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21

NOTES



Supply <1 ,1, ,;

SECTION III ANS\NT:RS TO QUESTIONS

Warm-up questions: A (c). (b). (h). D (a). E (a). F ((). H (b). I (a). J (b). (b), L Iei. \i

(d). N (d).

General quesdons: 1 (d). A cliauge in ilie piice ol cand\ Ixirs resulis in a along the supph cur\c. J (dl. A shortage occurs when the market price is set below the equilibrium price. - .Any good sold at a - price is scarce; if die good in quesdon wasnt scarce, one wouldnt need to give up anything to have it. Air is such a good. 3 (b). Reni controls suppress price compedtion. so non-price compeudon will increase; dogless older people ol European origin who are ahead} here will ha\e an ad\iiii-tage at such competition. New out-ofstate students will likely be at a dLsadvantage and so will rush fraternines and sororiues in greater numbers diaii otherwise. 4 (e). Surpluses would onh result when a price floor was estal> lished above the market clearing price. 5 (c). This iiiav be expected to reduce demand and hence pardally or completely reduce shortages. 6 (d). . , B. and are each prepared to supply Uvo units each at a price of S8; D and E are prepared to supply one unit at this price. 7 (d). Simply sum the contribudons of the indiridual firms at each price. 8 (d). At $4 per dcket, the quandt} demanded is 35,000, while supply is fixed at 30,000. 9 (e). This is the definition of market equilibrium. 10 (e). A maximum price above equilibrium will not affect trading. 11 (a). Tliis will result in a movement along a supply cui\e. 12 (a). This will tend to reduce die price of a major input into automobiles, steel. 13 (c). Again, a movement along the supply curve. 14 (d). .At $8 the quaiuit\-supplied will equal that demanded. 15 (b). The quandt}- supplied ai S8. 1 fi (e). First recognize that this one cannot be done using discrete methods. Not only are most prices and quantities along the deinand schedule not given, you would ha\e lo do tw-o-hiiiidred separate cakulanons if diey were. Since the demand curve is linear, then the consumer surplus is given by x Sj x 200,000 = 5800,000. 17 (d). At SIO. quandt}- demanded less quantit} supplied is -100,000. Negative excess demand is a surplus. 18 (a). At $8, quandt}demanded less quamit}-,suf> plied is positive, so excess demand (a shonage) exists. 19 (c). Al SIO exacdy 2.500 would be sold. .Above diat price less than 2,.5O0 would be .sold. 20 (d). The quantity- bought at the price floor will be less than at die equilibrium price. 2) (b). Beware! 22 (a). See text. 23 (c). See text. 24 (b). See Senate testimom of .AFL-CIO President Wayne Kirkland. March 25, 19S1. If von were naive enough to pick answer (d), we diiiik vou should

talk to us about buying a certain used car we have for .yalel 25 (a). The camping fee is below the market clearinpl price and people compete by making early reservations. Noie dial die facis in this que.sdon permit no iuferenceJ that an excess supply of motels exists. There will be i for all w henever die market clears. By the way, if parks reallv "belong to us all" in a meaningfiil sense, whyl cant we use them whenever we like? 26 (e). At the prices charged (in some cases zero prices), die quandt)- people I w-ish to buy exceeds that a\ailable, so excess demand I definidon. 27 (c). The saringswill be SI per fillup, andii costs Vv hour in waiting time to capture them, so the i is $2 per hour. B) the way, while the government; times mandates shortages like this one "to protect poor," the minimum wage makes it illegal to hire them j wages this low. 28 (a). As a lottery winner, I may value spot in Santa Ynez aparunents at $ per month. If \ value the same spot at $4( per month, ive could strike! deal that would make us bodi better off if 1 resold to ] at some price between $300 and $400 per monti Because the University does not charge a market de price, gains from tiade such as diis one are potend possible. 29 (a). See text 30 (d). The oppormnity ( of the bus trip is $10 plus the loss of income from working, $40. 31 (a). At $8 die opportunity costs] identical; below that wage, die oppormnit) cost of t die bus is lower. 32 (c). When the v-alue of die time; waiting in line ts considered, the opportunity cost at t high-priced foodstore may be much less. 33 (a). Alas,! only $1 in this all too realistic example. Dont forget ( cost of the return. That is why we mosd) see poor peo riding the bus and why efforts to increase rapid lidership by cutting price usually fail to affect ride much. Even if die bus trip were free, the opportunii)< of taking the car is much lower for almost evei-)Oiie (c). See text. 3 5(e). At $6 die quantitydemaiic 4000; the quandt) supplied is 2000, so there is cx demand of 2000. 36 (d). You can see it b\ drawing] picture. 37 (a). Transactions costs are those costs 1 buy the buyer (or seller) which are not received as i pensauon by the seller (or buyer). The time spent ing in line is an example. Such costs rise when the autl iues require )-ou to repeatedly wait in line to buvj beciuise )ou are prohibited from filling )our tank. Mate go\ernmeuLs responded to tke political demanj "do .something" by making matters worse. 38 (a), price ofzero, more students wanted enroUnieiu iiiuij course dien could be accommodated. This, is deinand by definidon. Some form of non-price comp uon is inevitable in such situations. B\it then we have to tell you that, did we?



SECTION IV: MARKET FORCES

So far, we have seen via demand and supply analysis how capitalist economies make the -whzt and ,,who decisions. In this section will put some muscle ijnto these concepts. First we show how changes in I equilibrium quanun, and price occur and then we introduce the factors yvhich determine the magnitude Fof these changes in the competiti\ e economy. We also Fpresent a few of the many applications of the supply id demand model.

4GES IN DEMAND

5j Figure I illustrates the market for widgets, ippose that initially the market is in equilibrium with i.price P and quantity Q. Now consider an increase in he market demand brought about, for example, by a ige in consumer income. As we saw in Section II, lis causes a rightwaid shift in the demand curve from to D. Consequendy P and Q cannot remain the Juilibrium price and quandty: excess demand will [>ull the price and quantity up vard to the new values of and Q. Moreover, since both price and quandt)- , total revenue (PQ) must also rise. On the other id, the decrease it: demand from D to D shown in gure II has precisely the opposite effects. At the old julUbrium price of P excess supply exist.s, pulling , and quantity down to the lower equilibrium \al-les of P and Q. Since bodi price and quaiuity now

take on smaller values, it follows that total revenue (PQ) must in this case fall. Of course, will have a movement along the supplv curve whenever demand increases or decreases.

CHANGES IN SUPPLY

In Figure 111 we present the effect of an increase in supply, caused perhaps by technical progress. As we saw in Section 111, the supply increase shifts die market supply curve rightvard from S to S. As the figure illustrates, the supply increase lowers the equilibrium price from P to P, but raises the equilibrium quandty from Q to Q. Figure \ illustrates a decrease in supply, caused perhaps b) an increase in wages. The supply decrease increases the equilibrium price and decreases the equilibrium quantity. Since supply shifts change price and quandt) sold in opposite directions, we can make no prediction concerning whether total revemie (PQ) yvill rise or fall without further information. We can readily see, hoyvever. that changes in supply move us along the demand curve to new prices and quandues.

SIMULTANEOUS SHIFTS

supply and demand shift simultaneously, the effect on equilibrium price and quantit) may be ambiguous. We illustrate through an example.



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