Chapter 3 Practice Using the Market Model

Chapter 3 Practice Using the Market Model - bushels) Price...

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Using the Market Model: A Cookbook (...Try this at home!)
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Using the Market Model Step 1: Is an event relevant for the market? Step 2: Which side of the market is affected? Demand, Supply, both? Step 3: In which direction is the effect working? Step 4: What is the impact on the equilibrium price and quantity in the market?
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Example: Heavy Draught & the Market for Wheat
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Step 1: Checking the Relevance Can a draught affect the market for wheat?
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Step 2: Which side is affected? Demand? Supply? Both?
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SUPPLY!
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Step 3: In which direction is the effect working? Reduction in Supply? Increase in Supply?
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Reduction in Supply!
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S 2 S 1 Reduction in Supply Wheat (million bushels) Price of wheat ($ per bushel) 50 70 $2 $6
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Step 4: What is the effect on the equilibrium price and quantity in the market?
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S 2 S 1 Reduction in Supply Wheat (million
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Unformatted text preview: bushels) Price of wheat ($ per bushel) 50 70 $2 $6 What is the effect? The price of wheat increases. The quantity of wheat that is produced/consumed decreases. Other examples Wage increases and the market for lumber. News about mystery meat and the market for hamburgers. Income tax increases and the market for cars. Increase in health-consciousness and the market for jogging-shoes More tricky examples A draught destroys large parts of the corn crop. At the same time, the bio-fuel industry discovers a way to produce gazoline out of corn. How do these two events together impact the market of corn? So far, this was about using the model to make predictions. .. How about using the model to explain present events? Example: ROHLF (p.93)...
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Chapter 3 Practice Using the Market Model - bushels) Price...

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