
controlled price is below equilibrium. At this
Pb
price the quantity of apartments demanded
Pe
exceeds the quantity of apartments supplied.
Since there are more apartments demanded than
Pc
supplied at this price, apartments are hard to
D
find.
b. Since at the existing quantity supplied, Qs,
Qs Qe Qd
demanders would be willing to pay Pb, there is a
strong incentive to make side payments to
Quantity of apartments
existing tenants to acquire the apartment. At Pb,
more tenants are willing to supply their apartments than at Pc, so a side payment can
induce a tenant to give up their apartments. This is one form of rationing. When market
price rationing does not take place, some other form of rationing must take its place.
c. Eliminating rent controls would most likely allow the market price of apartments to
increase and eliminate side payments. The quantity supplied will rise until it equals the
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Chapter 5: Using Supply and Demand
quantity demanded at the market price. The price, quantity combination is (Pe, Qe) in the
graph.
d. The political appeal of rent control is that it benefits those who currently have
apartments. Apartment owners are more likely to vote, and this is why it is maintained.
20. a. Computer pricing of roads could end bottlenecks and rush hour congestion by price
rationing. Currently at zero price, at certain times, the quantity demanded greatly exceeds
the quantity supplied, resulting in congestion. Raising prices, during those times, could
eliminate excess demand and reduce the congestion. This technological change will
spread out congestions over wider geographic areas and over the day, as individuals with
more flexibility with respect to route and timing will choose to demand less of the current
high demand route at rush hour.
b. Some of the problems are administrative: disputes may arise over computer accuracy and
possibility of cheating the system. Other problems might be the regressive nature of the
pricing scheme. If low income individuals are the ones who have less flexibility
regarding route and timing then they will be the ones to pay more for the use of roads
compared to higher income individuals who might have more flexibility and can avoid
the high-cost routes.
c. This is an individual question. A professor in a rural area would change his habits very
little because there is no rush hour traffic. A student with a more flexible schedule and
who lives in an urban area may be more likely to change driving habits or to use public
transportation or carpooling.
22. a. The Oregon Health Plan includes a prioritized list of medical services that determine
whether a service is covered. The list is based on comparative benefit to those covered.
Those services that have the highest net benefit are ranked highest.
b. Economists should not oppose the Oregon Plan because it involves rationing. The market
involves rationing through the price mechanism. Economists might oppose the Oregon
Plan because in general they support the market as the least-cost method of providing
goods and services. Economists are open to the argument that the market may not
distribute goods and services in the way that society wants, which may require
government intervention.
c. In the market, the interaction of demand and supply determines the equilibrium price and
quantity that is bought and sold. Those who are able to pay the equilibrium price are the
ones who receive the health care. The Oregon Plan uses its benefit-ranking system rather
than price as the rationing mechanism.
24. a. Equilibrium price is $6 and equilibrium quantity is 300.
b. In a third-party payer system where the consumer pays $2, quantity demanded will be
900. Suppliers require payment of $14 to supply that quantity.
c. Total spending in a is $1,800. Total spending in b is $12,600.
26. a. This is because there are only a limited number of airways in the industry.
b. No, since they get the money, television networks would have no incentives to produce
high definition television.
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Chapter 5: Using Supply and Demand
Supply
Price
Price
28. a. The supply curve is vertical at 10,000 tickets. We know there is an excess demand at
$130 because there is a secondary market for scalped tickets at a higher price. The graph
below on the left shows excess demand of Qd – 10,000.
b. The people represented by Qd-10,000 will make offers to scalpers for any amount above
$130 up to the equilibrium price (if there had been a market) of $2,000. The graph below
on the right shows the range of $200 to $2,000.
c. If scalping became legalized, more people would be willing to sell their tickets when
there is no risk of being arrested and fined. The shift of the supply curve for resold
tickets to the right will reduce the secondary-market price of Final-Four tickets.
Supply
$2000
$200
$130
Demand
10,000 Qd
Quantity
$130
Demand
10,000
Qd
Quantity
30. a. Japan prescribes many more drugs than the U.S. because Japanese doctors have a
financial incentive to do so.
b. It would lead to many more drugs being produced, even if they were not really
innovative, as happened when Japan tried this.
c. Drug reps would likely provide free samples and other gifts to doctors and have drug
lunches for them where they tout the advantages of their drugs.
Chapter 5: Web Questions
2. a. The minimum wage, adjusted for inflation, has fallen nearly consistently since 1979. It is
at its lowest level since 1955. If the inflation-adjusted minimum wage is on the vertical
axis, this will reduce the shortage of jobs (number of unemployed) that results from the
minimum wage.
b. According to the article, minorities and women are disproportionately represented among
minimum wage earners..
c. The author says that the job-loss effect is small or minimal. He cites the observation that
the 90-cent increase in 1996/97 did not lead to lower employment levels among
minorities.
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Chapter 5: Using Supply and Demand
Chapter 5: Appendix A
2. a. The following are the demand and supply tables after the hormone is introduced:
Price
(dollars per
gallon)
0.00
1.00
2.00
2.50
3.00
4.00
5.00
6.00
Quantity
Demanded
(gallons per
year)
600
500
400
350
300
200
100
0
Quantity
Supplied
(gallons per
year)
225
125
275
350
425
575
725
875
Price
per gallon
The hormone (a technological advance) shifts the supply curve to the right by 125,000
gallons, The demand curve is unchanged.
b. The original supply curve is S0. The growth
hormone shifts the supply curve to S1 (to the
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right by 125). Equilibrium price falls to
S0
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$2.50 a gallon, and equilibrium quantity
S1
rises to 350 million gallons (point B).
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A
c. The demand curve remains the same at QD
3
= 600 - 100P. The supply curve becomes QS
2
= -25 + 150P. To solve the two equations,
B
Demand
1
set them equal to one another: 600 - 100P =
-25 - 150P and solve for P. Doing so, we get
0
P = 2.5. Substituting this value for P into
100 200 300 400 500 600
either the demand or supply equation gives
Quantity in millions
us equilibrium quantity of 350.
of gallons
d. Quantity supplied would be 425 (-25 + 150
X 3) and quantity demanded would be 300
(600 - 100 X 3). There would be excess supply of 125. The price floor is shown in the
accompanying graph.
4. a. A demand curve follows the formula QD = a - bP, where a is the price-axis intercept and b
is the slope of the curve. A shift in demand is reflected in a change in a. An increase in
demand increases a and a decrease in demand reduces a.
b. A supply curve follows the formula, QS = a + bP, where a is the price-axis intercept and b
is the slope of the curve. A shift in supply is reflected in a change in a. An increase in
supply increases a and a decrease in supply decreases a.
c. A movement in supply or demand is reflected in the effect of a change in P on either QS
or QD.
6. a. The new supply equation is QS = -150 + 150(P - 1) where P is the equilibrium price, or
QS = -300 + 150P.
b. P = 3.60; Q = 240.
c. Farmers receive $2.60 per gallon, while demanders pay $3.60 per gallon.
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Chapter 5: Using Supply and Demand
8. a. The new supply equation is QS = -150 + 150(P + 1) where P is the equilibrium price, or
QS = 150P.
b. P = 2.40; Q = 360.
c. Farmers receive $3.40 per gallon.
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