Supply and demand

Problems

1. Using supply and demand curves, show the effect of each of the following events on the market for wheat:
2. The Midwestern U.S. (a major wheat-producing area) suffers a flood.
3. The price of corn decreases (assume that many farmers can grow either corn or wheat).
4. The Midwest has great weather.
5. The price of fertilizer declines.
6. More individuals start growing wheat.

Ans:

1. The price of wheat increases and the equilibrium quantity of wheat traded decreases.
2. If the price of corn decreases, corn farmers are likely to plant less corn and more wheat. As a result, the supply of wheat to the marketplace will increase, decreasing the equilibrium price of wheat and increasing the equilibrium quantity of wheat exchanged.
3. If the Midwest has exceptionally favorable weather, crop yields are likely to increase. The supply curve for wheat will shift to the right, decreasing the equilibrium price and increasing the equilibrium quantity of wheat traded.
4. Fertilizer is an input to the production of wheat. As a result of a decrease in the price of fertilizer, more will be used, raising crop yields, and the supply of wheat will increase. The equilibrium price of wheat will decrease and the equilibrium quantity will increase.
5. If more individuals begin growing wheat, the market supply curve for wheat will increase. The equilibrium price of wheat will decrease and the equilibrium quantity will increase.

2. Beginning from an initial equilibrium, draw the effects of the following changes in terms of the relevant supply and demand curves:
3. an increase in the price of hot dogs on the hamburger market
4. a decrease in the number of taxicab companies in New York City on cab trips
5. the effect of El Niño rain storms destroying the broccoli crop in two California counties

Ans:

a.

b.

c.

3. Use supply and demand curves to show:
4. simultaneous increases in supply and demand, with a large increase in supply and a small increase in demand
5. simultaneous increases in supply and demand, with a small increase in supply and a large increase in demand
6. simultaneous decreases in supply and demand, with a large decrease in supply and a small decrease in demand
7. simultaneous decreases in supply and demand, with a small decrease in supply and a large decrease in demand

Ans:

1. Price falls, quantity rises.
2. Price rises, quantityrises.
3. Price rises, quantity falls.
4. Price falls, quantity falls.

4. What would be the impact of a rental price ceiling set above the equilibrium rental price for apartments? What if it was set below the equilibrium rental price?

Ans: A price ceiling set above the equilibrium rental price would have no impact on a rental market. (A price ceiling is a maximum allowed price, not a mandated market price.) If a price ceiling is set below the equilibrium rental price, a shortage will result.

5. What would be the impact of a price floor set above the equilibrium price for dairy products? What if it was set below the equilibrium price?

Ans: A price floor set above the equilibrium price for dairy products would result in a surplus. A price floor set below the equilibrium price would have no impact on the price or quantity of dairy products traded. (A price floor is a minimum allowed price, not a mandated market price.)

6. Giving in to pressure from voters who charge that local theater owners are gouging their customers with ticket prices as high as $10 per movie, the city council of a Midwestern city imposes a price ceiling of $2 on all movies. What effect is this likely to have on the market for movies in this particular city? What will happen to the quantity of tickets demanded? What will happen to the quantity supplied? Who gains? Who loses?

Ans: The $2 price ceiling will likely result in a shortage of movie tickets. At the new, lower price, quantity demanded will rise. People will want more tickets at $2 then they did at $10. Assuming that the equilibrium price is somewhere around $10, the ceiling will cause the quantity of tickets sold to decline. Some theaters may reduce their hours of operation and some may even go out of business. Some theaters may stop showing first-run movies. Theater owners will certainly suffer. While some movie-goers may benefit from lower prices, they may also have to stand in long lines to buy tickets. They may also see a reduction in the quality of movies offered by theaters.

7. Why do price floors and price ceilings both reduce the quantity of goods traded in those markets?

Ans: When a price floor is imposed above the equilibrium price, the quantity demanded by buyers falls. Sellers cannot sell what buyers are unwilling to purchase at this price. The quantity traded is therefore reduced relative to the market equilibrium. When a price ceiling is imposed below the equilibrium price, the quantity supplied falls. Buyers cannot purchase more units than sellers are willing to exchange. Therefore, the quantity traded decreases relative to the market equilibrium.

8. Why do 10:00 a.m. classes fill up before 8:00 a.m. classes during class registration? Use supply and demand curves to help explain your answer.

Ans: Even though the tuition “price” is the same in both cases, student demand for 10 a.m. classes is typically greater than for 8 a.m. classes. College students often prefer to sleep in later than punctual attendance at an 8 a.m. class would allow. A shortage of 10 a.m. class space relative to demand is the likely result. A surplus of class space in 8 a.m. courses may result if the demand for early morning classes is sufficiently low.

9. What would happen to the equilibrium price and quantity exchanged in the following cases?
10. an increase in income and a decreasing price of a complement, for a normal good
11. a technological advance and lower input prices
12. an increase in the price of a substitute and an increase in income, for an inferior good
13. producers’ expectations that prices will soon fall, and increasingly costly government regulations

Ans:

1. Demand would increase, since both changes increase demand. As a result, the price and quantity exchanged would both increase.
2. Supply would increase, since both changes increase supply. As a result, the price would decrease and the quantity exchanged would increase.
3. Both changes shift demand, but the net result on the demand curve is indeterminate, since the increase in the price of a substitute increases demand and an increase in income for an inferior good reduces demand. If the net effect is an increase in demand, both price and the quantity exchanged would increase; if the net effect is a decrease in demand, both price and the quantity exchanged would decrease.
4. Both changes shift supply, but the net result on the supply curve is indeterminate, since the producers’ expectations of lower prices in the near future increase current supply and increasingly costly government regulations decrease supply. If the net effect is an increase in supply, the price will fall and the quantity exchanged will rise; if the net effect is a decrease in supply, the price will rise and the quantity exchanged will fall.

10. Refer to the following supply and demand curve diagram.
11. Starting from an initial equilibrium at E, what shift or shifts in supply and/or demand could move the equilibrium price and quantity to each of points A through I?
12. Starting from an initial equilibrium at E, what would happen if both a decrease in the price of a substitute in production and an increase in income occurred, if it is a normal good?
13. Starting from an initial equilibrium at E, what would happen if both an increase in the price of an input and an advance in technology occurred?
14. If a price floor is imposed above the equilibrium price, which of A through I would tend to be the quantity supplied, and which would tend to be the quantity demanded? Which would be the new quantity exchanged?
15. If a price ceiling is imposed below the equilibrium price, which of A through I would tend to be the quantity supplied, and which would tend to be the quantity demanded? Which would be the new quantity exchanged?

Ans:

1. To get to point A would require a decrease in supply; to get to point B would require a decrease in supply and an increase in demand; to get to point C would require an increase in demand; to get to point D would require a decrease in supply and a decrease in demand; point E is the current equilibrium; to get to point F would require an increase in supply and an increase in demand; to get to point G would require a decrease in demand; to get to point H would require an increase in supply and a decrease in demand; to get to point I would require an increase in supply
2. F, because it is an increase in supply and an increase in demand
3. indeterminate; because one of the changes decreases supply and the other increases supply, we don’t know what the net effect on supply will be. If the effects were of the exact same magnitude, the result would be E; if the increase in supply was greater than the decrease in supply, the answer would be I; if the decrease in supply was greater than the increase in supply, the answer would be A.
4. C; A; A
5. G; I; G

Sexton, R..L. (2019).