ECN HW

Chapter 3 Worksheet - ECN211/212 Activity 1a – The Demand Curve

Focus on a good or service in a market (this could be anything you like, from ice cream to surf lessons). Create a demand schedule relating market price to quantity demanded of the good or service. Make sure it conforms to the law of demand. Next, graph your data to the side (don’t forget to label your axes!). What does it tell us about the relation between price and the quantity demanded? How does the ceteris paribus assumption associate with this?

P Qd

Activity 1b – The Supply Curve

Next, we’ll look at the supply side of the market for the good you chose in 1a. Create a supply schedule relating market price to quantity supplied. Choose the same price range you did for 1a but unique quantity supplied. Make sure it conforms to the law of supply. Next, graph your data to the side. What does it tell us about the relation between price and the quantity supplied? How does the ceteris paribus assumption associate with this?

P Qs

Activity 1c – The Market

To cap this activity, let’s put demand and supply together to create a marketplace. Transcribe your previous price and quantity numbers (Activities 1a and 1b) to the chart below. For the last column, subtract all Qds from the Qss to calculate any surpluses or shortages in the market at various prices. Next, graph your data to the side. Identify (or estimate) on the graph the equilibrium price (p*) and equilibrium quantity (q*) in the market based on your data (the “market clearing” price, where Qs-Qd = 0).

Relate the idea of market price and output adjustments in a free market to Adam Smith’s concept of the invisible hand from chapter 1.

P Qs Qd Qs-Qd

Activity II – Demand and Supply Shifters

Determinants of demand: Graph a shifting left or right of the demand curve for lemonade, and predict the change in the equilibrium price (p*) and equilibrium quantity (q*). Label all curves (D1, D2, or S). All graphs below reflect only the lemonade market.

a.   Consumer income increases (lemonade is a normal good).

b.   Price of soda decreased (substitute good)

c.   Price of cheetos® decrease (complement good)

d.   A new advertisement campaign is launched: “Got lemonade?”

e.   People move away from the neighborhood

f.   Lemonade is expected to increase in price next week

Determinants of Supply: Graph a shifting left or right of the supply curve for lemonade, and predict the change in the equilibrium price (p*) and equilibrium quantity (q*). Label all curves (D, S1, or S2). All graphs below reflect only the lemonade market.

a.   The price of lemons increase

b.   More firms set up lemonade stands

c.   The city government starts taxing the sale of lemonade

d.   A new machine comes out, making it easier to squeeze juice from lemons

e.   Lemonade is expected to increase in price next week

Activity III – Changes to equilibrium price (p*) and equilibrium quantity (q*) when the demand and/or supply curve shifts

For each scenario below, you will decide if the demand curve will shift, if the supply curve will shift, no curves will shift, or both curves will shift. Shift all relevant curves, and identify the changes to equilibrium price (p*) and equilibrium quantity (q*), if any, as a result.

Consumer income increases (normal good) Consumer population shrinks while cost of inputs increases

Complementary consumer good increases in price Sales tax increases

Improved technology for production Price of the product increases

Price of the product decreases Both buyers and sellers expect the price to increase in the future

Activity IV – The impact of price floors, price ceilings, and efficient markets

1.   Show a market in equilibrium. Shade in the consumer surplus and the producer surplus. What do each of these terms mean? How does Adam Smith’s concept of the invisible hand lead to maximum societal surplus (consumer surplus + producer surplus)?

2.   The state government becomes concerned about the health impacts of smoking, and therefore passes a law that packs of cigarettes cannot be sold for less than $10/pack. Is this an example of a price floor or price ceiling? If the current market price is $5/pack, show the impact this law has in the market place by showing the new consumer surplus and producer surpluses. What unintended consequences may occur because of this new law?

3.   The city government responds to concerns about the lack of affordable housing in a community by declaring it illegal to rent apartments for more than $500/month. If the current average apartment rents for $800/month, is this an example of a price floor or price ceiling? Show the impact this law has in the market place by showing the new consumer surplus and producer surpluses. What unintended consequences may occur because of this new law?

..

Determinants of Demand for Labor: Graph a shifting left or right of the demand curve for plumbers, and predict the change in the equilibrium wage rate (w*) and equilibrium quantity of labor hired (L*). Label all curves (D1, D2, or S). All graphs below reflect only the labor market for plumbers.

g.   The number of new homes under construction increases

h.   A new training program comes out that makes plumbers more effective

i.   Free online videos on “do-it-yourself-plumbing” become more popular

j.   Plumbing tools become more advanced and raises the productivity of plumbers

k.   A significant number of plumbing businesses go out of business due to an economic recession

l.   Governments increase liability insurance requirements for every plumber hired by a firm

m.   A large new tax on plumbers’ tools is implemented

Determinants of Supply for Labor: Graph a shifting left or right of the supply curve for plumbers, and predict the change in the equilibrium wage (w*) and equilibrium quantity of labor hired (L*). Label all curves (D, S1, or S2). All graphs below reflect only the labor market for plumbers.

f.   Many plumbers move to a neighboring state to take advantage of higher wages there for plumbers

g.   New state regulations require more training for plumbers

h.   The federal government subsidies the tuition for plumbers-in-training

i.   The government provides more generous unemployment benefits

j.   The government provides tax credits for plumbers working 20 or more hours a week and have children

Activity II – Issues Impacting the Labor Market

1.   The invention of the self-checkout machine at major groceries stores has changed the way that many shoppers pay for their groceries. It has also had a significant impact on the labor market. For each of the labor segments below, show what has happened to the demand for labor and/or the supply of workers. Show how this has changed the equilibrium wage (w*) and equilibrium quantity of labor (L*).

The market for grocery cashiers The market for payment terminal repair persons

2.   There is much current discussion of raising federal, state, or city minimum wages. To understand the possible benefits and costs to labor and employers, start by graphing the demand and supply for low skilled worker. Identify the equilibrium wage rate (w*) and equilibrium quantity of labor hired (L*). Next, choose a minimum wage (price floor) that is set significantly above the equilibrium wage. Indicate the new quantity of labor hired as well as the surplus of labor in the market. Who benefits from the minimum wage, and who is hurt by it?

Activity III – Financial Markets

1.   For each of the scenarios below, indicate if the demand and/or supply of financial capital will shift, and the impact this will have on the equilibrium interest rate (r*) and equilibrium financial capital (q*).

Businesses cut back on investment due to an economic downturn The minimum wage rate rises

Households become concerned about Social Security’s solvency Interest rates are expected to rise next year

2.   Assume that policymakers are concerned about the high rate of interest being charged by banks, and make a new law that interest rates charged cannot be higher than 8%. Assume this is significantly lower than the equilibrium interest rate, graph the situation below. Is this an example of a price floor or price ceiling? Who will benefit from this policy and who will lose?

Activity IV – The Market System as an Efficient Mechanism for Information

1.   How does knowing the free market price for a good or service provide valuable information for both buyers and sellers? How do price controls in the market place hamper the ability of economic actors to make rational and efficient decisions?