1、Chapter 2: The Basics of Supply and Demand 5 CHAPTER 2 THE BASICS OF SUPPLY AND DEMAND QUESTIONS FOR REVIEW 1. Suppose that unusually hot weather causes the demand curve for ice cream to shift to the right. Why will the price of ice cream rise to a new market-clearing level? Assume the supply curve
2、is fixed. The unusually hot weather will cause a rightward shift in the demand curve, creating short-run excess demand at the current price. Consumers will begin to bid against each other for the ice cream, putting upward pressure on the price. The price of ice cream will rise until the quantity dem
3、anded and the quantity supplied are equal. D1D2P1P2SP r i c eQ ua nt ity of I c e C r ea mQ1= Q2Figure 2.1 2. Use supply and demand curves to illustrate how each of the following events would affect the price of butter and the quantity of butter bought and sold: a. An increase in the price of margar
4、ine. Most people consider butter and margarine to be substitute goods. An increase in the price of margarine will cause people to increase their consumption of butter, thereby shifting the demand curve for butter out from D1 to D2 in Figure 2.2.a. This shift in demand will cause the equilibrium pric
5、e to rise from P1 to P2 and the equilibrium quantity to increase from Q1 to Q2. Chapter 2: The Basics of Supply and Demand 6 D1D2P1P2SP r i c eQ ua nt ity of Bu tte rQ1Q2Figure 2.2.a b. An increase in the price of milk. Milk is the main ingredient in butter. An increase in the price of milk will inc
6、rease the cost of producing butter. The supply curve for butter will shift from S1 to S2 in Figure 2.2.b, resulting in a higher equilibrium price, P2, covering the higher production costs, and a lower equilibrium quantity, Q2. DP1P2S2P r i c eQ ua nt ity of Bu tte rQ1Q2S1Figure 2.2.b Note: Given tha
7、t butter is in fact made from the fat that is skimmed off of the milk, butter and milk are joint products. If you are aware of this relationship, then your answer will change. In this case, as the price of milk increases, so does the quantity supplied. As the quantity supplied of milk increases, the
8、re is a larger supply of fat available to make butter. This will shift the supply of butter curve to the right and the price of butter will fall. Chapter 2: The Basics of Supply and Demand 7 c. A decrease in average income levels. Assume that butter is a normal good. A decrease in the average income
9、 level will cause the demand curve for butter to shift from D1 to D2. This will result in a decline in the equilibrium price from P1 to P2, and a decline in the equilibrium quantity from Q1 to Q2. See Figure 2.2.c. D1P1P2SP r i c eQ ua nt ity of Bu tte rQ1Q2D2Figure 2.2.c 3. If a 3-percent increase
10、in the price of corn flakes causes a 6-percent decline in the quantity demanded, what is the elasticity of demand? The elasticity of demand is the percentage change in the quantity demanded divided by the percentage change in the price. The elasticity of demand for corn flakes is 63 2 . This is equi
11、valent to saying that a 1% increase in price leads to a 2% decrease in quantity demanded. This is in the elastic region of the demand curve, where the elasticity of demand exceeds -1.0. 4. Explain the difference between a shift in the supply curve and a movement along the supply curve. A movement al
12、ong the supply curve is caused by a change in the price or the quantity of the good, since these are the variables on the axes. A shift of the supply curve is caused by any other relevant variable that causes a change in the quantity supplied at any given price. Some examples are changes in producti
13、on costs and an increase in the number of firms supplying the product. 5. Explain why for many goods, the long-run price elasticity of supply is larger than the short-run elasticity. The elasticity of supply is the percentage change in the quantity supplied divided by the percentage change in price.
14、 An increase in price induces an increase in the quantity supplied by firms. Some firms in some markets may respond quickly and cheaply to price changes. However, other firms may be constrained by their production capacity in the short run. The firms with short-run capacity constraints will have a s
15、hort-run supply elasticity that is less elastic. However, in the long run all firms can increase their scale of production and thus have a larger long-run price elasticity. Chapter 2: The Basics of Supply and Demand 8 6. Why do long-run elasticities of demand differ from short-run elasticities? Cons
16、ider two goods: paper towels and televisions. Which is a durable good? Would you expect the price elasticity of demand for paper towels to be larger in the short-run or in the long-run? Why? What about the price elasticity of demand for televisions? Long-run and short-run elasticities differ based o
17、n how rapidly consumers respond to price changes and how many substitutes are available. If the price of paper towels, a non-durable good, were to increase, consumers might react only minimally in the short run. In the long run, however, demand for paper towels would be more elastic as new substitut
18、es entered the market (such as sponges or kitchen towels). In contrast, the quantity demanded of durable goods, such as televisions, might change dramatically in the short run following a price change. For example, the initial result of a price increase for televisions would cause consumers to delay
19、 purchases because durable goods are built to last longer. Eventually consumers must replace their televisions as they wear out or become obsolete, and therefore, we expect the demand for durables to be more inelastic in the long run. 7. Are the following statements true or false? Explain your answe
20、r. a. The elasticity of demand is the same as the slope of the demand curve. False. Elasticity of demand is the percentage change in quantity demanded for a given percentage change in the price of the product. The slope of the demand curve is the change in price for a given change in quantity demand
21、ed, measured in units of output. Though similar in definition, the units for each measure are different. b. The cross price elasticity will always be positive. False. The cross price elasticity measures the percentage change in the quantity demanded of one product for a given percentage change in th
22、e price of another product. This elasticity will be positive for substitutes (an increase in the price of hot dogs is likely to cause an increase in the quantity demanded of hamburgers) and negative for complements (an increase in the price of hot dogs is likely to cause a decrease in the quantity d
23、emanded of hot dog buns). c. The supply of apartments is more inelastic in the short run than the long run. True. In the short run it is difficult to change the supply of apartments in response to a change in price. Increasing the supply requires constructing new apartment buildings, which can take
24、a year or more. Since apartments are a durable good, in the long run a change in price will induce suppliers to create more apartments (if price increases) or delay construction (if price decreases). 8. Suppose the government regulates the prices of beef and chicken and sets them below their market-
25、clearing levels. Explain why shortages of these goods will develop and what factors will determine the sizes of the shortages. What will happen to the price of pork? Explain briefly. If the price of a commodity is set below its market-clearing level, the quantity that firms are willing to supply is
26、less than the quantity that consumers wish to purchase. The extent of the excess demand implied by this response will depend on the relative elasticities of demand and supply. For instance, if both supply and demand are elastic, the shortage is larger than if both are inelastic. Factors such as the
27、willingness of consumers to eat less meat and the ability of farmers to change the size of their herds and hence produce less will determine these elasticities and influence the size of excess demand. Customers whose demands are not met will attempt to purchase substitutes, thus increasing the deman
28、d for substitutes and raising their prices. If the prices of beef and chicken are set below market-clearing levels, the price of pork will rise, assuming that pork is a substitute for beef and chicken. Chapter 2: The Basics of Supply and Demand 9 9. The city council of a small college town decides t
29、o regulate rents in order to reduce student living expenses. Suppose the average annual market-clearing rent for a two-bedroom apartment had been $700 per month, and rents are expected to increase to $900 within a year. The city council limits rents to their current $700 per month level. a. Draw a s
30、upply and demand graph to illustrate what will happen to the rental price of an apartment after the imposition of rent controls. The rental price will stay at the old equilibrium level of $700 per month. The expected increase to $900 per month may have been caused by an increase in demand. Given thi
31、s is true, the price of $700 will be below the new equilibrium and there will be a shortage of apartments. b. Do you think this policy will benefit all students? Why or why not. It will benefit those students who get an apartment, though these students may also find that the costs of searching for a
32、n apartment are higher given the shortage of apartments. Those students who do not get an apartment may face higher costs as a result of having to live outside of the college town. Their rent may be higher and the transportation costs will be higher. 10. In a discussion of tuition rates, a universit
33、y official argues that the demand for admission is completely price inelastic. As evidence she notes that while the university has doubled its tuition (in real terms) over the past 15 years, neither the number nor quality of students applying has decreased. Would you accept this argument? Explain br
34、iefly. (Hint: The official makes an assertion about the demand for admission, but does she actually observe a demand curve? What else could be going on?) If demand is fixed, the individual firm (a university) may determine the shape of the demand curve it faces by raising the price and observing the
35、 change in quantity sold. The university official is not observing the entire demand curve, but rather only the equilibrium price and quantity over the last 15 years. If demand is shifting upward, as supply shifts upward, demand could have any elasticity. (See Figure 2.7, for example.) Demand could
36、be shifting upward because the value of a college education has increased and students are willing to pay a high price for each opening. More market research would be required to support the conclusion that demand is completely price inelastic. S1976P r i c eQ ua nt ity S1986S1996D1996D1986D1976Figu
37、re 2.10 Chapter 2: The Basics of Supply and Demand 10 11. Suppose the demand curve for a product is given by Q=10-2P+Ps, where P is the price of the product and Ps is the price of a substitute good. The price of the substitute good is $2.00. a. Suppose P=$1.00. What is the price elasticity of demand
38、? What is the cross-price elasticity of demand? First you need to find the quantity demanded at the price of $1.00. Q=10-2(1)+2=10. Price elasticity of demand = PQ Q P 110 ( 2 ) 210 0 .2 .Cross-price elasticity of demand = PsQ QPs 210 (1) 0.2. b. Suppose the price of the good, P, goes to $2.00. Now
39、what is the price elasticity of demand? What is the cross-price elasticity of demand? First you need to find the quantity demanded at the price of $2.00. Q=10-2(2)+2=8. Price elasticity of demand = PQ Q P 28 ( 2 ) 48 0 .5 .Cross-price elasticity of demand = PsQ QPs 28 (1) 0.25 . 12. Suppose that rat
40、her than the declining demand assumed in Example 2.8, a decrease in the cost of copper production causes the supply curve to shift to the right by 40 percent. How will the price of copper change? If the supply curve shifts to the right by 40% then the new quantity supplied will be 140 percent of the
41、 old quantity supplied at every price. The new supply curve is therefore Q = 1.4*(-4.5+16P) = -6.3+22.4P. To find the new equilibrium price of copper, set the new supply equal to demand so that 6.3+22.4P=13.5-8P. Solving for price results in P=65 cents per pound for the new equilibrium price. The pr
42、ice decreased by 10 cents per pound, or 13.3%. 13. Suppose the demand for natural gas is perfectly inelastic. What would be the effect, if any, of natural gas price controls? If the demand for natural gas is perfectly inelastic, then the demand curve is vertical. Consumers will demand a certain quan
43、tity and will pay any price for this quantity. In this case, a price control will have no effect on the quantity demanded. Chapter 2: The Basics of Supply and Demand 11 EXERCISES 1. Suppose the demand curve for a product is given by Q=300-2P+4I, where I is average income measured in thousands of dol
44、lars. The supply curve is Q=3P-50. a. If I=25, find the market clearing price and quantity for the product. Given I=25, the demand curve becomes Q=300-2P+4*25, or Q=400-2P. Setting demand equal to supply we can solve for P and then Q: 400-2P=3P-50 P=90 Q=220. b. If I=50, find the market clearing pri
45、ce and quantity for the product. Given I=50, the demand curve becomes Q=300-2P+4*50, or Q=500-2P. Setting demand equal to supply we can solve for P and then Q: 500-2P=3P-50 P=110 Q=280. c. Draw a graph to illustrate your answers. Equilibrium price and quantity are found at the intersection of the de
46、mand and supply curves. When the income level increases in part b, the demand curve will shift up and to the right. The intersection of the new demand curve and the supply curve is the new equilibrium point. 2. Consider a competitive market for which the quantities demanded and supplied (per year) a
47、t various prices are given as follows: Price ($) Demand (millions) Supply (millions) 60 22 14 80 20 16 100 18 18 120 16 20 a. Calculate the price elasticity of demand when the price is $80 and when the price is $100. We know that the price elasticity of demand may be calculated using equation 2.1 fr
48、om the text: EQQPPPQQPDDDDD .With each price increase of $20, the quantity demanded decreases by 2. Therefore, Q DP 220 0.1. At P = 80, quantity demanded equals 20 and Chapter 2: The Basics of Supply and Demand 12 E D 8020 0 .1 0 .40 .Similarly, at P = 100, quantity demanded equals 18 and E D 1 0 01
49、8 0 .1 0 .56 . b. Calculate the price elasticity of supply when the price is $80 and when the price is $100. The elasticity of supply is given by: EQQPPPQQPSSSSS .With each price increase of $20, quantity supplied increases by 2. Therefore, Q SP 220 0.1. At P = 80, quantity supplied equals 16 and ES 8016 0.1 0.5. Similarly, at P = 100, quantity supplied equals 18 and E S 1 0 018 0 .1 0 .56 . c. What are the equilibrium price and quanti
