1 CHAPTER 4 WORKING WITH SUPPLY AND DEMAND E CONOMICS U PDATED S ECOND E DITION R OBERT E. H ALL S TANFORD U NIVERSITY M ARC L IEBERMAN N EW Y ORK U NIVERSITY

1

CHAPTER 4 WORKING WITH SUPPLY

AND DEMAND

ECONOMICSUPDATED SECOND EDITION

ROBERT E. HALL

STANFORD UNIVERSITY

MARC LIEBERMAN

NEW YORK UNIVERSITY

ECONOMICS UPDATED 2e / HALL & LIEBERMANCHAPTER 4 / WORK WITH SUPPLY AND DEMAND© 2003 South-Western

2

Figure 1 Price Ceilings in the Market for Maple Syrup

Numberof Bottles ofMaple Syrup

Price

per

Bottle

5,000

E

D

S

3.00

T$4.00

R

6,0004,000

V2.00


3

Figure 2 A Price Floor in the Market for Nonfat Dry Milk

Millions of Pounds

Price

per

Pound

200

0.80

S

D

220180

K$0.90

J

A


4

Figure 3 Reinterpreting the Supply Curve

Quantity

Price per Unit

S

60

A .90

120

$1.50B


5

Figure 4 The Market for International Air Travel

Tickets

(Millionsper Year)

Price

per

Ticket

11.3

730

S

D

A700

B

10

S

$800


6

Figure 5 Calculating Price Elasticity of Demand

Movement Along Demand Curve

% Q D % P Elasticity of Demand

Point to Point

A B

(500,000 – 600,000)/650,000 ($1,500 – $1,000)/$1,250 – 18.2%/40%

– 0.182 0.40 – 0.46 or – 18.2% or 40%

Point toPoint

C D

(100,000 – 200,000)/150,000 ($3,500 – $3,000)/$3,250 – 66.7%/15.4%

– 0.66 7 0.154 – 4.33 or – 66.7% or 15.4%

Quantity of Laptops

C

Price per Laptop

100,000 200,000 300,000 400,000 500,000 600,000

$3,500

3,000

2,500

2,000

1,500

1,000

B

A

D

D


7

Figure 6 Elasticity and Straight-Line Demand Curves

Quantity

Price

. . . and since equal quantitydecreases (horizontal arrows) are larger and larger percentagedecreases . . .

Since equal dollar

increases

increases (vertical arrows) are smaller and smaller

percentage . . .

1

2

3

D

. . . demand becomes more and more elastic as we move leftward and upward along a straight line demand curve.


8

Figure 7 Extreme Cases of Demand

aaa

Quantity

PriceperUnit

1

D

2

3

$4

20 40 60 80 100

(a)

Perfectly InelasticDemand

Quantity

PriceperUnit

D

20 40 60 80 100

(b)

1

2

3

$4Perfectly Elastic

Demand


9

Table 1 Effects of Price Changes on Expenditure

Where demand is: A price increase will: A price decrease will:

Inelastic ( | | < 1) increase expenditure decrease expenditure unitary elastic ( | | = 1) cause no change in

expenditure cause

no change in

expenditure

elastic ( | | > 1) decrease expenditure increase expenditure


10

Table 2 Effects of Price Changes for Laptop Computers

Price per Quantity Demanded Total Monthly Expenditur eLaptop (P) (per Month) (Q) (P 3 Q)

$1,000 600,000 $600 million$1,500 500,000 $750 million

$3,000 200,000 $600 million$3,500 100,000 $350 million


11

Figure 8 Elasticity and Total Expenditure

Quantity of Laptops

Price per

Laptop

A

D

100,000 200,000 300,000 400,000 500,000 600,000

$3,500

3,000

2,500

2,000

1,500

1,000

500

B


12

Table 3 Some Short-Run Price Elasticities of Demand

Specific Brands Narrow Categories Broad Categories

T ide Detergent – 2.7 9 Transatlantic Air Travel – 1.3 0 Recreation – 1.09 Tourism in Thailand – 1.2 0

Pepsi – 2.08 Ground Beef – 1.02 Clothing – 0.89 Coke – 1.7 1 Pork – 0.7 8 Food – 0.6 7

Milk – 0.5 4 Imports – 0.5 8 Cigarettes – 0.45 Transportation – 0.5 6 Electricity – 0.40 to – 0.5 0 Beer – 0.2 6 Eggs – 0.2 6 Gasoline – 0.2 0 Oil – 0.1 5


13

Table 4 Adjustments After a Rise in the Price of Gasoline

Shor t Run (a few months or less) Long Run (a year or more)

Use public transit more often Buy a more fuel-efficient car Arrange a car pool Move closer to your job Get a tune-up Switch to a job closer to home Drive more slowly on the highway Move to a city where less driving is required Eliminate unnecessary trips (use mail order

instead of driving to stores; locate goods by phone instead of driving around; shop for food less often and buy more each time)

If there are two cars, use the more fuel-efficient one


14

Figure 9 The War on Drugs

Quantity

Price per Unit

P1

Q1

D1

A A

S1

Quantity

Price per Unit

Q1

D1

S1

Quantity

Price per Unit

P1

Q1

S1

D1

(a) (b) (c)

AP1

Q2

B

S2

P2

Q3

P3

D2

C


15

Figure 10 Elasticity and the Excise Tax on International Air Travel

Tickets(Millionsper Year)

Price

per

Ticket

11.3

730

S

D S

$830B

A

Priceper

Ticket

S

$730 D

11.3

A

7.0

B

Tickets(Millionsper Year)


16

Table 5 Some Income Elasticities

Income Elasticity

Income Elasticity Good or Service Good or Service

Fresh Fruit 1.99 Imports 2.7 3 Computers 1.7 1 Transatlantic Air Travel 1.40 Transportation 1.7 9 College Education 0.5 5 Cigarettes 0.5 0 Recreation 1.0 7 Chicken 0.42 Clothing 1.02 Pork 0.3 4 F ood 0.60 to 0.85 Fresh Vegetables 0.2 6 Tooth Extraction – 0.1 3 to 0.4 7 Ground Beef – 0.2 0 Bread – 0.42 Potatoes – 0.8 1


17

Table 6 Income and Spending on Economic Necessities and Economic Luxuries

Per cent of Per cent of IncomeSpending Income Spent Spending on Spent on

Income on Food on Food Transportation Transportation

$10,000 $ 6,000 60% $ 1,000 10%$20,000 $ 9,600 48% $ 2,800 14%$40,000 $15,360 38% $ 7,840 20%$80,000 $24,576 30% $21,952 27%


18

Table 7 Some Cross-Price Elasticities

Products Cross-Price Elasticity

Margarine with price of butter 1.5 3 Pepsi with price of Coke 0.80 Coke with price of Pepsi 0.6 1 Ground beef with price of beef table cuts 0.4 1 Ground beef with price of poultry 0.2 4 Electricity with price of natural gas 0.2 0 Theater with price of all other lively arts 0.1 2 Entertainment with price of food – 0.7 2


19

Figure 11 The Market for Food

Quantity of Food

Price per

Unit ofFood

P1

Q1

D

Sold technology

A

(a)

Snewtechnology

P2 B

Q2

(b)

Quantityof Food

Price perUnit ofFood

D

SBad Weather

AP1

Q1 2

B

SGoodWeather

P2

Q


20

Table 8 U.S. Winter Wheat Production

1996 1997 1998

Bushels produced 1.47 billion 1.84 billion 1.90 billionAverage price per bushel $4.33 $3.52 $2.50Total value of sales $6.40 billion $5.95 billion $4.77 billion

Source:U.S. Department of Agriculture, Marketing Year Average Prices and Value of Production, by States and UnitedStates, 1996, 1997, and 1998. Production figures calculated by authors as total value of sales divided by average price.


21

Figure 12 The Market for Health Care with Coinsurance

Examinations per Year

Price

per

Examination

100,000

A

DS

50

150,000

B

D´

$100

70

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1 CHAPTER 4 WORKING WITH SUPPLY AND DEMAND E CONOMICS U PDATED S ECOND E DITION R OBERT E. H ALL S TANFORD U NIVERSITY M ARC L IEBERMAN N EW Y ORK U NIVERSITY