1. a. Cold weather damages the orange crop, reducing the supply of oranges. This can be seen in Figure 4-6 as a shift to the left in the supply curve for oranges. The new equilibrium price is higher than the old equilibrium price.  Figure 4-6 b. People often travel to the Caribbean from New England to escape cold weather, so demand for Caribbean hotel rooms is high in the winter. In the summer, fewer people travel to the Caribbean, since northern climes are more pleasant. The result, as shown in Figure 4-7, is a shift to the left in the demand curve. The equilibrium price of Caribbean hotel rooms is thus lower in the summer than in the winter, as the figure shows. Figure 4-7 c. When a war breaks out in the Middle East, many markets are affected. Since much oil production takes place there, the war disrupts oil supplies, shifting the supply curve for gasoline to the left, as shown in Figure 4-8. The result is a rise in the equilibrium price of gasoline. With a higher price for gasoline, the cost of operating a gas-guzzling automobile, like a Cadillac, will increase. As a result, the demand for used Cadillacs will decline, as people in the market for cars won't find Cadillacs as attractive. In addition, some people who already own Cadillacs will try to sell them. The result is that the demand curve for used Cadillacs shifts to the left, while the supply curve shifts to the right, as shown in Figure 4-9. The result is a decline in the equilibrium price of used Cadillacs.
3. a. If people decide to have more children (a change in tastes), they'll want larger vehicles for hauling their kids around, so the demand for minivans will increase. Supply won't be affected. The result is a rise in both price and quantity, as Figure 4-12 shows.
b. If a strike by steelworkers raises steel prices, the costs of producing a minivan rise (a rise in input prices), so the supply of minivans decreases. Demand won't be affected. The result is a rise in the price of minivans and a decline in the quantity, as Figure 4-13 shows. c. The development of new automated machinery for the production of minivans is an improvement in technology. The reduction in firms' costs results in an increase in supply. Demand isn't affected. The result is a decline in the price of minivans and an increase in the quantity, as Figure 4-14 shows.
d. The rise in the price of station wagons affects minivan demand because station wagons are substitutes for minivans (that is, there's a rise in the price of a related good). The result is an increase in demand for minivans. Supply isn't affected. In equilibrium, the price and quantity of minivans both rise, as Figure 4-12 shows. e. The reduction in peoples' wealth caused by a stock-market crash reduces their income, leading to a reduction in the demand for minivans, since minivans are a normal good. Supply isn’t affected. As a result, both price and quantity decline, as Figure 4-15 shows. 5. a. When a hurricane in South Carolina damages the cotton crop, it raises input prices for producing sweatshirts. As a result, the supply of sweatshirts shifts to the left, as shown in Figure 4-19. The new equilibrium has a higher price and lower quantity of sweatshirts. Figure 4-19 b. A decline in the price of leather jackets leads more people to buy leather jackets, reducing the demand for sweatshirts. The result, shown in Figure 4-20, is a decline in both the equilibrium price and quantity of sweatshirts. Figure 4-20 c. The effects of colleges requiring students to engage in morning calisthenics in appropriate attire raises the demand for sweatshirts, as shown in Figure 4-21. The result is an increase in both the equilibrium price and quantity of sweatshirts. Figure 4-21 d. The invention of new knitting machines increases the supply of sweatshirts. As Figure 4-22 shows, the result is a reduction in the equilibrium price and an increase in the equilibrium quantity of sweatshirts. Figure 4-22 7. Since ketchup is a complement for hot dogs, when the price of hot dogs rises, the quantity demanded of hot dogs falls, thus reducing the demand for ketchup, causing both price and quantity of ketchup to fall. Since the quantity of ketchup falls, the demand for tomatoes by ketchup producers falls, so both price and quantity of tomatoes fall. When the price of tomatoes falls, producers of tomato juice face lower input prices, so the supply curve for tomato juice shifts down, causing the price of tomato juice to fall and the quantity of tomato juice to rise. The fall in the price of tomato juice causes people to substitute tomato juice for orange juice, so the demand for orange juice declines, causing the price and quantity of orange juice to fall. Now you can see clearly why a rise in the price of hot dogs leads to a fall in price of orange juice! It would be clearer if there were graphs. I always expect graphs! 9 Quantity supplied equals quantity demanded at a price of $6 and quantity of 81 pizzas (Figure 4-26). If price were greater than $6, quantity supplied would exceed quantity demanded, so suppliers would reduce their price to gain sales. If price were less than $6, quantity demanded would exceed quantity supplied, so suppliers could raise their price without losing sales. In both cases, the price would continue to adjust until it reached $6, the only price at which there's neither surplus nor shortage. Figure 4-26 1. a. Mystery novels have more elastic demand than required textbooks, because mystery novels have close substitutes and are a luxury good, while required textbooks are a necessity with no close substitutes. If the price of mystery novels were to rise, readers could substitute other types of novels, or buy fewer novels altogether. But if the price of required textbooks were to rise, students would have little choice but to pay the higher price. Thus the quantity demanded of required textbooks is less responsive to price than the quantity demanded of mystery novels. b. Beethoven recordings have more elastic demand than classical music recordings in general. Beethoven recordings are a narrower market than classical music recordings, so it’s easy to find close substitutes for them. If the price of Beethoven recordings were to rise, people could substitute other classical recordings, like Mozart. But if the price of all classical recordings were to rise, substitution would be more difficult (a transition from classical music to rap is unlikely!). Thus the quantity demanded of classical recordings is less responsive to price than the quantity demanded of Beethoven recordings. c. Heating oil during the next five years has more elastic demand than heating oil during the next six months. Goods have a more elastic demand over longer time horizons. If the price of heating oil were to rise temporarily, consumers couldn’t switch to other sources of fuel without great expense. But if the price of heating oil were to be high for a long time, people would gradually switch to gas or electric heat. As a result, the quantity demanded of heating oil during the next six months is less responsive to price than the quantity demanded of heating oil during the next five years. d. Root beer has more elastic demand than water. Root beer is a luxury with close substitutes, while water is a necessity with no close substitutes. If the price of water were to rise, consumers have little choice but to pay the higher price. But if the price of root beer were to rise, consumers could easily switch to other sodas. So the quantity demanded of root beer is more responsive to price than the quantity demanded of water.
Price Floor: is legally imposed minimum price on the market. Transactions below this price is prohibited. • •Policy makers set floor price above the market equilibrium price which they believed is too low. • •Price floors are most often placed on markets for goods that are an important source of income for the sellers, such as labor market. •Price floor generate surpluses on the market. •Example: minimum wage.
Price Ceiling: is legally imposed maximum price on the market. Transactions above this price is prohibited. •Policy makers set ceiling price below the market equilibrium price which they believed is too high. •Intention of price ceiling is keeping stuff affordable for poor people. •Price ceiling generates shortages on the market. •Example: Rent control. Equilibrium price and quantity are determined by the intersection of supply and demand. A change in supply, or demand, or both, will necessarily change the equilibrium price, quantity or both. It is highly unlikely that the change in supply and demand perfectly offset one another so that equilibrium remains the same. Example: This example is based on the assumption of Ceteris Paribus. 1) If there is an exporter who is willing to export oranges from Florida to Asia, he will increase the demand for Florida’s oranges. An increase in demand will create a shortage, which increases the equilibrium price and equilibrium quantity. 2) If there is an importer who is willing to import oranges from Mexico to Florida, he will increase the supply for Florida’s oranges. An increase in supply will create a surplus, which lowers the equilibrium price and increase the equilibrium quantity. 3) What will happen if the exporter and importer enter the Florida’s orange market at the same time? From the above analysis, we can tell that equilibrium quantity will be higher. But the import and exporter’s impact on price is opposite. Therefore, the change in equilibrium price cannot be determined unless more details are provided. Detail information should include the exact quantity the exporter and importer is engaged in. By comparing the quantity between importer and exporter, we can determine who has more impact on the market. In the following table, an example of demand and supply increase is illustrated. Page 2The focus of this lecture is the basic concepts of economics. Students will learn to think like an economist by applying some economic models to practical examples. OBJECTIVES 1. Define the term “Economics” 2. Explain the role of government in a mixed economy 3. Understand Production Possibility Frontier 4. Illustrate market equilibrium using supply and demand curves 5. Explain the relationship between market and aggregate supply and demand. TOPICS Please read all the lectures by clicking on the following topics. ECONOMIC ESSENTIALSPRODUCTION POSSIBILITY FRONTIER ECONOMIC SYSTEMS INTERNATIONAL TRADE DEMAND DETERMINANTS OF DEMAND SUPPLY DETERMINANTS OF SUPPLY MARKET EQUILIBRIUMPage 3Elasticity of Demand And Supply The focus of this lecture is the elasticity. Students will learn about the price elasticity of demand, price elasticity of supply, cross elasticity and income elasticity. OBJECTIVES 1. Understand the definition of elasticity. 2. Be able to compute the elasticity coefficients. 3. Analyze the elasticity characteristics. 4. Illustrate the determinants of the elasticity. 5. Explain the total revenue test and understand the relationship between total revenue and price elasticity of demand. TOPICS Please read all the lectures by clicking on the following topics. PRICE ELASTICITY OF DEMAND DETERMINANTS OF Ed TOTAL REVENUE TEST PRICE ELASTICITY OF SUPPLY CROSS ELASTICITY OF DEMAND INCOME ELASTICITY OF DEMAND Page 4Four Market Structures The focus of this lecture is the four market structures. Students will learn the characteristics of pure competition, pure monopoly, monopolistic competition, and oligopoly. Using the cost schedule from the previous lecture, the idea of profit maximization is explored. OBJECTIVES 1. Identify various market structures and their characteristics. 2. Be able to category firms into four market structures. 3. Describe the effects of imperfect competition upon the market and the firm. 4. Understand the pricing structure of the four structures. TOPICS Please read all the lectures by clicking on the following topics. PERFECT COMPETITION PERFECT COMPETITION CONT. PERFECT COMPETITION EXAMPLE PURE MONOPOLY MONOPOLY EXAMPLE PRICE DISCRIMINATION MONOPOLISTIC COMPETITION OLIGOPOLY TECHNOLOGICAL DEVELOPMENT ECONOMIC EFFICIENCY Lecture One Lecture Two Lecture Three Lecture Four Lecture Five Lecture Six Home |
What will be the effect of these changes on the equilibrium price and quantity in Orange market?
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