1 CHAPTER 4 WORKING WITH SUPPLY AND DEMAND E CONOMICS U PDATED S ECOND E DITION R OBERT E. H ALL S TANFORD U NIVERSITY M ARC L IEBERMAN N EW Y ORK U NIVERSITY

ECONOMICS UPDATED 2e / HALL & LIEBERMAN CHAPTER 4 / WORK WITH SUPPLY AND DEMAND © 2003 South-Western 2 Figure 1Price Ceilings in the Market for Maple Syrup Number of Bottles of Maple Syrup Price per Bottle 5,000 E D S 3.00 T $4.00 R 6,0004,000 V 2.00

ECONOMICS UPDATED 2e / HALL & LIEBERMAN CHAPTER 4 / WORK WITH SUPPLY AND DEMAND © 2003 South-Western 3 Figure 2A Price Floor in the Market for Nonfat Dry Milk Millions of Pounds Price per Pound S D K $0.90 J A

ECONOMICS UPDATED 2e / HALL & LIEBERMAN CHAPTER 4 / WORK WITH SUPPLY AND DEMAND © 2003 South-Western 4 Figure 3Reinterpreting the Supply Curve Quantity Price per Unit S 60 A $1.50 B

ECONOMICS UPDATED 2e / HALL & LIEBERMAN CHAPTER 4 / WORK WITH SUPPLY AND DEMAND © 2003 South-Western 5 Figure 4The Market for International Air Travel Tickets (Millions per Year) Price per Ticket S D A 700 B 10 S ´ $800

ECONOMICS UPDATED 2e / HALL & LIEBERMAN CHAPTER 4 / WORK WITH SUPPLY AND DEMAND © 2003 South-Western 6 Figure 5Calculating Price Elasticity of Demand 1,500 1,000 B A D D

ECONOMICS UPDATED 2e / HALL & LIEBERMAN CHAPTER 4 / WORK WITH SUPPLY AND DEMAND © 2003 South-Western 7 Figure 6Elasticity and Straight-Line Demand Curves Quantity Price... and since equal quantity decreases (horizontal arrows) are larger and larger percentage decreases... Since equal dollar increases increases (vertical arrows) are smaller and smaller percentage D... demand becomes more and more elastic as we move leftward and upward along a straight line demand curve.

ECONOMICS UPDATED 2e / HALL & LIEBERMAN CHAPTER 4 / WORK WITH SUPPLY AND DEMAND © 2003 South-Western 8 Figure 7Extreme Cases of Demand

ECONOMICS UPDATED 2e / HALL & LIEBERMAN CHAPTER 4 / WORK WITH SUPPLY AND DEMAND © 2003 South-Western 9 Table 1Effects of Price Changes on Expenditure Where demand is:Aprice increase will:Aprice decrease will: Inelastic(|| < 1)increaseexpendituredecrease expenditure unitaryelastic(||=1)cause no change in expenditure cause no change in expenditure elastic(|| > 1)decrease expenditureincrease expenditure

ECONOMICS UPDATED 2e / HALL & LIEBERMAN CHAPTER 4 / WORK WITH SUPPLY AND DEMAND © 2003 South-Western 10 Table 2Effects of Price Changes for Laptop Computers Price perQuantity DemandedTotal Monthly Expenditure Laptop (P)(per Month) (Q)(P 3 Q) $1,000600,000$600 million $1,500500,000$750 million $3,000200,000$600 million $3,500100,000$350 million

ECONOMICS UPDATED 2e / HALL & LIEBERMAN CHAPTER 4 / WORK WITH SUPPLY AND DEMAND © 2003 South-Western 11 Figure 8Elasticity and Total Expenditure Quantity of Laptops Price per Laptop A D 100,000200,000300,000400,000500,000600,000 $3,500 3,000 2,500 2,000 1,500 1, B

ECONOMICS UPDATED 2e / HALL & LIEBERMAN CHAPTER 4 / WORK WITH SUPPLY AND DEMAND © 2003 South-Western 12 Table 3Some Short-Run Price Elasticities of Demand SpecificBrandsNarrowCategoriesBroadCategories TideDetergent–2.79Transatlantic Air Travel–1.30Recreation–1.09 Tourism in Thailand–1.20 Pepsi –2.08GroundBeef–1.02Clothing–0.89 Coke–1.71Pork–0.78Food–0.67 Milk–0.54Imports–0.58 Cigarettes–0.45Transportation–0.56 Electricity–0.40to–0.50 Beer–0.26 Eggs–0.26 Gasoline–0.20 Oil–0.15

ECONOMICS UPDATED 2e / HALL & LIEBERMAN CHAPTER 4 / WORK WITH SUPPLY AND DEMAND © 2003 South-Western 13 Table 4Adjustments After a Rise in the Price of Gasoline Short Run (a few months or less)Long Run (a year or more) Use public transit more oftenBuy a more fuel-efficient car Arrange a car poolMove closer to your job Getatune-upSwitch to a job closer to home Drive more slowly on the highwayMove 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 & LIEBERMAN CHAPTER 4 / WORK WITH SUPPLY AND DEMAND © 2003 South-Western 14 Figure 9The War on Drugs Quantity Price per Unit P 1 Q 1 D 1 A A S 1 Quantity Price per Unit Q 1 D 1 S 1 Quantity Price per Unit P 1 Q 1 S 1 D 1 (a)(b)(c) A P 1 Q 2 B S 2 P 2 Q 3 P 3 D 2 C

ECONOMICS UPDATED 2e / HALL & LIEBERMAN CHAPTER 4 / WORK WITH SUPPLY AND DEMAND © 2003 South-Western 15 Figure 10Elasticity and the Excise Tax on International Air Travel Tickets (Millions per Year) Price per Ticket S D S ´ $830 B A Price per Ticket S $730 D 11.3 A 7.0 B Tickets (Millions per Year)

ECONOMICS UPDATED 2e / HALL & LIEBERMAN CHAPTER 4 / WORK WITH SUPPLY AND DEMAND © 2003 South-Western 16 Table 5Some Income Elasticities Income Elasticity Income Elasticity Good or ServiceGoodorService FreshFruit1.99Imports2.73 Computers1.71 Transatlantic Air Travel1.40Transportation1.79 CollegeEducation0.55 Cigarettes0.50Recreation1.07 Chicken0.42Clothing1.02 Pork0.34Food0.60to0.85 Fresh Vegetables0.26 Tooth Extraction–0.13to0.47 Ground Beef–0.20 Bread–0.42 Potatoes–0.81

ECONOMICS UPDATED 2e / HALL & LIEBERMAN CHAPTER 4 / WORK WITH SUPPLY AND DEMAND © 2003 South-Western 17 Table 6Income and Spending on Economic Necessities and Economic Luxuries Percent ofPercent ofIncome SpendingIncome SpentSpending onSpent on Incomeon Foodon FoodTransportationTransportation $10,000$ 6,00060%$ 1,00010% $20,000$ 9,60048%$ 2,80014% $40,000$15,36038%$ 7,84020% $80,000$24,57630%$21,95227%

ECONOMICS UPDATED 2e / HALL & LIEBERMAN CHAPTER 4 / WORK WITH SUPPLY AND DEMAND © 2003 South-Western 18 Table 7Some Cross-Price Elasticities ProductsCross-PriceElasticity Margarine with price of butter1.53 Pepsi with price of Coke0.80 Coke with price of Pepsi0.61 Ground beef with price of beef table cuts0.41 Ground beef with price of poultry0.24 Electricity with price of natural gas0.20 Theater with price of all other lively arts0.12 Entertainment with price of food–0.72

ECONOMICS UPDATED 2e / HALL & LIEBERMAN CHAPTER 4 / WORK WITH SUPPLY AND DEMAND © 2003 South-Western 19 Figure 11The Market for Food Quantity of Food Price per Unit of Food P 1 Q 1 D S old technology A (a) S new technology P 2 B Q 2 (b) Quantity of Food Price per Unit of Food D S Bad Weather A P 1 Q 1 2 B S Good Weather P 2 Q

ECONOMICS UPDATED 2e / HALL & LIEBERMAN CHAPTER 4 / WORK WITH SUPPLY AND DEMAND © 2003 South-Western 20 Table 8U.S. Winter Wheat Production Bushels produced1.47 billion1.84 billion1.90 billion Average price per bushel$4.33$3.52$2.50 Total 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 United States, 1996, 1997, and Production figures calculated by authors as total value of sales divided by average price.

ECONOMICS UPDATED 2e / HALL & LIEBERMAN CHAPTER 4 / WORK WITH SUPPLY AND DEMAND © 2003 South-Western 21 Figure 12The Market for Health Care with Coinsurance Examinations per Year Price per Examination 100,000 A D S ,000 B D ´ $100 70