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Main Point - Markets a places that motivate individuals to produce good in an efficient way and efficiently allocate goods to the people who most want them.
Part # 1 - Market Basics
Reading - Market Basics - click here
Practice Problem - 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?
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.
Part # 2 - Market Adjustment
Reading - Market Operations - click here
Practice Problem - 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.
Part # 3 - Elasticity
Reading - Elasticity - click here
Practice Problem - 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.
C. What does this show about how elasticity changes along the demand curve?
Practice Problem - 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
Practice Problem - 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 demand curve from the price of $1 to $3 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 demand curve from the price of $3 to $4.
Practice Problem - 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.
Practice Problem - 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 ?
Practice Problem - 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?
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