* Mature of the good - Whether the good is a necessity or a luxury + The availability of close substitutes * How narrowly you define a good * The share consumer's budget spent on the good * The passage of time A good with many close substitutes is likely to have relatively demand, because consumers can easily choose to purchase one of the close substitutes if the price of the good rises. A good's price elasticity of demand depends in part on how necessary it is relative to other goods. If the following goods are priced approximately the same, which one has the least elastic demand? O vYacht O A heart valve for heart attack victims Price elasticity for a good depends on the share of a consumer's budget spent on a good. Other things being equal, which of the following goods has the most elastic demand? O Laundry detergent O Computer O salt The price elasticity of demand for a good also depends on how you define the good. Organize the goods found in the following table by indicating which is likely to have the most elastic demand, which is likely to have the least elastic demand, and which will have demand that falls in between. Categories Most Elastic In Between Least Elastic Clothing Q O O Boot-cut jeans O O O Pants Q O O The price elasticity of demand is also affected by the given time period, sometimes called the time horizon. Compared to the short-run demand for oil, the demand for oil in the long run will tend to be W elastic. The following graph input tool shows the daily demand for hotel rooms at the Big Winner Hotel and Casino in Las Vegas, Nevada. To help the hotel management better understand the market, an economist identified three primary factors that affect the demand for rooms each night. These demand factors, along with the values corresponding to the initial demand curve, are shown in the following table and alongside the graph input tool. Demand Factor Initial Value Average American household income $50,000 per year Round trip airfare from San Francisco (SFO) to Las Vegas (LAS) 5200 per round trip Room rate at the Lucky Hotel and Casino, which is near the Big Winner %250 per night Graph Input Tool @ Market for Big Winner's Hotel Rooms 500 - s 400 (Daollars per room) T Quantity S 350 Demanded 200 E (Hotel rooms per 3 300 + night} o [ 5 250 0 S 20 I Demand Factors % 150 I r I Demand Average Income & o 1 (Thousands of I dollars) 50 I Airfare from SFO to e 0 (Doam per round 0 50 100 150 200 250 300 350 400 450 500 trip} QUANTITY (Hotel rooms) Room Rate at Lucky (Dollars per night) For each of the following scenarios, begin by assuming that all demand factors are set to their original values and that Big Winner is charging $200 per room per night. If average household income increases by 20%, from $50,000 to $60,000 per year, the quantity of rooms demanded at the Big Winner W from D rooms per night toD rooms per night. Therefore, the income elasticity of demand is , meaning that hotel rooms at the Big Winner are v . If the price of an airline ticket from SFO to LAS were to increase by 10%, from $200 to $220 round trip, while all other demand factors remain at their initial values, the quantity of rooms demanded at the Big Winner W from E rooms per night to E rooms per night. Because the cross elasticity of demand is W, hotel rooms at the Big Winner and airline trips between SFO and LAS are v . Big Winner is debating decreasing the price of its rooms to 5275 per night. Under the initial demand conditions, you can see that this would cause its total revenue to W . Decreasing the price will always have this effect on revenue when Big Winner is operating on the w portion of its demand curve. Van is a retired teacher who lives in Chicago and does some consulting work for extra cash. At a wage of 530 per hour, he is willing to work 6 hours per week. At 550 per hour, he is willing to work 16 hours per week. Using the elasticity formula {calculated based on average change), the elasticity of Van's labor supply between the wages of $30 and $50 per hour is approximately W, which means that Van's supply of labor within this wage range is v . The citizens of Splashville enjoy swimming all summer long. Assume that the quantity of swimsuits demanded in a given year depends only on the average temperature that summer and the price of swimsuits. Additionally, assume that the cost of Lycra (a synthetic elastic fabric used to produce close-fitting clothing such as swimsuits) represents the great majority of swimsuit manufacturers' costs and that every other determinant of supply remains constant over this time period. The following table shows the average summer temperature and the price of Lycra in Splashville for each year from 1995 to 2007. Avg Temp Price of Lycra Year (F) (Dollars per yard) 1995 75 9 1996 80 10 1997 85 10 1998 75 10 1999 80 7 2000 Q0 8 2001 85 7 2002 85 8 2003 80 8 2004 80 13 2005 85 13 2006 85 12 2007 75 12 The following diagram shows the price of swimsuits and the quantity of swimsuits sold in Splashville for each year from 1995 through 2007. On the following diagram, use the blue line (circle symbol) to connect all the points for which the average temperature was 85 degrees. Then use the orange line (square symbol) to connect all the points for which the price of Lycra was $12 per yard. @ Demand (85) e Price (Lycra)= 12 PRICE (Dollars per swimsuit) 0 1 2 3 4 5 6 7 g 9 10 QUANTITY (Thousands of swimsuits) What does the blue line you drew represent? O The supply curve for swimsuits when the price of Lycra is 512 per yard ) The demand curve for swimsuits when the average temperature is 85 degrees O The supply curve for swimsuits when the average temperature is 85 degrees O The demand curve for swimsuits when the price of Lycra is $12 per yard O A historical graph showing how the price of swimsuits declined over the years in question What is the primary cause of the high price of a swimsuit in 2004 and 20057 Q Wages of swimsuit manufacturers fell. Q Temperatures were below average. O Temperatures were above average. O The price of Lycra increased. Assume that this year, the average temperature is projected to be 85 degrees, and the price of Lycra is $12 per yard. From the previous diagram, the equilibrium price of swimsuits is most likely to be W, and the equilibrium quantity is most likely to be v . The following graph shows the supply curve for sedans in an imaginary market. For simplicity, assume that all sedans are identical and sell for the same price. Two factors that affect the supply of sedans are the level of technical knowledgein this case, the speed with which manufacturing robots can fasten bolts, or robot speedand the wage rate that auto manufacturers must pay their employees. Initially, the graph shows the supply curve when robots can fasten 2,500 bolts per hour and autoworkers earn 525 per hour. Graph Input Tool @ 0 Supply for Sedans [l Price of a Sedan (Thousands of w dollars) Suppl %, PPy Quantity Supplied 135 = (Sedans per month) g 30 2 SUPPLY SHIFTERS 2 20 + = = Robot Speed \" 1 (Bolts per hour) 2500 x 1 a 10 Autoworker Wage 1 (Dollars per hour, 1 0 0 100 200 300 400 500 600 70O SO0 900 QUANTITY (Sedans per month) Suppose that the price of a sedan increases from $18,000 to $23,000. This would cause the quantity supplied of sedans to W, which is reflected on the graph by a W the supply curve. Following a technological improvementfor example, an increase in the speed with which robots can attach bolts to carsthere is a W the supply curve because the technological improvement makes cars v . The following table shows the monthly demand and supply in the market for shoes in Miami. Price Quantity Demanded Quantity Supplied (Dollars per pair of shoes) (Pairs of shoes) (Pairs of shoes) 20 2,200 400 40 1,600 1,000 60 1,200 1,800 50 800 2,000 100 400 2,400 Based on the preceding table, plot the demand for shoes on the following graph using the blue points (circle symbol). Next, plot the supply of shoes using the orange points (square symbol). Finally, use the black point (plus symbol) to indicate the equilibrium price and quantity in the market for shoes. 120 O 100 Demand W 2 -0- T 80 g Supply o o 5 @ -+ = . = = Equilibrium 2 w40 = r o 20 0 t t t t t i 0 400 300 1200 1600 2000 2400 QUANTITY (Pairs of shoes) The following graph shows the monthly demand and supply curves in the market for hats. Use the graph input tool to help you answer the following questions. Enter an amount into the Price field to see the quantity demanded and quantity supplied at that price. You will not be graded on any changes you make to this graph. Note: Once you enter a value in a white field, the graph and any corresponding amounts in each grey field will change accordingly. Graph Input Tool (? 100 Market for Hats 90 I Price 30 (Dollars per hat) 80 Supply Quantity 500 Quantity Supplied 70 Demanded (Hats) (Hats) 60 50 PRICE (Dollars per hat) 40 Demand 30 20 10 0 0 50 100 150 200 250 300 350 400 450 500 QUANTITY (Hats)The equilibrium price in this market is per hat, and the equilibrium quantity isl:l hats bought and sold per month. Complete the following table by indicating at each price whether there is a shortage or surplus in the market, the amount of that shortage or surplus, and whether this places upward or downward pressure on prices. Price Shortage or Surplus Amount (Dollars per hat) Shortage or Surplus (Hats) Pressure on Price o - T ~ 0 _ - ) ~ The following graph shows the market for peanut butter in New York City, where there are over a thousand stores that sell peanut butter at any given moment. Suppose the Surgeon General issues a public statement saying that consuming peanut butter is good for your health. Show the effect of this change on the market for peanut butter by shifting one or both of the curves on the following graph, holding all else constant. Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther. O Supg} Demand O Supply PRICE (Dollars per jar) emand QUANTITY (Jars) The following graph shows the market for cakes in Detroit, where there are over a thousand bakeries at any given moment. Suppose an innovation in the baking process makes it possible to produce more cakes at a lower cost than ever before. Show the effect of this change on the market for cakes by shifting one or both of the curves on the following graph, holding all else constant. Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther. O Supply Demand O Supply PRICE (Dollars per cake) Demand QUANTITY (Cakes)The first group of students thinks the reason for the increase in the price of hamburgers is that several burger joints in the area have recently gone out of business. On the following graph, adjust the supply and demand curves ta illustrate the first group's explanation for the increase in the price of hamburgers. Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther. @ O Supg} Demand s o = = = E Supply = @ g - -+ = = a w o g emand QUANTITY (Hamburgers) The second group of students attributes the increase in the price of hamburgers to the increase in the price of pizza at local pizza parlors. On the following graph, adjust the supply and demand curves to illustrate the second group's explanation for the increase in the price of hamburgers. @ O Supe) Demand O Supply emand PRICE (Dollars per hamburger) QUANTITY (Hamburgers) Suppose that both of the causes suggested by the students are partly responsible for the increase in the price of hamburgers. Based on your analysis of the explanations offered by the two groups of students, how would you figure out which of the possible causes is the dominant cause of the increase in the price of hamburgers? If the equilibrium quantity of hamburgers increases, then the supply shift in the market for hamburgers must have been larger than the demand shift. If the equilibrium quantity of hamburgers increases, then the demand shift in the market for hamburgers must have been larger than the supply shift. O If the price increase was large, then the supply shift in the market for hamburgers must have been larger than the demand shift. Whichever change occurred first must have been the primary cause of the change in the price of hamburgers. The following graph shows the daily market for wine when the tax on sellers is set at 50 per bottle. Suppose the government institutes a tax of $11.60 per bottle, to be paid by the seller. Use the graph input tool to help you answer the following questions. You will not be graded on any changes you make to this graph. Mote: Once you enter a value in a white field, the graph and any corresponding amounts in each grey field will change accordingly. Hint: To see the impact of the tax, first enter the value of the tax in the Tax on Sellers field. Adjust the value in the price field to move the green line to the after-tax equilibrium so that quantity demanded equals quantity supplied. Graph Input Tool Market for Wine [l Price (Doliars per bottle) Quantity Demanded (Botties of wine) PRICE (Dollars per bottle) 0 10 20 30 40 50 &0 70 80 90 100 QUANTITY (Bottles of wine) 50.00 @ Quantity Supplied (Bottles of wine) 50.00 Supply Shifter Tax on Sellers (Dollars per bottla) Fill in the following table with the quantity sold and the equilibrium price before and after the tax. Quantity Equilibrium Price (Bottles of wine) (Dollars per bottle) werrac [ Although the tax was $11.60 per bottle, after the tax was imposed, the equilibrium price increased by , which represents the amount of the per-unit tax that is paid by the buyers. From this you can conclude that sellers pay the remaining of the $11.60-per- unit tax. The following graph shows the annual market for Florida oranges, which are sold in units of 90-pound boxes. Graph Input Tool 50 Market for Florida Oranges 45 I Price 15 (Dollars per box) 40 Supply Quantity 900 Quantity Supplied 0 Demanded (Millions of boxes) (Millions of boxes) 30 25 PRICE (Dollars per box) 20 Demand 15 10 0 90 180 270 360 450 540 630 720 810 900 QUANTITY (Millions of boxes) In this market, the equilibrium price is $ per box, and the equilibrium quantity of oranges is million boxes.For each price listed in the following table, determine the quantity of oranges demanded, the guantity of oranges supplied, and the direction of pressure exerted on prices in the absence of any price controls. Price Quantity Demanded Quantity Supplied (Dollars per box) (Millions of boxes) (Millions of boxes) Shortage or Surplus Pressure on Prices 30 ] ] - [ ] ] 20 v w True or False: A price ceiling above $25 per box is a binding price ceiling in this market. (Hint: Econemists call a price ceiling that prevents the market from reaching equilibrium a binding price ceiling.) O True O False Because it takes many years before newly planted orange trees bear fruit, the supply curve in the short run is almost vertical. In the long run, farmers can decide whether to plant oranges on their land, to plant something else, or to sell their land altogether. Therefore, the long-run supply of oranges is much more price sensitive than the short-run supply of oranges. Assuming that the leng-run demand for oranges is the same as the short-run demand, you would expect a binding price ceiling to result in a W thatis in the long run than in the short run. @ The following graph shows the labor market in the fast-food industry in the fictional town of Supersize City. In a labor market, workers supply their labor to the market in exchange for wages, and their behavior is represented by the supply curve. Similarly, firms pay wages to obtain labor, and thus their behavior is represented by the demand curve. In this way, wages are the price of labor. Graph Input Tool Market for Labor in the Fast Food Industry 20 18 [ Wage i (Daoliars per hour) E Labor Demanded Labor Supplied 14 Supply {Thousands of 900 (Thousands of workers) workers) Demand WAGE (Dollars per hour) [=:] i 0 90 180 270 360 450 540 B30 720 310 900 LABOR (Thousands of workers) In this market, the equilibrium hourly wage is , and the equilibrium quantity of labor i5:thousand workers. Suppose a senator introduces a bill to legislate a minimum hourly wage of $6. This type of price control is called a b For each of the wages listed in the following table, determine the guantity of labor demanded, the quantity of labor supplied, and the direction of pressure exerted on wages in the absence of any price controls. Wage Labor Demanded Labor Supplied (Dollars per hour) (Thousands of workers) (Thousands of workers) Surplus or Shortage of Labor Pressure on Wages 12 ] ] - - - ] 8 v v True or False: A minimum wage above 510 per hour is a binding minimum wage in this market. (Hint: Economists call 2 minimum wage that prevents the labor market from reaching equilibrium a binding minimum wage.) O True O False Rent controls force landlords to price apartments below the equilibrium price level. An immediate effect is a shortage (excess demand) of apartments, because the quantity of apartments demanded is greater than the quantity supplied at the regulated price. When cities prevent landlords from charging market rents, which of the following are common outcomes? Check all that apply. O Illegal, or "black,\" markets develop. [J Efficient use of housing space results. J Tenants may undergo long waits and time-consuming searches to find an apartment. O The quality and maintenance of rental housing units falls