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Main Point - Markets work to both efficiently direct the process of turning resources to goods people want and to allocate goods to the people who most want them.
Main Point - Markets work to both efficiently direct the process of turning resources to goods people want and to allocate goods to the people who most want them.
Homework # 1 - Market Basics
Homework # 1 - Market Basics
Reading - Market Basics - click here
Video - Introduction to Supply and Demand - click here
Video - Individual Consumer and Producer Surplus - click here
Video - Allocative Efficiency - click here
Classwork # 1 - Market Basics
Classwork # 1 - Market Basics
Sample # 1 - Market Basics - The chart to the right shows the market demand and supply for apartments in the town of Whoville.
A. What is the equilibrium price?
B. What is the equilibrium quantity?
C. Suppose the government wants to help consumers and establishes a price ceiling (maximum legal price) of $900 for the market for apartments.
D. What effect will this have on the market?
E. Who benefits from this policy? Who bears the cost?
F. Suppose the government wants to help producers and establishes a price floor (minimum legal price) of $1100 for the market for apartments.
G. What effect will this have on the market?
H. Who benefits from this policy? Who bears the cost?
Sample # 2 - Market in Equations - Consider a market that has Supply and Demand Curves that are shown to the right:
A. How do the equations demonstrate the Law of Supply and the Law of Demand?
B. What is the equilibrium price and quantity in the market?
C. What would be the consumer surplus for a consumer in this market who was willing to pay $6 for this good?
D. What would be the producer surplus for a producer in this market who was willing to produce this good for $4.
E. Suppose the government imposes a price ceiling of $4 on this market, what effect would this policy have on the market?
F. How would the price ceiling affect the consumer in this market who was willing to pay $6 for this good and the producer in this market who was willing to produce this good for $4?
Consider how a $2 tax (paid by buyers) would affect the market.
G. How would this tax affect the amount of goods bought and sold in the market?
H. How much of the tax would be borne by the buyers and how much would be borne by the sellers.
Homework # 2 - Working with Markets (Answers)
Homework # 2 - Working with Markets (Answers)
Printable Copy of Assignment - click here
Article - What My Daughter Taught Me About Trade - click here
Problem # 1 - Market for Tangerines – A market for bags of tangerines is represented by the two equations shown to the right. Use this information to answer the following questions.
A. Which equation is the Demand Curve and which is the Supply Curve? How do you know?
B. What is the equilibrium price and quantity in the market?
C. 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?
D. Suppose the government placed a $1 sales tax (paid by the buyer) on every item sold in this market. What would be the specific deadweight loss measured in terms of the bags of tangerines sold in this market?
E. 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?
F. 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?
G. 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?
H. 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?
I. How does the 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?
Problem # 2 - Market for Unicorn Rides - A market for Unicorn Rides in Ponyville is represented by the equations shown to the right. Twilight Sparkle, the Chief Economist of Ponyville, has some questions for you.
A. What is the equilibrium price and quantity in this market?
B. The land of Ponyville signs a free trade deal with the land of Equestria and many people come from Equestria to enjoy the unicorn rides. The increases in the demand in the market is shown by the new equations shown to the right. What is the new equilibrium price and quantity in this market?
C. The people of Ponyville complain to the government that they cannot get unicorn rides because of the free trade agreement. The government of Ponyville enacts a $ 5 tax credit for people buying unicorn rides (i.e. it gives $ 5 to each buyer of a unicorn ride). How will this policy affect the price and quantity of unicorn rides being sold? Does this policy benefit the sellers of unicorn rides?
Homework # 3 - Market Adjustment
Homework # 3 - Market Adjustment
Reading - Market Adjustments - click here
Video - Shifts in Supply and Demand - click here
Classwork # 3 - Market Adjustments
Classwork # 3 - Market Adjustments
Sample Problem # 1 - Supply and Demand in Action - 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?
A. Product B becomes more fashionable.
B. A shortage of an important component used in the production of Product B limits the amount of Product B that can be produced.
C. The price of product C, which is a substitute for product B, goes down.
D. Technological advance in production of product B.
E. An increase in the price of resources used for making product B.
Homework # 4 - Elasticity
Homework # 4 - Elasticity
Reading - Elasticity - click here
Video - Shifts in Supply and Demand - click here
Video - Calculating Elasticity - Midpoint Method - click here
Classwork # 4 - Elasticity
Classwork # 4 - Elasticity
Sample # 1 - Calculating Price Elasticity of Demand
A. 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 using the formula shown below.
B. 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.
Sample Problem # 2 - 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 explain how would an increase in the price affect the amount of revenue earned from selling each item (i.e. would it go up or down)? What reason explains this?
A. Matches - 0.1
B. Movies - 0.9
C. Coffee - 0.25
D. Airline tickets for business traveler - 0.1
E. Airline tickets for holiday traveler - 2.4
F. Car (in general) - 1.2
G. Chevrolet Car - 4.0
Sample Problem # 3 - 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 gasoline 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)?
Sample Problem # 4 - Calculating Price Elasticity of Supply
1. Use the graph of the demand curve to the right to calculate the elasticity of the range of the supply curve from the price of $1 to $3 (assume quantity of 70) using the formula shown below.
2. Use the graph of the demand curve to the right to calculate the elasticity of the range of the supply curve from the price of $3 (assume quantity of 70) to $4 (assume quantity of 140).
Sample Problem # 5 - Elasticity and Tax Burden
A. What is the equilibrium price and quantity in this market?
B. Suppose the government imposes a $2 sales tax (paid by the buyer) on this market. What will be the price paid by the buyers, the price received by sellers and the new quantity sold in the market?
C. How is the $2 tax borne by the buyers and sellers in the market?
D. What is the price elasticity of demand from a price of $5 to a price of $8 for for this market?
E. What is the price elasticity of supply from a price of $5 to a price of $8 for this market?
F. How does the price elasticity for supply and demand for this price range correspond to how the tax is borne by the buyers and sellers in this market?
Video on Parts A - C - click here
Video on Parts D - F - click here
Sample Problem # 6 - Cross Price Elasticity: Substitutes or Complementary Goods - Look at the list of good below and their cross price elasticities to determine whether they are substitutes or complementary goods and how much a 10% increase in price would have on quantity sold.
A. Air conditioning units sold and price of electricity: - 0.34.
B. Pepsi sold and price of Coke: + 0.63.
C. Electric cars sold and price of gasoline: + 0.36.
Sample Problem # 7 - Calculating Cross Price Elasticity
A. The price of hamburgers increases from $4.00 to $5.00 causing the quantity of soft drinks sold to fall from 100 to 90. Calculate the elasticity - are hamburgers and soft drinks complement or substitutes ?
B. The price of hamburgers increases from $4.00 to $5.00 causing the quantity of hot dogs sold to increase from by 25%. Calculate the elasticity - are hamburgers and soft drinks complement or substitutes ?
Sample Problem # 8 - Calculating Income Elasticity
A. A person's income goes from $1200 a month to $1600 a month and their use of public transit goes from 20 bus rides a month to 15 bus rides a month. Calculate the elasticity - what does this tell you about bus rides as a good?
B. Assuming the income elasticity did not change, how much would the person change how much they ride the bus if their income rose to $2000 a month?
Homework # 5 - Elasticity (Answers)
Homework # 5 - Elasticity (Answers)
Printable Copy of Assignment - click here
Article - Why Airlines Like Extra Fees So Much - click here
Homework # 6 - Review of Markets (Answers)
Homework # 6 - Review of Markets (Answers)
Power Point Review of Main Concepts in Unit - Click Here
Extra Review Sheet - click here (Answers)
Printable Copy of Assignment - click here
Video - Dynamic Pricing, Explained - Click Here
# 1- Supply & Demand - 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)
A._____ Which diagram shows the effect of an increase in the price of corn on the popcorn market? Reason: ________________________
B._____ Which diagram shows the effect of an increase in the price of potato chips on the popcorn market? Reason: ___________________
C._____ 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: ___________________________
D._____ 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: _________________
# 2 - Putting It All Together - Theses are the equations for the supply and demand curves in the market for tickets for Captain Quack's Ferry Service to Green Island: Q = 20P - 100 and Q = 200 - 10P.
A. Which equation is the demand curve and which is the supply curve? (Explain how you are able to identify each curve)
B. What is the equilibrium price and quantity in this market?
C. One of Quack's ferries has engine problems and has to be removed from service in order to be repaired. This effects the market for ferry tickets and is shown in the new market equations: Q = 10P - 60 and Q = 200 - 10P. What is the new equilibrium price and quantity in this market?
D. There are two types of customers who buy tickets for ferry rides to Green Island. The demand curves for each group is shown to the right. The first group is residents of Green Island and their demand curve is QR = 80 - 2P. The second group is visitors to green island and their demand curve is QV = 120 - 8P. How has the change in price affected both groups? In the space below, show how the price change affected the number of tickets purchased by residents of Green Island and the visitors to Green Island.
E. Use this equation and the information about the price change to calculate the elasticity of demand for ferry tickets for residents of Green Island. What is elasticity of the residents' demand for ferry tickets? What reason could explain this elasticity?
F. Use this equation and the information about the price change to calculate the elasticity of demand for ferry tickets for residents of Green Island. What is elasticity of the residents' demand for ferry tickets? What reason could explain this elasticity?
G. Nellie sells ice cream at her sand on Green Island. She knows from experience that the cross price elasticity of the price of ferry tickets to ice cream sales is -1.5. Based on this information, how will the change in the price of ferry tickets affect the amount of ice cream that she sells? Is this result a surprise?
H. The mayor of Green Island accuses Captain Quack of deliberately taking the ferry out of service to get more profits from the residents of Green Island. He cites the example of Mr. Chirp who travels everyday by ferry to his job that pays $20. How has the change in ferry ticket prices affected Mr. Chirps consumer surplus (he only buys one ticket)? How has the price change affected Captain Quack's producer surplus per ticket (compared to the original price)?
I. The mayor of Green Island sets a $10 price ceiling on ferry tickets. The market equations are: QS = 10P - 60 and QD = 200 - 10P. What effect does the price ceiling have on the market?
J. Mr. Chirp, who travels everyday by ferry to his job that pays $20, finds that he is unable to buy a ticket at $10. His neighbor, Mr. Peep did buy a ticket. Mr. Peep values the ticket at $11. Mr. Peep tells Mr. Chirp that he will sell him the ticket for $15. How has the price ceiling benefited Mr. Peep and hurt Mr. Chirp?
K. Mr. Chirp complains to the mayor about the price ceiling policy. The mayor decides to get rid of the price ceiling policy and instead enact a subsidy of $1 for every ticket ferry purchased by a customer (the government of Green Island will give $1 to each person who buys a ticket). How would this effect the market? Specifically, how much money would Captain Quack make from each ticket, how much would each customer have to pay for a ticket and how many tickets would be sold?
L. Captain Quack tells the mayor that he loves the policy of subsidizing the tickets. How has the policy of subsidizing ferry tickets benefited Captain Quack compared to the market equilibrium?
M. The mayor responds to Captain Quack by enacting a new policy. This time, visitors to Green Island will be taxed $1 for each ticket they buy and the residents will be given a $1 subsidy for each ticket they buy. These are the market equations: QS = 10P - 60, QR = 80 - 2P, QV = 120 - 8P.
Important point - The market demand curve is made up of the residents' demand curve and visitors' demand curve (in other words: QD = QR + QV)
How would this effect the market? Specifically, how much money would captain Quack make from each ticket, how much will visitors and residents have to pay for a ticket, and how many tickets would be sold?
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