Equilibrium Pricing

Use the following scenarios to practice graphing with the pricing model.

 

1. Because the summer of 1995 was so hot, the fall pumpkin harvest was unusually small. When people bought pumpkins for Halloween, they found higher prices than they did the year before. Use a graph of demand and supply to show why the price of pumpkins increased. What do you think would have occurred if the price of pumpkins had not increased? Explain your answer.
2. As more schools require students to wear uniforms, more uniforms will have to be produced. Use your knowledge of demand, supply, and market-clearing prices to explain how our free enterprise economy is likely to insure the production of these uniforms. What effect do you think these events will have on the price of school uniforms?
3. The United Network for Organ Sharing has reported that more than 40,000 U.S. citizens are on a waiting list for organ transplants. This number has more than doubled since 1987, reflecting the growing demand for organs. Meanwhile, the supply of organs is growing much slower. More than 3000 people died in 1994 while waiting for organs. Some people argue that people should be able to buy and sell organs, a practice now prohibited by the National Organ Transplant Act of 1984. Others sneer at the idea and argue that organs should be provided only by people’s generosity.

Putting aside your feelings about such an issue, do you think that a legal market in organs would save more lives by increasing the number of organs available? Explain by using an analysis of demand, supply, and equilibrium pricing. Would a legal market in organs change the way they are rationed? Explain.

4. Suppose you belong to a national organization called Hamburger Lovers USA. Its main purpose is to reduce the price of hamburgers. To accomplish this, the organization wants the government to establish a maximum price (price ceiling) that ranchers can charge for beef. The reasoning is that with a lower cost of beef, supermarkets and hamburger chains will charge less. Do you think this reasoning is correct? Explain.
5. The price of bottled water has gone up in recent years. In fact, the cost of a gallon of bottled water exceeds the cost of a gallon of gas (on average). Explain using supply and demand curves why the cost of bottled water has gone up much more than the cost of tap water.


6. Like many schools, Collierville High School has banned the use of backpacks to transport textbooks from class to class. Use supply and demand curves to explain what effect the new rules have had on the backpack market. Assuming that most schools follow the example of Collierville High School, what effect would the new rules have on backpack prices?
7. Since many people who work full time earn wages that keep them in the poverty range, some government officials have proposed an increase in the minimum wage. Assuming that the average wage for unskilled labor is approximately $5.25 per hour, use your knowledge of supply and demand to predict the effect of an increase in the minimum wage to $6.00 per hour.  What effect would an increase in the minimum wage have on the number of people employed? What effect would an increase in the minimum wage have on the number of teenagers employed?
8. Due to the large number of companies competing for cellular phone usage, the price per minute for cellular phone calls has decreased dramatically in recent years. Use supply and demand curves to explain why the price of cellular phone calls has decreased in recent years.
9. Kiwi, a relatively unknown fruit a decade ago, has become much more common in U.S. grocery stores. A good source of vitamin C, kiwi has become very popular among health-conscious consumers. Yet, as the demand for kiwi has increased, the price of kiwi in grocery stores has decreased. Use your knowledge of supply and demand curves to explain how an increase in the demand for kiwi has been accompanied by a decrease in the equilibrium price.
10. Aluminum is used by business to insulate many items. Due to high energy costs and aluminum’s insulating ability, the demand for aluminum has increased dramatically. Draw a graph that indicates what should happen to the price of aluminum in the short run, everything else equal.  Now draw a graph that indicates what should happen to the price of aluminum in the long run. Why do you predict this result?

 

11. Economic textbooks are generally in low demand, due to the fact that most school districts do not require economics for graduation from high school. Two new laws were passed in Florida that might change the market for economic textbooks. The first law requires economics for graduation from high school. What will be the effect of this new law on the market for economic textbooks in the short run? Draw a graph to indicate this change. The second law provides, at no cost to students, the opportunity to take economics for college credit. The school district will pay the cost of books, supplies, and exams. How will the second law change the market for economic textbooks? Which law will have the greatest impact on the market for economic textbooks? Why?

 

12. Clocks are more accurate than ever before yet their price in the market has fallen over the last 10 years. Use economic reasoning to explain this phenomenon. Draw a graph that illustrates the change(s) in the market for clocks.

 

13. American Flags became very expensive right after the September 11 attacks, yet many people who wanted flags and were willing to pay the higher price were unable to do so. The stores ran out of flags. Use a graph to illustrate how this can happen in a free market. What might explain the more recent decline in flag prices? Show this change graphically.

 

14. Answering machines have become common place in both businesses and homes. The government, in an attempt to balance the budget, decides to put a tax on the use of answering machines in both businesses and homes. Draw two graphs, one that indicates how this new tax will affect the market for answering machines and one that indicates how this new law will affect the overall economy (overall demand and overall supply).

 

15. Lithium batteries are common in many, but not all, electronic products. To encourage the use of lithium batteries over the use of more polluting batteries, the government has agreed to pay a subsidy to businesses who switch their products to lithium batteries. Draw a graph that illustrates the effect of this law on the market for electronic products in general and a second graph that illustrates the effect of this law on the market for lithium batteries in particular.

 

16. Apples have been determined to have previously-unknown health benefits. A recent medical report publicized world-wide attributes cancer-fighting, anti-aging, and weight-loss benefits to the consumption of raw apples. What affect will this report have on the raw apple market in the short run? What affect will it have on the applesauce market? What affect will it have on the overall apple market in the long run? Draw graphs to illustrate these effects.

 

17. Hot dogs are the subject of a new marketing campaign to get Americans back in the stadiums at both minor league and major league baseball games. They are being touted as the way citizens can show support both for the country and America’s favorite pastime. Graphically demonstrate the effect this campaign will have on both the market for hot dog buns and the market for ground hamburger meat.

 

18. The new Family Leave Act guarantees employees 12 weeks of unpaid leave in the event of family illness or the birth of a child. Employers must offer the returning employee comparable work at the same salary upon return to work. New proposals would like to require businesses to offer 12 weeks of paid leave. Graphically illustrate the effect this law will have on the labor market and the overall economy (overall demand and overall supply).

 

19. Suppose that the federal government guarantees dairy farmers that they will buy enough milk to maintain a price of $3 per gallon. If market quantity demanded at $3 is 1 billion gallons, and if market quantity supplied is 1.5 billion gallons, then what will the government do? How will this action affect the market for milk?

 

 

20. Suppose a new pollution tax of $0.01 per kilowatt-hour of electricity is imposed on coal-fired power producers by the federal government. How will this tax  affect the market for electricity served by these power plants?

 

21. Suppose that the average equilibrium monthly rental price of apartments and rooms in a college town had been steady at $600. Then the college expanded enrollment from 10,000 to 12,000, and suddenly there was a shortage of rental housing at the prevailing price of $600. What is going to happen to the rental price of apartments in the short term? What do you expect will happen to the market for apartments in the long term?

 

22. Suppose that the City of Arcata, California imposes rent control so that rents cannot exceed $500 per month on one bedroom rental units. Suppose that $500 had also been the equilibrium rental price in Arcata before a huge new apartment complex was built in the nearby town of McKinleyville, where rents are $400 per month. What is going to happen to the market for apartments in Arcata?

 

23. The price of laser jet printers has been steadily falling the last five years. Draw a graph that explains why the price of these printers has been falling. Laser printer cartridges are a complementary product. Why hasn’t the price for laser printer cartridges fallen at the same rate at the printers? Draw a graph to explain why.

 

24. The use of automatic teller machines changed the way banks do business. It did not take long for consumers to discover the convenience of using a “cash” card. Not long after ATM cards became popular, businesses began to realize the convenience of accepting “check” cards instead of either checks or credit cards. Use your knowledge of supply and demand to predict the effect that the use of “check” cards have had on the market for printed checks. Do you think that the price for printed checks has changed? In what way? Draw a graph to illustrate your prediction.

 

25. OPEC decided recently to cut the production of oil. Even non-OPEC countries like Mexico and Russia agreed to cut production. What effect do you think this decision will have on the price of oil? Draw a graph to illustrate this effect. If the world economy continues in a recession, will OPEC’s decision have the same effect?

 

26. During the most recent Super Bowl, the cost of a 30-second ad cost about $1 million. Before and after the game, ad prices were much lower. Draw a graph that illustrates why the price of a Super Bowl ad is so much higher than other ads.

 

27. A new study by some medical experts reports that the consumption of anti-oxidants prevents many kinds of skin cancer. Assuming that fresh fruits and vegetables like blueberries, grapes, and tomatoes are high in anti-oxidants, predict the effect that this medical report will have on the market for these products.

 

28. The U.S. Postal Service recently announced that it will increase the price of a first-class stamp some time this year. Following the September 11 terrorist attacks and the subsequent anthrax scare, the number of first-class letters has dramatically decreased. Use your understanding of equilibrium pricing to indicate whether the decision by the U.S. Postal service makes sense.

 

29. Enron, an energy supplier once favored by many investors, recently announced that it will not be able to pay back all its debts. In essence, the company is bankrupt. Following news reports that Enron used accounting practices that were either faulty or illegal, the value of Enron stock plummeted. Use your understanding of supply and demand to predict the impact of Enron’s demise upon the overall stock market.

 

30. The most recent economic data indicate that the recession is either over or will be over soon. Economists base this conclusion on the fact that manufacturers are increasing their production for the first time in two years. Use your understanding of supply and demand to predict the effect that this announcement will have on the overall wages earned by skilled laborers.

 

31. In the past 5 years the popularity of fly-fishing has increased dramatically. More people are fishing with fly rods than ever before. In fact, all the goods commonly used in fly-fishing are selling at much higher prices.  Graph the change in the market for fly-fishing paraphernalia that accounts for this price change. What do you expect to happen in this market to bring the price back down? Graph this change as well.

 

32. Bearded dragons are exotic animals that reproduce well in captivity. Due to an increase in the popularity of bearded dragons as household pets, more breeders of bearded dragons can be found. Use your understanding of supply and demand to predict changes in the price of bearded dragons. Graph this prediction. What factors may influence the outcome of your prediction?

 

33. The terrorist attacks of September 11 have increased the level of insecurity in this country. Given that security has become a major priority for many Americans, what changes do you expect to see in market for good/services? What goods/services do you expect to see increase in price? What goods/services do you expect to see decrease in price? Draw two graphs, one that explains the increase in price for some goods/services and one that explains the decrease in price for other goods/services.