Deck 5: Using Supply and Demand

Question 1

A musical group called "The Grateful Dead" sold out concert after concert and typically provided a good living for scalpers (who buy tickets and resell them).Explain (using a supply and demand diagram)how The Grateful Dead's ticket pricing policy set an effective ceiling on the price of concert tickets.If there were a fixed number of seats at their concerts,what was the shape of the supply curve for these seats?

Answer 1

By setting a top ticket price at a level below the market-clearing price,the Grateful Dead guaranteed that there would be an excess demand for their concert tickets.This is illustrated in the diagram below.The official price (P_O)effectively sets a ceiling on the price that is below the market-clearing price.At this official price,there is an excess demand for tickets (Q_D > Q_S).The supply curve for tickets was vertical,since for any given show there were only so many seats available.

Question 2

Start by drawing a supply and demand equilibrium situation.Using your diagram,demonstrate graphically and explain verbally the impact of a decrease in supply on equilibrium price and quantity.What could cause this shift?

Answer 2

The diagram: The initial equilibrium is point A.A decrease in supply is shown as the shift from S₀ to S₁.The new equilibrium is point B with a higher price level (P₁ > P₀)and a lower quantity exchanged (Q₁ < Q₀).An increase in sales tax,or an increase in factor cost,could cause this shift.

Question 3

What is a living wage? Why did many states find it necessary to establish a living wage?

Answer 3

A living wage is defined by the living wage movement as the wage necessary to support a family at or above the federally determined poverty line.Many states found it necessary to establish a living wage because the federal minimum wage is too low and is not binding for most workers (i.e.,the minimum wage is below the equilibrium wage).

Question 4

What is a third-party payer market? Give an example.

Question 5

Start by drawing a supply and demand equilibrium situation.Using your diagram,demonstrate graphically and explain verbally the impact of a decrease in demand and an increase in supply on equilibrium price and quantity.

Question 6

Define an excise tax and give three examples.Explain the relationship between a tariff and an excise tax.Use supply and demand analysis to explain why the equilibrium price of apples will rise and the equilibrium quantity will fall if an excise tax is levied on apples.Explain why the price of apples will not rise by the full amount of the tax.

Question 7

What is meant by the dollar-euro exchange rate? In what market is this rate determined? What factors will cause the dollar value of the euro to rise? What factors will cause the dollar value of the euro to fall?

Question 8

Demonstrate graphically and explain verbally the impact on a supply and demand equilibrium of an effective price ceiling.

Question 9

Explain the shifts in demand and/or supply that can result in the following observations: (Assume the demand curve is downward sloping and the supply curve is upward sloping.)
(a)Both price and quantity rise.
(b)Price rises,quantity falls.
(c)Price rises,quantity doesn't change.
(d)Quantity rises,price doesn't change.

Question 10

How does total size of expenditures in a third-part payer market compare to the total size of expenditures in a market with no third-party payer?

Question 11

As a result of the rapid growth of the Chinese economy,world demand for petroleum products has increased significantly.At the same time the war in Iraq has reduced that nation's petroleum production and exports to levels that are well below pre-war levels.Both events have had significant impacts on world oil prices.How would the simple supply and demand model apply to this case?

Question 12

Start by drawing a supply and demand equilibrium situation.Using your diagram,demonstrate graphically and explain verbally the impact of an increase in demand on equilibrium price and quantity.What could cause this shift?

Question 13

Suppose as a result of a recession and falling interest rates in the United States,European investors buy fewer U.S.financial assets.Conversely,U.S.investors decide to buy more European stocks.Use supply/demand analysis to show graphically why the value of the euro relative to the dollar increases.

Question 14

What is a price ceiling? What is a price floor? Give a real world example of each.What happens to the relationship between quantity demanded and the quantity supplied with an effective price ceiling? What happens to the relationship between quantity demanded and the quantity supplied with an effective price floor? What is likely to happen if there is a shortage of rent controlled apartments? What is likely to happen if there is a surplus of price supported grain?

Question 15

Over the past decade average household incomes have grown.Americans have spent heavily on electrical appliances,boosting demand for electricity faster than capacity is being added.The result has been a simultaneous increase in the equilibrium price and quantity of electricity.Analyze this change using a supply and demand diagram.

Question 16

What is a price ceiling? What happens to the relationship between quantity demanded and supplied with an effective price ceiling?

Question 17

In an effort to capture the attention-and dollars-of the demographically powerful Generation Y the Nike Company has moved beyond sportswear and has unveiled a new line of sports-focused electronics,such as digital audio players and high-tech walkie-talkies.
Analyze Nike's new business strategy using a supply and demand diagram.

Question 18

Start by drawing a supply and demand equilibrium situation.Using your diagram,demonstrate graphically and explain verbally the impact of an increase in demand and an increase in supply on equilibrium price and quantity.

Question 19

Americans over the age of 65 are covered by Medicare.For them,the medical market is a third-payer market.What is a third-party payer market? How does total quantity of medical services provided in a third-payer market,such as Medicare,compare to a market in which the purchaser of medical services pays the full cost? How does price of medical services provided in a third-part payer market,such as Medicare,compare to the price in a market in which the purchaser of medical services pays the full cost? If third-payer markets,such as Medicare,benefit buyers by providing a greater quantity of services and sellers by yielding a higher price,who is hurt by such a payments system?

Question 20

What is a price floor? What happens to the relationship between quantity demanded and supplied with an effective price floor?

Question 21

The market for tennis racquets in a small town is represented by the following demand and supply equations:
Q_D = 200 - P
Q_S = -50 + P
Calculate the following (treat each point as a separate scenario):
(a)The equilibrium price and quantity.
(b)The equilibrium price and quantity after a $10 tax on the supplier.
(c)The equilibrium price and quantity after a $10 tax on the consumer.
(d)The equilibrium price and quantity after the government sets a price ceiling of $100.
(e)The equilibrium price and quantity after the government sets a price floor of $110.
(f)The equilibrium price and quantity after the government sets a quantity restriction of 75 units and an increase in the demand for racquets by 50.

Question 22

Used newspaper often is recycled into building insulation,packaging materials,and other products.At present,there is a "glut" of used newspaper today in the United States.As a result,recycling centers are refusing to pay for used newspaper anymore,even though the price of used newspaper used to be about $.02 per pound.(Recycling centers continue to take used newspaper,without payment,from environmentally conscious consumers.)The "glut" is also causing consumers to throw out large quantities of used newspaper in their trash,where it ends up in landfills.Since these landfills are becoming costly to build and maintain,local governments are seeking ways to encourage recycling and reduce the amount of used newspaper that ends up in landfills.Your task is to analyze this problem in the context of the following numerical example.
Suppose the market for used newspaper can be described by the following equations:
Q_D = 600 - 10P
Q_S = 900
where Q_D is the quantity of used newspaper demanded by recycling centers.All prices are measured in cents per hundred pounds and all quantities are measured in pounds.
(a)Compute the initial equilibrium price (P₁)and quantity (Q₁)of used newspaper.Then identify how much used newspaper gets recycled and how much ends up in landfills.Is there a "glut" of used newspaper? Explain your answers briefly.
(b)Suppose the U.S.government required all newspaper publishers to purchase 25 percent of their newsprint from recycled newspaper.Suppose also that this requirement would shift the demand curve for used newspaper to either Q_D = 400 - 10P or Q_D = 1200 - 10P.Which demand curve would result from the 25 per cent recycling requirement?
(c)Based on your answer in (b),compute the new equilibrium price (P₂)and quantity (Q₂)of used newspaper.Now how much used newspaper gets recycled and how much ends up in landfills?
(d)Would the 25 per cent requirement help eliminate the alleged "glut" of used newspaper in the United States? Explain briefly with reference to your answers in (c).
(e)Draw an appropriate graph of your solutions in (a)and (c).

Question 23

Demonstrate graphically and explain verbally the impact of a third-party payer market on supply and demand equilibrium in the case.Be sure to discuss equilibrium quantity,price received by suppliers,price paid by consumers,and total expenditures.

Question 24

Many state governments support higher education through subsidies.(A subsidy is like a negative excise tax).Consider the following supply and demand for college education at State U,which shows the equilibrium that would prevail without subsidies: annual tuition is $20,000 with Q₀ enrolled students.Suppose the state provides a $10,000 per year subsidy paid to State U for each student enrolled.What impact will this subsidy have on the equilibrium tuition level and number of enrolled students? Explain.

Question 25

Demonstrate graphically and explain verbally the impact on supply and demand equilibrium of an effective price floor.

Question 26

What are quantity restrictions? Use a supply/demand diagram to demonstrate the effect of quantity restrictions on equilibrium price and quantity of a good when there is an increase in demand.

Question 27

What is an excise tax? Demonstrate the effect of an excise tax paid by suppliers on equilibrium quantity and price.

Question 28

What is a tariff? Demonstrate the effect of a tariff on equilibrium quantity and price.Does the equilibrium price rise by the amount of the tariff? Why or why not?

Question 29

Use a supply/demand diagram to explain the effects of a government-imposed price ceiling that is above the equilibrium price.What will be the effective quantity and price in this situation?