1 chapter 4 working with supply and demand e conomics u pdated s econd e dition r obert e. h all s...
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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
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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
ECONOMICS UPDATED 2e / HALL & LIEBERMANCHAPTER 4 / WORK WITH SUPPLY AND DEMAND© 2003 South-Western
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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
ECONOMICS UPDATED 2e / HALL & LIEBERMANCHAPTER 4 / WORK WITH SUPPLY AND DEMAND© 2003 South-Western
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Figure 3 Reinterpreting the Supply Curve
Quantity
Price per Unit
S
60
A .90
120
$1.50B
ECONOMICS UPDATED 2e / HALL & LIEBERMANCHAPTER 4 / WORK WITH SUPPLY AND DEMAND© 2003 South-Western
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Figure 4 The Market for International Air Travel
Tickets
(Millionsper Year)
Price
per
Ticket
11.3
730
S
D
A700
B
10
S
$800
ECONOMICS UPDATED 2e / HALL & LIEBERMANCHAPTER 4 / WORK WITH SUPPLY AND DEMAND© 2003 South-Western
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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
ECONOMICS UPDATED 2e / HALL & LIEBERMANCHAPTER 4 / WORK WITH SUPPLY AND DEMAND© 2003 South-Western
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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.
ECONOMICS UPDATED 2e / HALL & LIEBERMANCHAPTER 4 / WORK WITH SUPPLY AND DEMAND© 2003 South-Western
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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
ECONOMICS UPDATED 2e / HALL & LIEBERMANCHAPTER 4 / WORK WITH SUPPLY AND DEMAND© 2003 South-Western
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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
ECONOMICS UPDATED 2e / HALL & LIEBERMANCHAPTER 4 / WORK WITH SUPPLY AND DEMAND© 2003 South-Western
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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
ECONOMICS UPDATED 2e / HALL & LIEBERMANCHAPTER 4 / WORK WITH SUPPLY AND DEMAND© 2003 South-Western
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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
ECONOMICS UPDATED 2e / HALL & LIEBERMANCHAPTER 4 / WORK WITH SUPPLY AND DEMAND© 2003 South-Western
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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
ECONOMICS UPDATED 2e / HALL & LIEBERMANCHAPTER 4 / WORK WITH SUPPLY AND DEMAND© 2003 South-Western
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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
ECONOMICS UPDATED 2e / HALL & LIEBERMANCHAPTER 4 / WORK WITH SUPPLY AND DEMAND© 2003 South-Western
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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
ECONOMICS UPDATED 2e / HALL & LIEBERMANCHAPTER 4 / WORK WITH SUPPLY AND DEMAND© 2003 South-Western
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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)
ECONOMICS UPDATED 2e / HALL & LIEBERMANCHAPTER 4 / WORK WITH SUPPLY AND DEMAND© 2003 South-Western
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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
ECONOMICS UPDATED 2e / HALL & LIEBERMANCHAPTER 4 / WORK WITH SUPPLY AND DEMAND© 2003 South-Western
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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%
ECONOMICS UPDATED 2e / HALL & LIEBERMANCHAPTER 4 / WORK WITH SUPPLY AND DEMAND© 2003 South-Western
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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
ECONOMICS UPDATED 2e / HALL & LIEBERMANCHAPTER 4 / WORK WITH SUPPLY AND DEMAND© 2003 South-Western
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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
ECONOMICS UPDATED 2e / HALL & LIEBERMANCHAPTER 4 / WORK WITH SUPPLY AND DEMAND© 2003 South-Western
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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.