Wednesday, May 28, 2008

Supply & Demand - Questions for Further Study

1. Using supply & demand. Use supply and demand analysis to illustrate the likely effects of a hurricane in Florida on the equilibrium price and quantity in each of the following markets.

a. the market for orange juice. (Hint: The oranges grown in Florida are primarily used to make orange juice.)
b. the market for plywood. (Hint: Plywood is used to protect windows from the high winds associated with hurricanes.)
c. the market for batteries. (Hint: Hurricanes frequently know down power line, causing many people to be without electricity for days or weeks.)
d. the market for admission tickets to theme parks in Orlando. (Hint: Assume the hurricane causes heavy rain and wind throughout the Orlando area. Most of the attractions at these parks are outdoors.)
e. tickets for airline travel from Florida during the few days before the hurricane makes landfall. (Hint: Voluntary and mandatory evacuations are common when hurricanes threaten coastal areas.)

2. When supply and demand curves shift, there is a change in the equilibrium price and quantity. What is the relationship between the slope of the curves and the size of the changes in price and quantity?

3. Economists define the price elasticity of demand as the percentage change in the quantity demanded divided by the percentage change in the price of the product. How is elasticity useful in supply and demand analysis?

4. What happens to the equilibrium price and quantity when there is an increase in supply and demand? Does the answer depend on the magnitudes of the shifts?

5. What happens to the equilibrium price and quantity when there is a decrease in supply and demand? Does the answer depend on the magnitudes of the shifts?

6. What happens to the equilibrium price and quantity when there is an increase in supply and a decrease in demand? Does the answer depend on the magnitudes of the shifts?

7. What happens to the equilibrium price and quantity when there is a decrease in supply and an increase in demand? Does the answer depend on the magnitudes of the shifts?

8. Another example of a price control is a law that sets a minimum price that may be legally charged for an agricultural product, such as milk. Is this farm price control a price ceiling or a price floor? Draw a supply and demand diagram to illustrate the market price, equilibrium price, quantity supplied, quantity demanded, and the surplus or shortage when there is a binding farm price support. What is the social objective of a farm price support? What other methods could be used to achieve this objective? Would they be better than farm price supports?

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