Lab 13 Agricultural and Resource Economics (ARE 201)

Transcription

1 Lab 13 Agricultural and Resource Economics (ARE 201) This lab assignment is worth 100 points. Unless instructed differently, you are to complete the assignment and have it to me by this Thursday at 5:00 p.m. Late lab assignments will not be accepted without prior arrangement with me. Please let me know if you need any help with this assignment. Good Luck! Purpose of Lab: This assignment will continue our study of demand schedules and curves from Lab 12, analyze supply schedules and curves, and teach you how demand and supply schedules determine the market clearing price and quantity of a commodity. Assignments: Analyzing Demand Schedules and Curves. This section continues our discussion of demand schedules and curves in Lab 12. You may want to refer to last week's lab to refresh your memory before proceeding. A demand curve is said to be perfectly elastic if it is horizontal. On the other hand, a vertical demand curve is said to be perfectly inelastic. A demand curve is said to be relatively elastic if it is more horizontal than it is vertical yet not perfectly elastic. In a similar manner, a demand curve that is more vertical than it is horizontal yet not perfectly inelastic is said to be relatively inelastic. Please see Figure 1 for a graph of these different types of demand curves. The slope of a demand curve is determined by three factors: 1. Availability of Substitutes. The demand curve for a commodity will become more elastic or flat if there is an increase in the number of substitutes for the commodity. On the other hand, a decrease in the number of substitutes for a commodity will cause the demand curve for the commodity to be more inelastic or steep. The availability of substitutes for a commodity is the main determinant of the slope of the demand curve for the commodity. 2. Time. The demand curve for a commodity becomes more elastic or flat over time.

2 2 Price Price D Perfectly Elastic Demand Curve D Perfectly Inelastic Demand Curve Quantity Quantity Price Price Relatively Elastic Demand Curve Relatively Inelastic Demand Curve D D Quantity Quantity Figure 1: Slope of Demand Curves 3. Proportion of Consumers' Budgets. The demand curve for a commodity whose cost is a large proportion of consumers' budgets is relatively elastic. On the other hand, the demand curve for a commodity whose cost is a small proportion of consumers' budgets is relatively inelastic.

3 3 Please answer the questions below. You may want to refer to your notebook, lecture notes, or textbook. In the 1970s, many secretaries thought that White Out was the greatest invention for the office since carbon paper. White Out is the original correction fluid. What was the probable shape of the demand curve for White Out when the product was first introduced: a) perfectly elastic b) perfectly inelastic c) relatively elastic d) relatively inelastic What is the probable shape of the demand curve for table salt: a) perfectly elastic b) perfectly inelastic c) relatively elastic d) relatively inelastic Which one of the following products is the most likely to have a relatively elastic demand curve: a) cigarettes b) drinking alcohol c) ketchup d) 38 foot Catalina sailboat Which one of the following statements is likely to be true: a) the demand curve for a luxury car is more inelastic than the demand curve for an economy car b) the demand for electricity is more inelastic in the short run than in the long run c) the demand curve for ketchup is elastic d) all of the above

4 4 Which one of the following statements is likely to be false: a) the demand for bottled water is more inelastic than the demand for an underthe-sink water filter b) the demand for Dr. Pepper is more elastic than the demand for expensive wine c) the demand for Gateway computers in 1987 was relatively more inelastic than the demand for Gateway computers in 1997 d) all of the above The change in the quantity demanded of a commodity that is associated with a given change in the price for the commodity would be of the greatest magnitude with the following type of demand curve: a) perfectly elastic b) relatively elastic c) perfectly inelastic d) relatively inelastic e) not enough information to answer quantity II. Analyzing Supply Schedules and Curves. A supply schedule gives the number of units of a commodity that producers would be able and willing to sell during a given time period at different prices if there are no changes in the factors that can change or invalidate the supply schedule. For example, a supply schedule may give the number of bushels of corn that farmers would be willing and able to sell during October at different prices. The supply schedule would be valid as long as the supply of corn is unchanged. If some factor were to affect the supply of corn, the supply schedule would be invalidated. For instance, the supply schedule for corn would probably be invalidated if a couple of weeks of unusually hot and dry weather hit while the corn was silking. Under these circumstances, the pollination of corn would be incomplete or unsatisfactory. The graphing of a supply schedule was covered in Lab 11. You may want to see Lab 11 to review graphing. A change in the quantity supplied of a commodity is said to occur when there is movement from one point on a supply curve to a different point. For example, a change in the quantity supplied of a commodity is demonstrated in Figure 2 by movement from point A to point B (i.e., movement from a quantity supplied of 5 units to a quantity supplied of 10 units).

5 5 $12 B Supply Curve $6 A Price 5 10 Quantity Supplied Figure 2: A Change in the Quantity Supplied of a Commodity A change in the quantity supplied of a commodity is due to a change in the price for the commodity. In reference to Figure 2, a movement along the supply curve from point A to point B would occur when the price for the commodity rises from $6 to $12. The Law of Supply states that the quantity supplied of a commodity is directly related to the commodity's price. That is, an increase in the price for a commodity will lead to an increase in the quantity supplied of the commodity. On the other hand, a drop in the price for a commodity will lead to a decrease in the quantity supplied of the commodity. A change in the supply for a commodity occurs when a supply curve shifts from one position to another position. For example, a change in the supply for a commodity is demonstrated in Figure 3 by movement from supply curve S 0 to supply curve S 1 (i.e., the supply curve shifts up). A change in the supply for a commodity may be positive or negative. A decrease in the supply for a commodity occurs when producers are not willing to sell as many units of the commodity at a given price as they did at some time in the past. A decrease in supply is demonstrated in Figure 3 by movement from supply curve S 0 to supply curve S 1.

6 6 Price S 1 S 0 S 2 Supply Curves Quantity Supplied Figure 3: Change in Supply An increase in the supply for a commodity occurs when producers are willing to sell a greater quantity of the commodity at a given price than at some time in the past. An increase in supply is demonstrated in Figure 3 by movement from supply curve S 0 to supply curve S 2. A change in the supply for a commodity can be due to numerous factors. Some of these factors are as follows: Resource Prices or Costs of Production. An increase in the cost of producing a commodity will decrease the supply of the commodity. On the other hand, a decrease in the cost of producing a commodity will increase the supply of the commodity. Prices of Related Goods. Two commodities are said to be related if their production processes are similar. For example, Adirondack chairs and picnic tables are related commodities since their production requires similar factors of production (e.g., carpenters, table saws, and lumber). The supply of a commodity will increase if there is a decrease in the price of a related commodity. On the other hand, the supply of a commodity will decrease if there is an increase in the price of a related commodity.

7 7 Expectations about the Future. Producers' expectations about the future may cause a change in the supply of their commodity. For example, farmers may plant less cotton and more corn in 1998 than they did last year if they expect relatively high corn prices. Producers' expectations about the future may lead to a decrease or an increase in the supply of a commodity depending upon the particular circumstances. State of Technology. An increase in the physical efficiency of producing a commodity will increase the supply of the commodity. On the other hand, a decrease in the physical efficiency of producing a commodity will decrease the supply of the commodity. Number of Sellers or Firms. The supply of a commodity is directly related to the number of producers. For example, an increase in the number of producers of a commodity will increase the supply of the commodity. Weather. The supply of some commodities is related to the weather. For example, a frost in late March can lower the supply of strawberries if the plants are hurt by the cold. The weather may lead to a decrease or an increase in the supply of a commodity depending upon the particular circumstances. Please answer the questions below. You may want to refer to your notebook, lecture notes, or textbook. Which one of the following statements is true: a) a supply curve is affected by consumer demand b) a change in output and price from 5 units at $6 to 6 units at $7 would be due to a change in supply c) a decrease in the price for a commodity will lower the supply of the commodity d) all of the above Movement from the point (3, 4) on a supply curve to the point (5, 4) on a supply curve could represent: a) a decrease in quantity supplied b) an increase in quantity supplied c) a decrease in supply d) an increase in supply e) all of the above

8 8 The Law of Supply states: a) the quantity supplied of a commodity at $6 will be greater than the quantity supplied at $5, ceteris paribus b) a drop in the price for a commodity will lower the supply of the commodity c) an increase in the price for a commodity will increase the supply of the commodity d) all of the above The supply schedule for full-size trucks is likely to be invalidated in the following circumstance: a) the price for the trucks rises drastically b) a large reservoir of crude oil is discovered in the Gulf of Mexico c) the price for trucks is slashed d) all of the above Which one of the following statements is incorrect: a) the relationship between the cost of producing a commodity and the supply of the commodity is inverse b) the relationship between the supply of a commodity and the price of a related commodity is inverse c) the relationship between a technological improvement in the production of a commodity and the supply of the commodity is inverse d) all of the above Why is a supply curve valid only during a specified period of time? The determinants of supply change over time!

9 9 What are five examples of producer expectations' about the future that are likely to affect the supply of recreational vehicles? a) fuel prices b) demographic changes, aging population, retired population c) disposable income d) enhanced longevity and quality of life in later years e) expanded dealer networks What are five examples of pairs of related goods? (Goods that use the same or similar bundle of inputs) a) b) c) d) e) An increase in the federal minimum wage represents: a) an increase in the quantity supplied of a commodity b) no change in the quantity supplied of a commodity c) an increase in the supply of a commodity d) a increase in resource prices and a decrease in supply Which pair of the following commodities is likely to be classified as related goods: a) corn and soybeans b) house paint and cement c) computers and bricks d) all of the above

10 10 Let's suppose that backyard storage buildings and gazebos are related goods. Under these circumstances, which one of the following statements is likely to be true: a) an increase in the price for lumber will increase the supply of storage buildings and gazebos b) an increase in the price for storage buildings will increase the supply of gazebos c) a decrease in the price for storage buildings will decrease the supply of gazebos d) all of the above Which one of the following situations is likely to represent an increase in supply: a) the price for a winter coat is marked down in late March b) the price for scallops at Wrightsville Beach drops when the scallop season opens in North Carolina c) a drought affects the world price for corn d) all of the above III. Determining the Market Clearing Price and Quantity of a Commodity. We will discuss the relationships between demand and supply in this section. The market clearing price and quantity of a commodity is determined by the intersection of the demand and supply curves for the commodity. The determination of the market clearing price and quantity of a commodity is demonstrated in Figure 4. The market clearing price for the commodity portrayed in Figure 4 is P *. The market clearing quantity for the commodity is Q *. The point of intersection between the demand and supply curves for a commodity is called the equilibrium point. It is at the equilibrium point that the market clearing price and quantity of a commodity is determined.

11 11 A shortage is said to exist in a market if the price for the commodity is less than the market clearing price. Under these circumstances, the quantity demanded of the commodity is greater than the quantity supplied of the commodity. A shortage of a commodity is demonstrated in Figure 5. Let's assume that the price for the commodity portrayed in Figure 5 is P short, which is less than the market clearing price P *. Under these circumstances, the quantity supplied of the commodity is Q s. The quantity demanded of the commodity is Q d. A shortage is said to exist in this case since the quantity demanded of the commodity is greater than the quantity supplied of the commodity. That is, producers are not willing to supply as much of the commodity as buyers would like to purchase at the price P short. The number of units of the commodity that the market is short is equal to the difference between the quantity demanded of the commodity and the quantity supplied (i.e., Q d - Q s ). A shortage for a commodity would be eliminated by a higher price for the commodity. In reference to Figure 5, an increase in the price for the commodity from P short to P * will eliminate the shortage and restore the market to equilibrium.

12 12 Price S P * Equilibrium Point D Q * Quantity Figure 4: Market Clearing Price and Quantity Price S P * Shortage = Q d - Q s P short D Q s Q * Q d Quantity Figure 5: Shortage of a Commodity

13 13 Price S P surplus P * Surplus = Q s - Q d D Q d Q * Q s Quantity Figure 6: Surplus of a Commodity A surplus is said to exist in a market if the price for the commodity is greater than the market clearing price. Under these circumstances, the quantity demanded of the commodity is less than the quantity supplied of the commodity. A surplus of a commodity is demonstrated in Figure 6. Let's assume that the price for the commodity portrayed in Figure 6 is P surplus, which is greater than the market clearing price P *. Under these circumstances, the quantity supplied of the commodity is Q s. The quantity demanded of the commodity is Q d. A surplus is said to exist in this case since the quantity demanded of the commodity is less than the quantity supplied of the commodity. That is, buyers are not willing to purchase as much of the commodity as producers would like to sell at the price P surplus. The number of units of the commodity that the market is in surplus is equal to the difference between the quantity supplied of the commodity and the quantity demanded (i.e., Q s - Q d ). A surplus for a commodity would be eliminated by a lower price for the commodity. In reference to Figure 6, a decrease in the price for the commodity from P surplus to P * will eliminate the surplus and restore the market to equilibrium.

14 14 Please answer the questions below. You may want to refer to your notebook, lecture notes, textbook, and Labs 11 and 12. Let's consider the market for butter and margarine. Use a graph to illustrate the demand and supply for butter. Label the market clearing price for butter P 1 and the market clearing quantity Q 1. Decrease in supply of butter. Using the graph above, illustrate the effect that an increase in the production cost of butter would have on the market clearing price and market clearing quantity of butter. Label the new market clearing price P 2 and the new market clearing quantity Q 2. Use a graph to illustrate the market clearing price and market clearing quantity of margarine before the increase in the production cost of butter. Label the market clearing price for margarine P 1 and the market clearing quantity Q 1. Increase in price of butter led to an increase in the demand for margarine because the two are substitutes.

15 15 Using the graph above, illustrate the effect that the increase in the production cost of butter has on the market clearing price and market clearing quantity of margarine. Label the new market clearing price P 2 and the new market clearing quantity Q 2. Summarize the effect that the increase in the production cost of butter has on the market clearing prices and market clearing quantities of butter and margarine. Cost of butter production increased resulting in a decrease in the supply of butter. Price of butter increased due to decreased supplies. Margarine is a substitute for butter, so as the price of butter increased, the demand for margarine increased. As the demand for margarine increased, a price increase for margarine also occurred. Let's consider the market for lettuce and salad dressing. We will assume that lettuce and salad dressing are normal goods. Use a graph to illustrate the demand and supply for lettuce. Label the market clearing price for lettuce P 1 and the market clearing quantity Q 1. Increase in supply of lettuce led to a price decrease for lettuce.

16 16 Using the graph above, illustrate the effect that an increase in the supply of lettuce would have on the market clearing price and market clearing quantity of lettuce. Label the new market clearing price P 2 and the new market clearing quantity Q 2. Use a graph to illustrate the market clearing price and market clearing quantity of salad dressing before the increase in the supply of lettuce. Label the market clearing price for salad dressing P 1 and the market clearing quantity Q 1. Since the price of lettuce decreased due to increased supplies, quantity of lettuce demanded increased as well. Since salad dressing and lettuce are compliments, the decrease in the price of lettuce resulted in an increase in the demand for salad dressing. The price of salad dressing eventually increased as well. Using the graph above, illustrate the effect that the increase in the supply of lettuce has on the market clearing price and market clearing quantity of salad dressing. Label the new market clearing price P 2 and the new market clearing quantity Q 2. Summarize the effect that the increase in the supply of lettuce has on the market clearing prices and market clearing quantities of lettuce and salad dressing. Since the price of lettuce decreased due to increased supplies, quantity of lettuce demanded increased as well. Since salad dressing and lettuce are compliments, the decrease in the price of lettuce resulted in an increase in the demand for salad dressing. The price of salad dressing eventually increased as well.

17 17 Let's suppose that you own a business that produces garden benches. Use a graph to illustrate the market demand and market supply of garden benches in California. Label the market clearing price for garden benches P 1 and the market clearing quantity Q 1. Demand for garden benches decreased Using the graph above, illustrate the effect that that the stormy weather of El Nino is likely to have on the market clearing price and market clearing quantity of garden benches in California. Label the new market clearing price P 2 and the new market clearing quantity Q 2. Let's suppose that businesses that make garden benches can use the same factors of production to make microwave oven tables. Use a graph to illustrate the market demand and market supply of microwave oven tables before El Nino. Label the market clearing price for microwave tables P 1 and the market clearing quantity Q 1.

18 18 Using the graph above, illustrate the effect that El Nino is likely to have on the market clearing price and market clearing quantity of microwave oven tables. Label the new market clearing price P 2 and the new market clearing quantity Q 2. Summarize the effect that El Nino is likely to have on the market clearing prices and market clearing quantities of garden benches and microwave oven tables. El Nino results in increased rain and decreased time outdoors. Demand for garden benches decreases. Garden benches and microwave oven tables are related goods with respect to supply. Resources that were freed up due to decreased demand for garden benches are re-allocated to the production of microwave oven tables, thus increasing supply of microwave oven tables. An increase in the demand and an increase in the supply for a commodity are likely to have the following effect: a) higher price for the commodity b) lower price for the commodity c) no change in the price for the commodity d) not enough information to answer this question A decrease in the demand and an increase in the supply for a commodity are likely to have the following effect: a) higher price for the commodity b) lower price for the commodity c) no change in the price for the commodity d) not enough information to answer this question

19 19 A shortage of a commodity may be eliminated if the following situation arises: a) decrease in the demand for the commodity b) increase in the demand for the commodity c) decrease in the supply of the commodity d) not enough information to answer this question Let's examine the market for apartments in New York City. Use a graph to illustrate the market demand and market supply of apartments in New York City. Label the market clearing rent R 1 and the market clearing quantity of apartments Q 1. shortage Let's suppose that the government thinks that rent in New York City is too high. To address this problem, the government imposes a price ceiling on rent. A price ceiling is defined as the maximum price that can be charged for a commodity. We will assume that the price ceiling on rent is R 2, which is less than the market clearing rent. Using the graph above, illustrate the effect of the rent ceiling on the quantity demanded and the quantity supplied of apartments. Label the new quantity demanded of apartments Q d and the new quantity supplied of apartments Q s.

20 20 Summarize the effect of the rent ceiling on the market for apartments in New York City. Rent Ceiling: quantity demanded > quantity supplied so a persistent shortage develops. Let's examine the market for corn. Use a graph to illustrate the market demand and market supply of corn. Label the market clearing price for corn P 1 and the market clearing quantity Q 1. Surplus

21 21 Let's suppose that the government thinks that the price for corn is too low to give farmers a fair return on their assets. To address this problem, the government imposes a price floor on the price for corn. A price floor is defined as the minimum price that can be charged for a commodity. We will assume that the price floor on corn is P 2, which is greater than the market clearing price. Using the graph above, illustrate the effect of the price floor on the quantity demanded and the quantity supplied of corn. Label the new quantity demanded of corn Q d and the new quantity supplied of corn Q s. Summarize the effect of the price floor on the market for corn. Price Floor: quantity supplied > quantity demanded so a persistent surplus develops.

22 S 2 S 0 22 Refer to the graph below to answer the questions that follow. The graph illustrates the market for Ford trucks, which are normal goods. We will assume that Ford and Chevrolet trucks are substitutes. Always start at GO on the graph. Go back to GO before you answer the next question. 7 S GO Price 3 D 2 D 0 D 1 Quantity The price of Chevrolet trucks rises and there is a strike at the Ford truck assembly plant. You end at 7. There is an increase in farm disposable income. You end at 8. The Progressive Farmer magazine publishes an article that says Chevy trucks have the highest rate of major repairs when compared to all other manufacturers. You end at 8. The price of steel increases. Steel is a major input in truck manufacturing. You end at 6. Ford truck workers agree to accept lower wages and Ford Motor Co. has a successful new truck advertising campaign. You end at 1. A technological breakthrough discovered by Chevy allows for the manufacture of a more powerful, more durable, lower cost, turbo charged engine. You end at 4.

23 23 Browning Firearms announces a price decrease on its popular semi-automatic rifle known as the BAR. You end at GO. Ford Motor Co. s truck division is experiencing financial troubles and the Wall Street Journal expects the division to file for bankruptcy. You end at 5. Iraqi terrorists decide to try to disrupt American Industry by blowing up three Ford truck plants. You end at 6. The U.S. government decides to purchase one million Ford trucks at prevailing market prices which reduces supplies available to the private sector. You end at 6. Ford truck decides to reduce production costs by building two plants in Canada and another in Mexico. You end at 2. Chevrolet, in an effort to expand market share, reduces prices on its new line of tucks. At the same time, Ford truck division has shut down several plants for modernization. You end at 5. Some people think that a change in the demand for a commodity will affect the supply of the commodity. Are these people correct? Explain your answer. NO. A change in demand will affect the quantity supplied, not supply.