Copyright ©2005 by South-Western, a division of Thomson Learning. All rights reserved. Contemporary Economics: An Applications Approach By Robert J. Carbaugh 3rd Edition Chapter 3: Demand and Supply Applications

Carbaugh, Chap. 3 2 Price elasticity of demand Elasticity of Demand elasticity coefficient itemshort runlong run Airline travel Medical care Auto tires Stationery Gasoline Housing Automobiles Movies Jewelry & watches Radio & TV repair Natural gas Estimated price elasticities of demand

Carbaugh, Chap. 3 3 Elasticity and airline ticket tax Elasticity of Demand Price ($) S 1 (with tax) S 0 (without tax) D 0 (inelastic) A B Price ($) S 1 (with tax) D 1 (elastic) 520 A C All the tax is shifted to buyersSome of the tax shifted to buyers S 0 (without tax) Quantity of tickets Quantity of tickets

Carbaugh, Chap. 3 4 Elasticity and tuition revenue Elasticity of Demand Tuition $ D0D0 A B Inelastic demand: rising total revenue Tuition revenue = $28 million Tuition revenue = $24 million 5600 Tuition $ D1D1 C D Elastic demand: falling total revenue Tuition revenue = $23 million Tuition revenue = $24 million ,000 4,000 5,000 6,000 7, Attendance 3,000 4,000 5,000 6,000 7, Attendance

Carbaugh, Chap. 3 5 Price elasticity of supply Elasticity of Supply Price elasticity Vegetableshort runlong run Lima beans Cabbage Carrots Cucumbers Onions Green peas Green peppers Tomatoes Cauliflower Celery Spinach Estimated price elasticities of supply

Carbaugh, Chap. 3 6 Increasing price of health care Elasticity applied Price ($) S0S0 D1D1 D0D0 A B S1S Quantity of health services per mo.

Carbaugh, Chap. 3 7 Rent ceilings and housing shortages Price Ceilings and Floors Rent ($) S0S0 D1D1 D0D0 Shortage Rent ceiling A C B ,200 1, Quantity of apartments per mo.

Carbaugh, Chap. 3 8 Usury ceilings and credit shortages Price Ceilings and Floors Interest rate S0S0 D1D1 D0D0 Shortage Interest ceiling A C B Mill. dollars of loans per week

Carbaugh, Chap. 3 9 Market for gasoline with a price ceiling Price Ceilings and Floors Price S0S0 S1S1 D0D0 Shortage Price ceiling A C B $0.00 $0.25 $0.50 $0.75 $1.00 $1.25 $ Quantity of gasoline (mill. gallons)

Carbaugh, Chap Effect of price supports for wheat Price Ceilings and Floors Price S0S0 D0D0 Surplus Price floor A C B $0 $1 $2 $3 $4 $5 $6 $7 $ Quantity of wheat (mill. bushels)