Chapter 03 – Demand, Supply and Market Equilibrium (+ Appendix)
Chapter 03 Demand, Supply and Market Equilibrium (+ Appendix)
1. Why are shortages or surpluses more likely with preset prices, such as those on tickets, than
flexible prices, such as those on gasoline?
Preset prices, rather than responding to demand conditions, attempt to predict
the level of demand that will produce an equilibrium quantity.
If these predictions are
incorrect, there will be an imbalance between the quantity supplied and the quantity
Preset prices often apply to one-time-only events, versus something like gasoline that is
sold regularly and repeatedly.
Sellers can learn from experience how to adjust prices to
best meet demand.
2. Most scalping laws make it illegal to sell—but not to buy—tickets at prices above those printed
on the tickets. Assuming that is the case, use supply and demand analysis to explain why the
equilibrium ticket price in an illegal secondary market tends to be higher than in a legal secondary
Ticket prices tend to be higher in illegal secondary markets because sellers face
higher costs (thus reducing supply relative to what it would be in a legal secondary
The additional costs include the higher transactions costs (finding secret
locations to transact, monitoring for law enforcement, screening clients, etc.) and
compensation for the risk of getting caught (with the associated costs of legal services,
fines, incarceration, etc.).
3. Go to the Web site of the Energy Information Administration,
follow the links to find the current retail price of gasoline. How does the current price of regular
gasoline compare with the price a year ago? What must have happened to either supply, demand,
or both to explain the observed price change?
The answer here will depend on the time of the exercise.
4. Suppose the supply of apples sharply increases because of perfect weather conditions
throughout the growing season. Assuming no change in demand, explain the effect on the
equilibrium price and quantity of apples. Explain why quantity demanded increases even though
demand does not change.
The increase in supply will lower the equilibrium price and increase the
equilibrium quantity of apples.
The increase in supply implies that the supply schedule
shifts to the right (more apples are supplied at every price). Quantity demanded increases
without a shift in the demand curve because the greater supply causes price to fall.
fall in price causes movement along the demand schedule.