Supply & Demand | Use supply and demand curves to illustrate how each of the following events would affect the price of butter and the quantity of butter bought and sold

Use supply and demand curves to illustrate how each of the following events would affect the price of butter and the quantity of butter bought and sold:

a. An increase in the price of margarine.

b. An increase in the price of milk.

c.  A decrease in average income levels.

ANSWER

a. An increase in the price of margarine.

Butter and margarine are substitute goods for most people. Therefore, an increase in the price of margarine will cause people to increase their consumption of butter, thereby shifting the demand curve for butter out from D₁ to D₂ in Figure 2.2.a. This shift in demand causes the equilibrium price of butter to rise from P₁ to P₂ and the equilibrium quantity to increase from Q₁ to Q₂.

                       

Figure 2.2.a

b. An increase in the price of milk.

Milk is the main ingredient in butter. An increase in the price of milk increases the cost of producing butter, which reduces the supply of butter. The supply curve for butter shifts from
S₁ to S₂ in Figure 2.2.b, resulting in a higher equilibrium price, P₂ and a lower equilibrium quantity, Q₂, for butter.

                       

                               Figure 2.2.b

Note: Butter is in fact made from the fat that is skimmed from milk; thus butter and milk are joint products, and this complicates things. If you take account of this relationship, your answer might change, but it depends on why the price of milk increased. If the increase were caused by an increase in the demand for milk, the equilibrium quantity of milk supplied would increase. With more milk being produced, there would be more milk fat available to make butter, and the price of milk fat would fall. This would shift the supply curve for butter to the right, resulting in a drop in the price of butter and an increase in the quantity of butter supplied.

c.  A decrease in average income levels.

Assuming that butter is a normal good, a decrease in average income will cause the demand curve for butter to decrease (i.e., shift from D₁ to D₂). This will result in a decline in the equilibrium price from P₁ to P₂, and a decline in the equilibrium quantity from Q₁ to Q₂. See Figure 2.2.c.

                              Figure 2.2.c

Demand | Price of Good Rise - Substitute Good

If the price of a good rises, what impact will this have on a cheaper substitute good?

Your Answer:

Substitute goods are any good that can be used instead of another good to more or less take its place. Common sense and economic principles assert that if the price of any good rises, the demand for a cheaper substitute good also rises as people seek out alternatives that may be less costly.

Source: Heyne, Boettke, and Prychitko, The Economic Way of Thinking, 11/e, Pearson

http://wps.prenhall.com/bp_heyne_econway_11/33/8535/2184986.cw/-/2184999/index.html

Demand | What Else is Needed to Change the Demand?

Since a change only in the price of a good does not change the demand for that good, what else is needed to change the demand?

Your Answer:

For the demand of a good to change, consumers must be willing to pay higher prices for any quantities of a good than was previously the case, or they decide that they will only pay lower prices for any quantities of a good than was previously the case. 

Changes in attitudes toward the good or toward a compliment or substitute good must change to reflect a wholesale change in demand.

Source: Heyne, Boettke, and Prychitko, The Economic Way of Thinking, 11/e, Pearson

http://wps.prenhall.com/bp_heyne_econway_11/33/8535/2184986.cw/-/2184999/index.html

Supply & Demand | Additional Resources | Moving Along the Curve | Shifting the Curve | Government Intervention

Supply & Demand

Additional Resources

Demand Curve – Moving Along the Curve

http://www.college-cram.com/study/economics/supply-and-demand/demand-curve-moving-along-the-curve/

Demand Curve – Shifting the Curve

http://www.college-cram.com/study/economics/supply-and-demand/demand-curve-shifting-the-curve/

Supply Curve – Moving Along the Curve

http://www.college-cram.com/study/economics/supply-and-demand/supply-curve-moving-along-the-curve/

Supply Curve – Shifting the Curve

http://www.college-cram.com/study/economics/supply-and-demand/supply-curve-shifting-the-curve/

Equilibrium Curve – Shifting the Curve

http://www.college-cram.com/study/economics/supply-and-demand/equilibrium-curve-shifting-the-curve/

Government Intervention and Economics: Price Ceiling

http://www.college-cram.com/study/economics/government-intervention/price-ceiling/

Government Intervention and Economics: Price Floor

http://www.college-cram.com/study/economics/government-intervention/price-floor/

Resources provided from www.College-Cram.com

Supply & Demand | How Do We Use Information To Predict Market Behavior?

If we can estimate the supply and demand curves for a particular market, how do we use that information to predict market behavior?

Your Answer:

With an estimate of supply and demand, it is possible to predict the behavior of price and quantity in a market. Supply and demand estimates are used to calculate the market-clearing price and the corresponding equilibrium quantity, where quantity demanded equals quantity supplied. We can also use supply and demand estimates to predict the direction of price and quantity in the market as variables other than price change. Predicting market behavior, therefore, means examining the impact of changes in economic variables, such as income and the prices of other goods, on equilibrium price and quantity.

Source: Pindyck / Rubinfeld, Microeconomics, 7th edition, Pearson

http://wps.prenhall.com/bp_pindyck_micro_7/100/25712/6582421.cw/index.html

Supply & Demand | Short-Run / Long-Run Price Elasticity of Demand

In July 2008, average prices for household energy were 18% higher than in July 2007. Fuel oil and other fuels prices were up 61%, while natural gas and electricity prices were up 18%, according to the U.S. Bureau of Labor Statistics. How is the short-run price elasticity of demand likely to differ from the long-run price elasticity of demand for household energy products?

Your Answer:

For most products, long-run demand is more elastic than short-run demand, and the demand for household energy products is no different. 

For the winter of 2008, many consumers will pay higher prices for fuel oil, but will likely consume a slightly lower quantity: Demand will be inelastic in the short run. 

As time passes, however, many households will install more energy efficient windows and insulation to minimize heat loss in the winter. Some households will switch to using electric space heaters or electric heating systems as electricity prices rise more slowly than home heating oil prices. Some householders will move to smaller homes to reduce home heating needs over time as well. 

In the long run, the percentage change in quantity of home energy demanded in response to price will be much larger: Demand will become much more price elastic.

Source: Pindyck / Rubinfeld, Microeconomics, 7th edition, Pearson

http://wps.prenhall.com/bp_pindyck_micro_7/100/25712/6582421.cw/index.html

Supply & Demand | Complementary Good

Home mortgage loans and new homes are complementary goods. Interest rates fell beginning in the fall of 2001 and stayed at historically low levels for several years. Using the supply and demand model, discuss how falling interest rates affect the equilibrium price and quantity of the new home market.

Your Answer:

Falling interest rates cause the monthly payments for a new home to fall, all else remaining equal, which makes the purchase of a new home more affordable. 

As the interest rate and monthly mortgage payments fall, the demand for new homes increases, since mortgages and new homes are complementary products. The increase in demand for new homes is illustrated by a right shift in the demand curve. 

All else remaining equal, the equilibrium price and quantity of new homes will rise when interest rates fall.

Source: Pindyck / Rubinfeld, Microeconomics, 7th edition, Pearson

http://wps.prenhall.com/bp_pindyck_micro_7/100/25712/6582421.cw/index.html

Supply & Demand | Market Mechanism

The market mechanism is the tendency for prices to change until the quantity demanded equals the quantity supplied. Provide an explanation how the market adjusts to the market equilibrium when the price in the market is not originally set at the market equilibrium price.

Your Answer:

Market equilibrium is a situation in which there is no surplus or shortage of output, and no pressure for the price to change. Free markets have a tendency to settle down in equilibrium.

When price is higher than the market equilibrium, a surplus develops. A surplus means that the quantity supplied is greater than the quantity demanded, and the market is out of equilibrium. Disequilibrium in this case puts downward pressure on price. As the price falls, the quantity demanded increases, as more consumers are willing and able to purchase the good. As the price falls quantity supplied falls, as firms are less willing to bring the good or service to market. Once the price falls to the point where the quantity demanded equals the quantity supplied, the market is in equilibrium with no tendency to change.

When price is lower than the market equilibrium, a shortage develops. A shortage means that the quantity demanded is greater than the quantity supplied, and the market is out of equilibrium. Disequilibrium in this case puts upward pressure on price. As the price rises, the quantity demanded falls, as fewer consumers are willing and able to pay for the good or service. Quantity supplied rises as the price rises, until the market equilibrium price is reached and the quantity demanded equals the quantity supplied.

Source: Pindyck / Rubinfeld, Microeconomics, 7th edition, Pearson

http://wps.prenhall.com/bp_pindyck_micro_7/100/25712/6582421.cw/index.html

Preliminaries | Microeconomist & Designer of Public Policy

Describe the job of a microeconomist in the corporate world. Also, describe the job of a microeconomist as a designer of public policy.

Your Answer:

In the first case, a microeconomist studies the supply and demand conditions of the market in which the corporation does business. 

On the supply side, the economist studies both the firm itself and the industry in which the firm operates. Among other issues, the economist studies the nature and direction of competition, cost and production methods, as well as price and profit strategies and expectations. 

On the demand side, the economist studies the determinants of demand for such as the number of buyers, their income, tastes and preferences, their expectations, as well as the price of related goods, both substitutes and complements. Consumer behavior and responsiveness to price changes are also key aspects of microeconomic analysis.

As a designer of public policy, a microeconomist studies policy choices and their effect on consumers, businesses and market prices and output levels. 

The economist studies benefits and costs associated with government policies, and is concerned with the efficiency, fairness, and equity results of such policies. 

The microeconomist also helps to determine the optimal level of an activity such as the production or consumption of a good or service. The economist lists and studies options and presents information that can be used by policymakers to make more informed policy decisions.

Source: Pindyck / Rubinfeld, Microeconomics, 7th edition, Pearson

http://wps.prenhall.com/bp_pindyck_micro_7/100/25712/6582392.cw/index.html