下载文档原格式
C H A P T E R4A p p l i c a t i o n s o fS u p p l y a n d D e m a n dCHAPTER OVERVIEW AND TEACHING TIPSIn Chapter 3 you explained the laws of supply and demand, and you familiarized students with the effects of changes in supply and demand. This leads naturally to the related question, “By how much?” How large are the responses to changes in the market, and on what does this responsiveness depend? This chapter introduces students to the concept of elasticity and exposes them to two types of elasticities: price elasticity of demand and price elasticity of supply. These concepts are difficult for students, particularly for those who have math anxiety. Emphasize the importance of percent-age changes in the numerator and denominator of the elasticity equations, and distinguish between price elasticity of demand and the slope of the demand curve. Do not hesitate to spend class time working through examples that illustrate the relationships between the price elasticity of demand and supply, and the demand and supply curves.The final section of the chapter provides students with the opportunity to apply market analysis and elasticity concepts in the arena of public policy-making. Distinguish carefully between the party who writes the check to the gov-ernment for a tax and the party who bears the economic burden of taxation. Just because taxes are often “paid” to the government by sellers does not mean that the sellers actually experience reduced incomes when new taxes are imposed. Price ceilings and price floors describe another type of government intervention into the operation of markets. LEARNING OBJECTIVES1.Define the term price elasticity of demand.2.Discuss the factors that determine whether price elasticity of demand is elastic, unitary-elastic, or inelastic, andcompare consumer behavior in the short run and the long run. Describe elastic and inelastic regions that exist along any demand curve.3.Calculate price elasticity of demand using a method of averages, ant interpret your result.4.Explain, using diagrams, the relationship between total revenue and price elasticity of demand.5.Define the term price elasticity of supply.6.Discuss the factors that determine whether price elasticity of supply is elastic, unitary-elastic, or inelastic, andcompare consumer behavior in the short run and the long run.7.Calculate price elasticity of supply using a method of averages, and interpret your result.8.Apply supply, demand, and elasticity concepts to the following situations and markets: (a) agriculture markets, (b)gasoline taxes, (c) minimum wages, and (d) energy price controls.SUGGESTED ANSWERS TO QUESTIONS IN THE TEXT1.A good harvest shifts a fairly inelastic supply curve to the right. Equilibrium moves down along a relativelyinelastic demand curve to support a (much) lower price, and hence lower farm revenues.2.More price elastic: perfume and ice cream because they are closer to luxuries than necessities; chocolate ice creamand automobiles because there are more substitutes for these goods than there are for ice cream and automobile tires, respectively.3.Demand would be inelastic, with E D= .5.4.Assume that demand and supply both show some price elasticity.a.Output and price up along supply curve (demand-curve shift), assuming apartments are normal goods.b.Output down and price (paid by renters) up along demand curve (supply shift).c.If this price is below equilibrium (which makes sense if the policy is to have an impact), this is a price ceiling,established to protect buyers. A shortage of apartments will result, with quantity demanded greater than quantity supplied.1516C HAPTER4: A PPLICATIONS OF S UPPLY AND D EMANDd.Output up and price down along demand curve (supply shift).e.Output down and price up along demand curve (supply shift).5.According to the text, a 10% increase in the minimum wage would decrease employment of teenagers between 1and 3 percent. The impact on the adult population is even smaller. Thus, income for teenagers and adults would rise. Thus, if I had to make a decision on increasing the minimum wage, and if raising wages for low-wage workers were important to me, I would certainly vote to increase the minimum.6.Minimum wages can increase the quantity of labor supplied and decrease the quantity of labor demanded. A bind-ing minimum wage therefore creates a surplus of labor. Price ceilings can have the opposite effect. A legal maximum interest rate can lead to a shortage of loanable funds, with lenders willing to supply fewer funds than demanders would like to borrow. See Figure 4-1 for an illustration of the impact of a minimum wage on the market for unskilled workers when the demand is relatively elastic for those workers. Area B is lost due to the minimum wage, area A is gained, resulting in smaller earnings overall.Figure 4-17.The $2000 tariff on imported automobiles will act like a tax in that market, shifting the supply curve to the left bythe amount of the tariff and resulting in lower quantities exchanged at a higher price. This will encourage con-sumers to substitute into autos produced by domestic firms, increasing the demand for those cars. The price and quantity exchanged of autos produced by domestic firms will rise, resulting in greater revenues for domestic automakers.8. a.Supply down by 5 percent with elasticity of 0.05 means that price must increase by 100 percent.b.Elasticity is a ratio of percentages; it is thus unitless.c.Supply down by 50 percent means that price must increase by 100 percent to keep the price elasticity equal to0.5. Crime should increase if addicts steal to feed their habits. A successful rehab program would shift demand in;quantity would fall by 50 percent and price would stay the same (the shifts would match).d.This policy would shift the supply of pork to the left, raising market prices. If, as argued in this chapter, thedemand for agriculture products is inelastic, higher prices will result in higher farm incomes.e.The income rectangle is larger after the minimum wage is increased. This tells us that the price elasticity ofdemand for unskilled workers if very low; changes in the wage have little impact on the quantity of these laborers demanded.9. a.See diagram.Figure 4-2C HAPTER4: A PPLICATIONS OF S UPPLY AND D EMAND17b.The vacancy rate will fall, there will be a shortage of apartments at the ceiling price.Figure 4-3c.The government might subsidize landlords in order to provide higher compensation for apartments.d.Rent controls limit the amount of compensation that landlords can receive for their property. This limits theirwillingness to maintain property, thus giving rise to the concerns of the European critic.10.The demand curve is given by P= 6.56 -.08Q, the supply curve is perfectly elastic at a price of $2.40 and then at aprice of $2.80. See diagram. The appropriate constant elasticity demand curve is Q = 87.2P-59.Figure 4-4DISCUSSION QUESTIONS1.Define the term elasticity. How does this concept help to explain the general shape and slope of a demand curve?2.True or false: The price elasticity of demand changes as price changes along a linear demand curve. Carefullyexplain your answer.3.I f price elasticity of demand changes along a demand curve, how can we say that a demand curve is relativelyelastic or inelastic? Explain.4.It is easy to understand why a large harvest of corn should lower the per unit price. Explain how that could actuallylower the total receipts farmers get from the corn harvest.5.Oil prices increased more than tenfold between 1973 and 1981 as a result of strategies employed by OPEC, an inter-national cartel. Are you surprised that even the richest societies chose to conserve their oil and related energy products? How might people conserve and economize when gasoline, heating fuels, and electricity have become more expensive per unit? How might the increase in gasoline prices in summer 2000 affect behavior?6.“Any demand curve is almost certain to have both an elastic and an inelastic range.” Can you give an exception? Isit realistic through the range of all prices and quantities?7.How does the introduction of the time element affect price elasticities of supply and demand?18C HAPTER4: A PPLICATIONS OF S UPPLY AND D EMAND 8.“Knowing how to calculate the slope of a straight line enables you to calculate the elasticity for any point on anycurve.” Discuss the relationship between price elasticity of demand and the slope of the demand curve.9.What is the difference between the price elasticity of demand and the price elasticity of supply?ernments interested in maximizing their total revenue have often taxed products like salt, tobacco, and alcohol.What does this suggest about the elasticity of demand for these goods? Why would they be good targets for taxation?11.Evaluate the following charge: If the government grants an industry a subsidy of $1 per unit and the price does notfall by the full $1, then the industry is cheating the consumer.12.Under what circumstances might black markets arise? What can be done about them? Are black markets necessari-ly bad?13.Suppose the government wishes to set a lower bound on the price of wheat. Compare and contrast the methods itcan use to achieve this goal with respect to the what, how, and for whom questions.14.Many economists are against minimum-wage laws. Discuss why a legal minimum wage set above equilibrium maylead to unemployment. How do the price elasticities of demand and supply help to determine the extent of this unemployment? Can people who earn lower wages be helped in ways that will not lead to unemployment? (Think about both sides of the market as you answer this question.)15.According to some estimates, the total revenues from the sale of pornography in Denmark declined by 25 percent inthe year immediately following the liberalization of the censorship laws. From this evidence, some sociologists have determined that legalizing this type of activity reduces the demand for it. Do you agree? Why or why not?What effects on the supply side might be deduced?16.What factors are likely to make demand for a commodity either elastic or inelastic? What factors are likely toinfluence elasticity of supply?17.How do you think a minimum-wage law might affect the market for unskilled labor? For skilled labor?ESSAY QUESTIONS1.The Brazilian government used to destroy a substantial portion of its coffee harvest to increase its revenue fromcoffee exports. What conditions are essential to make this type of policy economically beneficial for the country?2.A witness in a recent congressional hearing argued that consumers budgeted a fixed amount of expenditure for theproducts of his industry. Assuming his statements to be correct, what is the elasticity of demand for the industry’s products? Why?3.On a straight-line demand curve, point out the ranges where demand is elastic, inelastic, and unitary elastic. Whydoes the elasticity vary along a straight-line demand curve? Draw a graph that relates these regions to the slope of a total revenue curve.4.Consider two markets, the apple market and the orange market. Draw a supply-and-demand diagram for eachmarket. Indicate the equilibrium price and quantity of P0and Q0, respectively.a.I f there were an outbreak of an apple disease, illustrate the new equilibrium price and quantity in the applemarket by P1, Q1.b.How might this affect the orange market? Show these effects on your diagram.Redraw the original diagram for the apple market. Now suppose the government wishes to encourage the production of apples and gives the producers of apples a subsidy of x dollars per apple.c.Indicate the new equilibrium price and quantity in the apple market by P2, and Q2, respectively.d.Explain whether the equilibrium price will increase or decrease by more or less than the amount of the subsidyper apple.e.Shade in the total subsidy the government will pay to the apple industry each period.f.Describe how this subsidy will be shared between consumers and producers.5.The supply and demand curves for wheat are very inelastic. Those for sugar are very elastic. If a sales tax of $1 perunit is put on each of these goods, in which case will the incidence fall largely on the consumer and in which case largely on the producer? In which case is the revenue raised by the tax higher? Use diagrams to illustrate your answers.6.Elasticity is the same as slope. Comment on the validity of this statement.7.Explain the relationship between the elasticity of demand and revenue of a business.。
