1. 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

2. Carbaugh, Chap. 3 2 Price elasticity of demand Elasticity of Demand elasticity coefficient itemshort runlong run Airline travel0.12.4 Medical care0.30.9 Auto tires0.91.2 Stationery0.50.6 Gasoline0.20.7 Housing0.31.9 Automobiles1.92.2 Movies0.93.7 Jewelry & watches0.40.7 Radio & TV repair0.53.8 Natural gas1.42.1 Estimated price elasticities of demand

3. 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) 450 500 550 600 0100200300400500600 Quantity of tickets 450 500 550 600 0100200300400500600 Quantity of tickets

4. 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 4600 3,000 4,000 5,000 6,000 7,000 400050006000 Attendance 3,000 4,000 5,000 6,000 7,000 400050006000 Attendance

5. Carbaugh, Chap. 3 5 Price elasticity of supply Elasticity of Supply Price elasticity Vegetableshort runlong run Lima beans0.101.70 Cabbage0.361.20 Carrots0.141.00 Cucumbers0.292.20 Onions0.341.00 Green peas0.314.40 Green peppers0.070.26 Tomatoes0.160.90 Cauliflower0.141.10 Celery0.140.95 Spinach0.204.70 Estimated price elasticities of supply

6. Carbaugh, Chap. 3 6 Increasing price of health care Elasticity applied Price ($) S0S0 D1D1 D0D0 A B S1S1 0 50 100 150 200 250 300 350 400 450 0102030 Quantity of health services per mo.

7. Carbaugh, Chap. 3 7 Rent ceilings and housing shortages Price Ceilings and Floors Rent ($) S0S0 D1D1 D0D0 Shortage Rent ceiling A C B 0 300 600 900 1,200 1,500 05001000 Quantity of apartments per mo.

8. Carbaugh, Chap. 3 8 Usury ceilings and credit shortages Price Ceilings and Floors Interest rate S0S0 D1D1 D0D0 Shortage Interest ceiling A C B 4 6 8 10 12 14 048121620 Mill. dollars of loans per week

9. 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 $1.50 020406080100120 Quantity of gasoline (mill. gallons)

10. Carbaugh, Chap. 3 10 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 $8 01234567891011121314151617 Quantity of wheat (mill. bushels)