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Market Basics - Consider demand and supply for wheat in grain market shown to the below.
1. What is the equilibrium price? 2. What is the equilibrium quantity? Suppose the government wants to help consumers and establishes a price ceiling (maximum legal price) of $3.70 for the market of wheat. 3. What effect will this have on the market?
4. Who benefits from this policy? Who bears the cost?
Suppose the government wants to help producers and establishes a price floor (minimum legal price) of $4.30 for the market of wheat.
5. What effect will this have on the market?
6. Who benefits from this policy? Who bears the cost?
Market in Equations - Consider a market that has the following Supply and Demand Curves:
QD = 22 – P QS = 2 + 3P
1. What is the equilibrium price and quantity?
Consider how a $2 tax (paid by buyers) would affect the market represented by these Supply and Demand Curves (note that consumers will treat the tax as an additional part of the price):
QD = 22 – P QS = 2 + 3P
2. What is the new equilibrium price and quantity?
3. What would be the affect if the tax was paid by the sellers?
Consumer & Producer Surplus - Consider the chart to the right. It shows four buyers in a market and their willingness to pay for the item. Assume that each buyer only wants to buy one good.
4. If the price is $80, what is the consumer surplus? 5. If the price falls to $70, how does the consumer surplus change? Consider the chart to the right. It shows four sellers in a market and their willingness to pay for the item. Assume that each buyer only wants to buy one good.
6. If the price is $80, what is the producer surplus? 7. If the price falls to $70, how does the producer surplus change? Classwork Problem - Market for Tangerines – A market for bags of tangerines is represented by two equations (Q = 2 + 2P and Q = 38 – P). Use this information to answer the following questions.
1. Which equation is the Demand Curve and which is the Supply Curve? How do you know?
2. What is the equilibrium price and quantity in the market?
3. Consider two people in this market: a seller willing to sell into the market at a price of $10 and a buyer who is willing to buy at a price of $14. At the market equilibrium price, how much producer and consumer surplus is created?
4. Suppose the government placed a $1 sales tax (paid by the buyer) on every item sold in this market. What would be the specific dead weight loss measured in terms of the bags of tangerines sold in this market?
5. How does this new equilibrium price affect the producer surplus of the seller willing to sell into the market at a price of $10 and the consumer surplus of a buyer who is willing to buy at a price of $14?
6. Go back to the original equations (before the tax). Suppose a hurricane damages the tangerine orchards and the new supply curve in the market is QS = P. What would be the new equilibrium price and quantity in the market?
7. How does this new equilibrium price affect the producer and surplus of the seller willing to sell into the market at a price of $10 and a buyer who is willing to buy at a price of $14?
8. In response to the change in supply caused by the hurricane, the government (in an effort to protect consumers from high prices), sets the maximum price for a bag of tangerines at $12. How would the law affect the market? Who would benefit and who would suffer?
9. How does government price ceiling affect the producer and surplus of the seller willing to sell into the market at a price of $10 and a buyer who is willing to buy at a price of $14?
Market Movement – Supply and Demand in Action
Demand - For the following questions, use the graphs shown below (options: a, b, c, d) to show how the following changes will affect the demand for product B?
1. Product B becomes more fashionable.
2. The price of product C, which is a substitute for product B, goes down.
Supply - What effect will the following changes have on the supply for product B?
1. Technological advance in production of product B.
2. An increase in the price of resources required for making product B.
Classwork Problem - Use the market diagrams below to answer the following questions about the market for popcorn. For each question, choose an option (a, b, c, d) that shows how the market changes and state the reason for the change (i.e. how it affects the willingness and ability of either buyers or sellers)
1._____ Which diagram shows the effect of an increase in the price of corn on the popcorn market? Reason: ________________________
2._____ Which diagram shows the effect of an increase in the price of potato chips on the popcorn market? Reason: ___________________
3._____ Which diagram shows the effect of the development of a high efficiency popcorn popper, which produces more popcorn with less energy, on the popcorn market? Reason: ___________________________
4._____ Assume that movies and popcorn are complementary goods (i.e. go together) – Which diagram shows the effect of an increase in the price of movie tickets on the market for popcorn? Reason: _________________
Calculating Price Elasticity of Demand
For this problem, you will be calculating the price elasticity of demand. You can either do the calculation by hand or make a price elasticity in Google Sheets. To the right is a graph of a Demand Curve and a calculation of the elasticity of demand using that Demand Curve. You can use this as a guide to finding the elasticity of demand for the following questions.
1. Use the graph of the demand curve to the right to calculate the elasticity of the range of the demand curve from the price of $9 to $15. 2. Use the graph of the demand curve to the right to calculate the elasticity of the range of the demand curve from the price of $9 to $3. 3. Use the equation for the demand curve QD = 22 – P to calculate the elasticity of the of the curve from the price of $18 to $10. Factors that affect Elasticity of Demand
The Elasticity of Demand for a good is usually the result of these four factors: Availability of Substitute Products, Amount of Income it takes to buy the Product, Whether it is a Luxury or a Necessity, Length of Time involved in the Market Decision. Look at the Elasticity of Demand for the following goods and identify the factors that explain the Elasticity of Demand number.
1. Matches - 0.1
2. Movies - 0.9
3. Coffee - 0.25
4. Airline tickets for business traveler - 0.1
5. Airline tickets for holiday traveler - 2.4
6. Car (in general) - 1.2
7. Chevrolet Car - 4.0
8. Visit to doctor's office - 0.6
9. Restaurant Meal - 2.3
10. Fish from store to eat at home - 0.5
Price Elasticity and Price Increases
When a price goes up the result is decrease in quantity demanded (Law of Demand). A company selling a good has to consider the value of lost sales against the revenue from sales at higher prices when making a decision to raise the price of a good. If a good is inelastic then the price increase will result in higher revenue for a company (revenue from sales at higher prices will be greater than the value of lost sales). Look at the list of the goods above. What four goods would bring in higher revenue with higher prices.
Price Elasticity of Demand and Policy
Elasticity can be useful in setting economic policy. Consider the following measures of elasticity and policy goals:
Reducing smoking: The elasticity for cigarette smoking is between 0.3 to 0.6 for the general public and between 0.6 to 0.7 for young people. How would a price increase (through a tax on cigarettes) affect smoking?
Lowering greenhouse gasses: The elasticity for gas for cars is 0.25 in the short run and 0.64 in long run. How would an increase in gas prices effect gas consumption (and greenhouse gasses)?
Income Elasticity of Supply
The Income Elasticity of Demand describes how a change in income will affect a people's willingness to buy a product. The equation to the right is the equation used to calculate elasticity of supply. You can use this as a guide to finding the elasticity of supply in the following questions. You could also use the price elasticity calculator that you built for the earlier questions.
1. Use the graph of the demand curve to the right to calculate the elasticity of the range of the demand curve from the price of $1 to $3.
2. Use the graph of the demand curve to the right to calculate the elasticity of the range of the demand curve from the price of $3 (assume quantity of 50) to $4 (assume quantity of 160).
3. Use the equation for the demand curve QS = 2 + 3P to calculate the elasticity of the of the curve from the price of $18 to $10.
Elasticity and Tax Burden
1. Use the equation for the demand curve QD = 22 – P to calculate the elasticity of the of the curve from the price of $18 to $10 (hint you calculated this earlier in the problem set).
2. Use the equation for the demand curve QS = 2 + 3P to calculate the elasticity of the of the curve from the price of $18 to $10 (hint you calculated this earlier in the problem set).
3. In general, the curve with the greater inelasticity will bare most of the tax burden. Based on your answers to questions # 1 and #2, who bears most of the tax burden - buyers or sellers?
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