Chapter 2
The Basics of Supply and Demand
Questions for Review
1. Suppo that unusually hot weather caus the demand curve for ice cream to shift to the right.
Why will the price of ice cream ri to a new market-clearing level?
Suppo the supply of ice cream is completely inelastic in the short run, so the supply curve is
vertical as shown below. The initial equilibrium is at price P1. The unusually hot weather caus the demand curve for ice cream to shift from D1 to D2, creating short-run excess demand (i.e., a temporary shortage) at the current price. Consumers will bid against each other for the ice cream, putting
upward pressure on the price, and ice cream llers will react by raising price. The price of ice cream will ri until the quantity demanded and the quantity supplied are equal, which occurs at price P2.
Chapter 2 The Basics of Supply and Demand9 2. U supply and demand curves to illustrate how each of the following events would affect the
price of butter and the quantity of butter bought and sold:
a. An increa in the price of margarine.
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Butter and margarine are substitute goods for most people. Therefore, an increa in the price of margarine will cau people to increa their consumption of butter, thereby shifting the demand curve for butter out from D1 to D2 in Figure 2.2.a. This shift in demand caus the equilibrium
price of butter to ri from P1 to P2 and the equilibrium quantity to increa from Q1 to Q2.
Figure 2.2.a
b. An increa in the price of milk.
Milk is the main ingredient in butter. An increa in the price of milk increas the cost of
producing butter, which reduces the supply of butter. The supply curve for butter shifts from
S1 to S2 in Figure 2.2.b, resulting in a higher equilibrium price, P2 and a lower equilibrium
quantity, Q2, for butter.
Figure 2.2.b
10 Pindyck/Rubinfeld, Microeconomics, Eighth Edition
Note : Butter is in fact made from the fat that is skimmed from milk; thus butter and milk are joint products, and this complicates things. If you take account of this relationship, your answer might change, but it depends on why the price of milk incread. If the increa were caud by an
increa in the demand for milk, the equilibrium quantity of milk supplied would increa. With
more milk being produced, there would be more milk fat available to make butter, and the price
of milk fat would fall. This would shift the supply curve for butter to the right, resulting in a drop in the price of butter and an increa in the quantity of butter supplied.
c. A decrea in average income levels.
Assuming that butter is a normal good, a decrea in average income will cau the demand
curve for butter to decrea (i.e., shift from D 1 to D 2). This will result in a decline in the
equilibrium price from P 1 to P 2, and a decline in the equilibrium quantity from Q 1 to Q 2. See Figure 上海市公积金管理中心
Figure 2.2.c
3. If a 3% increa in the price of corn flakes caus a 6% decline in the quantity demanded, what
is the elasticity of demand?
The elasticity of demand is the percentage change in the quantity demanded divided by the percentage change in the price. The elasticity of demand for corn flakes is therefore
%6 2.%3
D P Q
E P ∆-===-∆+ 4. Explain the difference between a shift in the supply curve and a movement along the supply
curve.
A movement along the supply curve occurs when the price of the good changes. A shift of the supply curve is caud by a change in something other than the good’s price that results in a change in the
quantity supplied at the current price. Some examples are a change in the price of an input, a change in technology that reduces the cost of production, and an increa in the number of firms supplying the product.父母宝贝
Chapter 2 The Basics of Supply and Demand11 5. Explain why for many goods, the long-run price elasticity of supply is larger than the short-run
elasticity.
The price elasticity of supply is the percentage change in the quantity supplied divided by the
percentage change in price. In the short run, an increa in price induces firms to produce more by using their facilities more hours per week, paying workers to work overtime and hiring new workers.
Nevertheless, there is a limit to how much firms can produce becau they face capacity constraints in the short run. In the long run, however, firms can expand capacity by building new plants and hiring new permanent workers. Also, new firms can enter the market and add their output to total supply. Hence a greater change in quantity supplied is possible in the long run, and thus the price elasticity of supply is larger in the long run than in the short run.
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6. Why do long-run elasticities of demand differ from short-run elasticities? Consider two goods:
paper towels and televisions. Which is a durable good? Would you expect the price elasticity of demand for paper towels to be larger in the short run or in the long run? Why? What about the price elasticity of demand for televisions?
Long-run and short-run elasticities differ bad on how rapidly consumers respond to price changes and how many substitutes are available. If the price of paper towels, a non-durable good, were to increa, consumers might react only minimally in the short run becau it takes time for people to change their consumption habits. In the long run, however, consumers might learn to u other
products such as sponges or kitchen towels instead of paper towels. Thus, the price elasticity would be larger in the long run than in the short run. In contrast, the quantity demanded of durable goods, such as televisions, might change dramatically in the short run. For example, the initial result of a price increa for televisions would cau consumers to delay purchas becau they could keep on using their current TVs longer. Eventually consumers would replace their televisions as they wore out or became obsolete. Therefore, we expect the demand for durables to be more elastic in the short run than in the long run.
7. Are the following statements true or fal? Explain your answers.
a. The elasticity of demand is the same as the slope of the demand curve.
Fal. Elasticity of demand is the percentage change in quantity demanded divided by the
穷开心歌词percentage change in the price of the product. In contrast, the slope of the demand curve is the
change in quantity demanded (in units) divided by the change in price (typically in dollars).
The difference is that elasticity us percentage changes while the slope is bad on changes
in the number of units and number of dollars.
b. The cross-price elasticity will always be positive.
Fal. The cross-price elasticity measures the percentage change in the quantity demanded of
one good due to a 1% change in the price of another good. This elasticity will be positive for
爱国图片素材substitutes (an increa in the price of hot dogs is likely to cau an increa in the quantity
demanded of hamburgers) and negative for complements (an increa in the price of hot dogs is likely to cau a decrea in the quantity demanded of hot dog buns).
c. The supply of apartments is more inelastic in the short run than the long run.
True. In the short run it is difficult to change the supply of apartments in respon to a change in price. Increasing the supply requires constructing new apartment buildings, which can take a year or more. Therefore, the elasticity of supply is more inelastic in the short run than in the long run.
12Pindyck/Rubinfeld, Microeconomics,Eighth Edition
8. Suppo the government regulates the prices of beef and chicken and ts them below their
market-clearing levels. Explain why shortages of the goods will develop and what factors will determine the sizes of the shortages. What will happen to the price of pork? Explain briefly.
If the price of a commodity is t below its market-clearing level, the quantity that firms are willing to supply is less than the quantity that consumers wish to purcha. The extent of the resulting shortage depends on the elasticities of demand and supply as well as the amount by which the regulated price is t below the market-clearing price. For instance, if both supply and demand are el风油精的功效与作用
astic, the shortage is larger than if both are inelastic, and if the regulated price is substantially below the market-clearing price, the shortage is larger than if the regulated price is only slightly below the market-clearing price.
Factors such as the willingness of consumers to eat less meat and the ability of farmers to reduce the size of their herds/flocks will determine the relevant elasticities. Customers who demands for
beef and chicken are not met becau of the shortages will want to purcha substitutes like pork.
This increas the demand for pork (i.e., shifts demand to the right), which results in a higher price for pork.
9. The city council of a small college town decides to regulate rents in order to reduce student
living expens. Suppo the average annual market-clearing rent for a two-bedroom apartment had been $700 per month and that rents were expected to increa to $900 within a year. The city council limits rents to their current $700-per-month level.
a. Draw a supply and demand graph to illustrate what will happen to the rental price of an
apartment after the imposition of rent controls.
Initially demand is D1 and supply is S, so the equilibrium rent is $700 and Q1 apartments are
rented. Without regulation, demand was expected to increa to D2, which would have raid
rent to $900 and resulted in Q2 apartment rentals. Under the city council regulation, however,
the rental price stays at the old equilibrium level of $700 per month. After demand increas to
D2, only Q1 apartments will be supplied while Q3 will be demanded. There will be a shortage of
Q3 Q1 apartments.
a. Do you think this policy will benefit all students? Why or why not?
No. It will benefit tho students who get an apartment, although the students may find that the cost of arching for an apartment is higher given the shortage of apartments. Tho students who do not get an apartment may face higher costs as a result of having to live outside the college
town. Their rent may be higher and their transportation costs will be higher, so they will be wor off as a result of the policy.
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