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CHAPTER4ApplicationsofSupplyandDemandCHAPTEROVERVIEWANDTEACHINGTIPSInChapter3youexplainedthelawsofsupplyanddemand,andyoufamiliarizedstudentswiththeeffectsofchangesinsupplyanddemand.Thisleadsnaturallytotherelatedquestion,“Byhowmuch?”Howlargearetheresponsestochangesinthemarket,andonwhatdoesthisresponsivenessdepend?Thischapterintroducesstudentstotheconceptofelasticityandexposesthemtotwotypesofelasticities:priceelasticityofdemandandpriceelasticityofsupply.Theseconceptsaredifficultforstudents,particularlyforthosewhohavemathanxiety.Emphasizetheimportanceofpercent-agechangesinthenumeratoranddenominatoroftheelasticityequations,anddistinguishbetweenpriceelasticityofdemandandtheslopeofthedemandcurve.Donothesitatetospendclasstimeworkingthroughexamplesthatillustratetherelationshipsbetweenthepriceelasticityofdemandandsupply,andthedemandandsupplycurves.Thefinalsectionofthechapterprovidesstudentswiththeopportunitytoapplymarketanalysisandelasticityconceptsinthearenaofpublicpolicy-making.Distinguishcarefullybetweenthepartywhowritesthechecktothegov-ernmentforataxandthepartywhobearstheeconomicburdenoftaxation.Justbecausetaxesareoften“paid”tothegovernmentbysellersdoesnotmeanthatthesellersactuallyexperiencereducedincomeswhennewtaxesareimposed.Priceceilingsandpricefloorsdescribeanothertypeofgovernmentinterventionintotheoperationofmarkets.LEARNINGOBJECTIVES1.Definethetermpriceelasticityofdemand.2.Discussthefactorsthatdeterminewhetherpriceelasticityofdemandiselastic,unitary-elastic,orinelastic,andcompareconsumerbehaviorintheshortrunandthelongrun.Describeelasticandinelasticregionsthatexistalonganydemandcurve.3.Calculatepriceelasticityofdemandusingamethodofaverages,antinterpretyourresult.4.Explain,usingdiagrams,therelationshipbetweentotalrevenueandpriceelasticityofdemand.5.Definethetermpriceelasticityofsupply.6.Discussthefactorsthatdeterminewhetherpriceelasticityofsupplyiselastic,unitary-elastic,orinelastic,andcompareconsumerbehaviorintheshortrunandthelongrun.7.Calculatepriceelasticityofsupplyusingamethodofaverages,andinterpretyourresult.8.Applysupply,demand,andelasticityconceptstothefollowingsituationsandmarkets:(aagriculturemarkets,(bgasolinetaxes,(cminimumwages,and(denergypricecontrols.SUGGESTEDANSWERSTOQUESTIONSINTHETEXT1.Agoodharvestshiftsafairlyinelasticsupplycurvetotheright.Equilibriummovesdownalongarelativelyinelasticdemandcurvetosupporta(muchlowerprice,andhencelowerfarmrevenues.2.Morepriceelastic:perfumeandicecreambecausetheyareclosertoluxuriesthannecessities;chocolateicecreamandautomobilesbecausetherearemoresubstitutesforthesegoodsthanthereareforicecreamandautomobiletires,respectively.3.Demandwouldbeinelastic,withED=.5.4.Assumethatdemandandsupplybothshowsomepriceelasticity.a.Outputandpriceupalongsupplycurve(demand-curveshift,assumingapartmentsarenormalgoods.b.Outputdownandprice(paidbyrentersupalongdemandcurve(supplyshift.c.Ifthispriceisbelowequilibrium(whichmakessenseifthepolicyistohaveanimpact,thisisapriceceiling,establishedtoprotectbuyers.Ashortageofapartmentswillresult,withquantitydemandedgreaterthanquantitysupplied.15
16CHAPTER4:APPLICATIONSOFSUPPLYANDDEMANDd.Outputupandpricedownalongdemandcurve(supplyshift.e.Outputdownandpriceupalongdemandcurve(supplyshift.5.Accordingtothetext,a10%increaseintheminimumwagewoulddecreaseemploymentofteenagersbetween1and3percent.Theimpactontheadultpopulationisevensmaller.Thus,incomeforteenagersandadultswouldrise.Thus,ifIhadtomakeadecisiononincreasingtheminimumwage,andifraisingwagesforlow-wageworkerswereimportanttome,Iwouldcertainlyvotetoincreasetheminimum.6.Minimumwagescanincreasethe