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
Price
Price
D
Perfectly Elastic
Demand Curve
Perfectly Inelastic
Demand Curve
D
Quantity
Price
Quantity
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.
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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
e) none of the above
What is the probable shape of the demand curve for table salt:
a) perfectly elastic
b) perfectly inelastic
c) relatively elastic
d) relatively inelastic
e) none of the above
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
e) none of the above
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
e) none of the above
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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
e) none 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)
b)
c)
d)
e)
perfectly elastic
relatively elastic
perfectly inelastic
relatively inelastic
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
B
$12
Supply
Curve
A
$6
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 S0 to supply curve S1 (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 S0 to supply curve S1.
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Price
S1
S0
S2
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 S0 to
supply curve S2.
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.
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• 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
e) none 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)
b)
c)
d)
e)
a decrease in quantity supplied
an increase in quantity supplied
a decrease in supply
an increase in supply
all of the above
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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
e) none of the above
The supply schedule for full-size trucks is likely to be invalidated in the following
circumstance:
a)
b)
c)
d)
e)
the price for the trucks rises drastically
a large reservoir of crude oil is discovered in the Gulf of Mexico
the price for trucks is slashed
all of the above
none 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
e) none of the above
Why is a supply curve valid only during a specified period of time?
The determinants of supply change over time!
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
e) none of the above
Which pair of the following commodities is likely to be classified as related goods:
a)
b)
c)
d)
e)
corn and soybeans
house paint and cement
computers and bricks
all of the above
none of the above
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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
e) none 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
e) none 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.
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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 Pshort, which is less than the market clearing price
P*. Under these circumstances, the quantity supplied of the commodity is Qs. The
quantity demanded of the commodity is Qd.
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 Pshort.
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., Qd Qs).
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 Pshort to P* will
eliminate the shortage and restore the market to equilibrium.
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Price
S
P*
Equilibrium Point
D
Q*
Quantity
Figure 4: Market Clearing Price and Quantity
Price
S
Shortage = Qd - Qs
P*
Pshort
D
Qs
Q*
Figure 5: Shortage of a Commodity
Qd
Quantity
13
Price
S
Psurplus
Surplus = Qs - Qd
*
P
D
Qd Q*
Qs
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 Psurplus, which is greater than the market clearing price
P*. Under these circumstances, the quantity supplied of the commodity is Qs. The
quantity demanded of the commodity is Qd.
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 Psurplus.
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., Qs - Qd).
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 Psurplus to P* will
eliminate the surplus and restore the market to equilibrium.
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 P1 and the market clearing quantity Q1.
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 P2 and the new market clearing
quantity Q2.
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 P1 and the market clearing quantity Q1.
Increase in price of butter led to an increase
in the demand for margarine because the
two are substitutes.
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 P2 and the new market clearing
quantity Q2.
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 P1 and the market clearing quantity Q1.
Increase in supply of lettuce led to a price decrease for lettuce.
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 P2 and the new market clearing quantity Q2.
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 P1 and the market clearing quantity Q1.
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 P2 and the new market clearing
quantity Q2.
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
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 P1 and the
market clearing quantity Q1.
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 P2 and the new
market clearing quantity Q2.
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 P1 and the market clearing
quantity Q1.
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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 P2 and the new market clearing quantity Q2.
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)
b)
c)
d)
e)
higher price for the commodity
lower price for the commodity
no change in the price for the commodity
not enough information to answer this question
none of the above
A decrease in the demand and an increase in the supply for a commodity are likely to
have the following effect:
a)
b)
c)
d)
e)
higher price for the commodity
lower price for the commodity
no change in the price for the commodity
not enough information to answer this question
none of the above
19
A shortage of a commodity may be eliminated if the following situation arises:
a)
b)
c)
d)
e)
decrease in the demand for the commodity
increase in the demand for the commodity
decrease in the supply of the commodity
not enough information to answer this question
none of the above
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 R1 and the market clearing
quantity of apartments Q1.
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 R2, 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 Qd and the new quantity supplied of apartments
Qs.
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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 P1 and the market clearing quantity Q1.
Surplus
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 P2, 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 Qd
and the new quantity supplied of corn Qs.
Summarize the effect of the price floor on the market for corn.
Price Floor: quantity supplied > quantity demanded so a persistent
surplus develops.
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.
S2
S0
7
S1
6
8
5
GO
1
4
2
3
D0
D1
D2
Price
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____ .
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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.