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Principles of Economics- Mankiw (5th) 104

Principles of Economics- Mankiw (5th) 104 - 108 PA R T T W...

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108 PART TWO SUPPLY AND DEMAND I: HOW MARKETS WORK THREE APPLICATIONS OF SUPPLY, DEMAND, AND ELASTICITY Can good news for farming be bad news for farmers? Why did the Organization of Petroleum Exporting Countries (OPEC) fail to keep the price of oil high? Does drug interdiction increase or decrease drug-related crime? At first, these questions might seem to have little in common. Yet all three questions are about markets, and all markets are subject to the forces of supply and demand. Here we apply the versatile tools of supply, demand, and elasticity to answer these seemingly com- plex questions. CAN GOOD NEWS FOR FARMING BE BAD NEWS FOR FARMERS? Let’s now return to the question posed at the beginning of this chapter: What hap- pens to wheat farmers and the market for wheat when university agronomists dis- cover a new wheat hybrid that is more productive than existing varieties? Recall from Chapter 4 that we answer such questions in three steps. First, we examine whether the supply curve or demand curve shifts. Second, we consider which di-
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