Intermediate Price Theory free essay sample

What would you expect to happen to the market price and the QD and the QS as the market adjusts to the disequilibrium? Why? If the market price is set below the equilibrium price, more will be demanded than supplied, (Qdgt;Qs). This creates a shortage of the goods in the market. The amount of shortages will cause buyers to bid up the price in order to acquire the goods. Competition among buyers will bid up the price. Price will go up until shortages are eliminated. e. Suppose the supply shifts to QS = 30 + 4P Has the slope of the supply changed? Why or why not? No, the slope of the supply remained the same. Only the intercept changed. The rate of change in quantity supplied remained at 4 units for every dollar increase or decrease. At equilibrium, QD = QS 80 2P = 30 + 4P 6P = 50 P = $8. 33 Qs = 30 + 4(8. 33) = 63. 33 billion bushels 2. Following the collapse of the subprime mortgage market in 2008, the price of lumber plummeted from roughly $290 per thousand board feet to less than $200 per thousand board feet. We will write a custom essay sample on Intermediate Price Theory or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page New home construction also declined markedly. Draw graphs showing what you believe happened in these markets and explain why. As the subprime mortgage market collapse, the demand for new homes declined. Price per unit of houses will fall. Demand for new homes [pic] As the prices of new homes declined, sellers become less keen in constructing and selling new homes. Therefore, demand for lumber, an input for home construction also declined. Demand for lumber [pic] 3. Suppose that the price of a commodity declines from one month to the next and that more is bought in the second month. Draw three diagrams one showing that the demand could have increased, a second diagram showing that the demand could have decreased, and a third showing that demand might not have changed. [pic] [pic] pic] 4. Draw a diagram to show what would happen if the government imposed a ceiling on the retail price of gasoline. Why do some advocates of price controls also recommend rationing? If the government set a price ceilingon the retail price of gasoline. More gasoline will be demanded than supplied. This creates a gasoline shortage which may be addressed by a rationing system in order that everyone will get a fair share of the commodity. Shortages often result to long queues and rationing schemes such as the first-come first-served basis, payment of reservation fees, and even lottery. Moreover, price ceiling encourages hoarding. This in turn leads to the proliferation of the black market where people succumb to higher prices in order to acquire the goods. To avoid this, a rationing system is recommended by some advocates of price controls. 5. A magazine article notes that a tax on beer had caused the price of beer to increase by 5% over the price of beer a year earlier. The article notes, however, that the sales of beer had risen during the period. The article concludes that the law of demand does not apply to beer. Do you agree with the article’s conclusion? Explain why or why not. The law of demand is still operating in the beer market even if sales had risen after the imposition of a tax. Note that demand shows the different quantities of beer that may be bought at each specific price of beer, with tax or without tax. An increase in the price of beer caused by the tax only leads to a decrease in quantity demanded at that specific price. There are many factors that can cause an increase in demand for beer despite the price increase. The article probably did not look at the non-price determinants that could have caused the demand for beer to rise despite the tax on it. The non price determinants of demand are consumers tastes and preferences, number of buyers, prices of related goods, price expectation, consumers income etc. 6. Evaluate the following statement: A decrease in the supply of steel will cause the price of steel to rise. Manufacturers who use steel to produce their products will cut back on their production, thus reducing their demand for steel. The resulting decrease in demand for steel will cause the price of steel to fall. Consequently, the decrease in the price of steel may be temporary at best. The decrease in the price of steel caused by a low demand may be temporary at best because it is caused by a temporalreaction of manufacturers to a rising cost of production. Manufacturers of products that use steel as an input will surely want to remain in business. Therefore, they will keep on buying this inputto ensure their continued existence in the industry. If the decrease in the supply of steel will go on in the long run, price of steel will continue to rise. Manufacturers who use steel to produce their products have no recourse but to pass on additional cost of production to their consumers in the form of higher product price.