In the last problem, you saw how simultaneous shifts in demand and supply can leave us with uncertainty about the impact on price or on quantity. An increase in both demand and supply will increase equilibrium quantity but have an ambiguous effect on equilibrium price. However, if we knew that there was a significant increase in demand and only a small increase in supply, we could conclude that the price would probably rise overall, albeit not by as much as would have been the case if supply had not increased slightly.
In each of the following examples, there are a major event and a minor event. Determine whether each change relates to demand or to supply, and then figure out the impact on price and quantity; be sure to say something about the relative magnitudes of the price and quantity changes.
a. Market: Rock salt
Major event: A bitterly cold and unusually snowy winter season has significantly depleted the amount of available rock salt.
Minor event: There is another snow storm, and roads and sidewalks need to be salted.
b. Market: Smartphones
Major event: The proliferation of fast, reliable, affordable (or free) wi-fi and cellular signals increases the usability of smartphones.
Minor event: The production of smartphones is marked by modest technological advances.
c. Market: Canned tomatoes
Major event: A large canned tomato manufacturer begins to use cheap imported tomatoes from Mexico rather than domestic tomatoes.
Minor event: This causes a public relations fiasco, resulting in an organized effort to boycott canned tomatoes.