Supply Demand

Supply and Demand Applications
Gasoline
• Supply of gasoline decreases

• Refinery breakdowns
• Mideast politics and warfare
• Rising price of oil
• Demand for gasoline increases
• Consumers’ incomes increased
• Low mileage SUVs popular
LO6 3-2
• The supply curve for gasoline shifts left due to a decrease in the
number of producers and increases in input costs (oil).
• The demand curve shifts to the right due to increases in consumers’
income which causes an increase in the demand for the normal good
(gasoline) and increased use of automobiles that do not get very good
gasoline mileage.
Gasoline
An increase in the demand

S2 for gasoline, as shown by
S1
the shift from D1 to D2,
coupled with a decrease in
Price (per gallon)

P2 supply, as shown by the
shift from S1 to S2, boosts
equilibrium price (here
from P1 to P2).
P1
D2 In this case, equilibrium
quantity increases from Q1
D1 to Q2 because the increase
in demand outweighs the
decrease in supply.
0
Q1 Q2
Quantity (in gallons)
LO6 3-4
• Use supply and demand curves to
illustrate how each of the
following events would affect the
price of butter and the quantity of
butter bought and sold:
• a. An increase in the price of
margarine.
• Substitutes
• An increase in the
price of milk.
• Milk is the main

ingredient in butter.
• A decrease in average
income levels.
• Assuming that butter is a

normal good, a decrease in
average income will cause the
demand
• Suppose the demand curve for a product is given by Q = 300 - 2P + 4I,
where I is average income measured in thousands of dollars. The
supply curve is Q = 3P - 50.
a. If I = 25, find the market-clearing price and quantity for the
product.
Given I = 25, the demand curve becomes Q = 300 − 2P + 4(25), or Q =
400 − 2P. Set demand equal to supply and solve for P and then Q:
400 - 2P = 3P - 50
P = 90
Q = 400 - 2(90) = 220.
b. If I = 50, find the market-clearing price and quantity for the
product.
• Given I = 50, the demand curve becomes Q = 300 - 2P + 4(50), or Q =
500 - 2P. Setting demand equal to supply, solve for P and then Q:
• 500 - 2P = 3P - 50
P = 110
Q = 500 - 2(110) = 280.
Q-3, textbook) Refer to Example 2.5 (page 37) on the market for wheat. In 1998, the total demand for U.S.
wheat was Q = 3244 - 283P and the domestic supply was QS = 1944 + 207P. At the end of 1998, both Brazil
and Indonesia opened their wheat markets to U.S. farmers. Suppose that these new markets add 200
million bushels to U.S. wheat demand. What will be the free-market price of wheat and what quantity will
be produced and sold by U.S. farmers?
If Brazil and Indonesia add 200 million bushels of wheat to U.S. wheat
demand, the new demand curve will be Q + 200, or
QD = (3244 - 283P) + 200 = 3444 - 283P.
Equate supply and the new demand to find the new equilibrium price.
1944 + 207P = 3444 - 283P, or
490P = 1500, and thus P = $3.06 per bushel.
To find the equilibrium quantity, substitute the price into either the supply
or demand equation.
Using demand,
QD = 3444 - 283(3.06) = 2578 million bushels.
Q-5, textbook) Much of the demand for U.S. agricultural output has come from
other countries. In 1998, the total demand for wheat was Q = 3244 - 283P. Of this,
total domestic demand was QD = 1700 - 107P, and domestic supply was QS = 1944 +
207P. Suppose the export demand for wheat falls
by 40%.
a. U.S. farmers are concerned about this drop-in export demand. What happens
to the free-market price of wheat in the United States? Do farmers have much reason
to worry?
Before the drop in export demand, the market equilibrium price is found by setting total demand equal to
domestic supply:
3244 - 283P = 1944 + 207P, or
P = $2.65.
Export demand is the difference between total demand and domestic demand:
Q = 3244 - 283P minus QD = 1700 - 107P.
So export demand is originally Qe = 1544 - 176P.
After the 40% drop, export demand is only 60% of the original export demand.
The new export demand is therefore, Q′e = 0.6Qe = 0.6(1544 - 176P) = 926.4 - 105.6P.
Graphically, export demand has pivoted inward as illustrated in the figure below.
The new total demand becomes
Q′ = QD + Q′e = (1700 - 107P) + (926.4 - 105.6P) = 2626.4 - 212.6P.
Equating total supply and the new total demand,
1944 + 207P = 2626.4 - 212.6P, or P = $1.63,
• P = $1.63,
• this is a significant drop from the
original market-clearing price of
$2.65 per bushel.
• At this price, the market-clearing
quantity is about
• Q = 2281 million bushels.
• Total revenue has decreased from
about $6609 million to $3718
million, so farmers have a lot to
worry about.
b. Now suppose the U.S. government wants to buy enough wheat to
raise the price to $3.50 per bushel. With the drop in export demand, how
much wheat would the government have to buy? How much would this
cost the government?
With a price of $3.50, the market is not in equilibrium. Quantity demanded and
supplied are
Q′ = 2626.4 - 212.6(3.50) = 1882.3, and
QS = 1944 + 207(3.50) = 2668.5.
• Excess supply is therefore 2668.5 - 1882.3 = 786.2 million bushels.

• The government must purchase this amount to support a price of $3.50,
and will have to spend $3.50(786.2 million) = $2751.7 million.
Q-6, textbook) The rent control agency of New York City has found that
aggregate demand is QD = 160 - 8P. Quantity is measured in tens of
thousands of apartments. Price, the average monthly rental rate, is
measured in hundreds of dollars. The agency also noted that the
increase in Q at lower P results from more three-person families
coming into the city from Long Island and demanding apartments. The
city’s board of realtors acknowledges that this is a good demand
estimate and has shown that supply is QS = 70 + 7P.
a) If both the agency and the board are right about demand and supply, what is the free-market
price? What is the change in city population if the agency sets a maximum average monthly rent
of $300 and all those who cannot find an apartment leave the city?
Set supply equal to demand to find the free-market price for apartments:
160 - 8P = 70 + 7P, or P = 6,
which means the rental price is $600 since price is measured in hundreds of dollars.
Substituting the equilibrium price into either the demand or supply equation to determine
the equilibrium quantity:
QD = 160 - 8(6) = 112 AND QS = 70 + 7(6) = 112.
The quantity of apartments rented is 1,120,000 since Q is measured in tens of thousands of

apartments.
If the rent control agency sets the rental rate at $300, the quantity supplied would
be 910,000 (QS = 70 + 7(3) = 91),
a decrease of 210,000 apartments from the free-market equilibrium.
Assuming three people per family per apartment, this would imply a loss in city population
of 630,000 people.
• Note: At the $300 rental rate, the demand for apartments is 1,360,000 units, and
the resulting shortage is 450,000 units (1,360,000 - 910,000).
• However, excess demand (the shortage) and lower quantity demanded are not
the same concept.
• The shortage of 450,000 units is the difference between the number of
apartments demanded at the new lower price (including the number demanded
by new people who would have moved into
the city), and the number supplied at the lower price.
• But these new people will not actually move into the city because the apartments
are not available.
• Therefore, the city population will fall by 630,000, which is due to the drop in the
number of apartments available from 1,120,000 (the old equilibrium value) to
910,000.
(b) Suppose the agency bows to the wishes of the board and sets a
rental of $900 per month on all apartments to allow landlords a “fair”
rate of return. If 50% of any long-run increases in apartment offerings
come from new construction, how many apartments are constructed?
• At a rental rate of $900,

• the demand for apartments would be 160 - 8(9) = 88, or 880,000
units,
• which is 240,000 fewer apartments than the original free-market
equilibrium number of 1,120,000.
• Therefore, no new apartments would be constructed.
EXAMPLE 2.8 THE BEHAVIOR OF COPPER PRICES
After reaching a level of about $1.00 per pound in 1980, the price of copper fell
sharply to about 60 cents per pound in 1986.
Worldwide recessions in 1980 and 1982 contributed to the decline of copper

prices.
Why did the price increase so sharply after 2003? First, the demand for copper
from China and other Asian countries began increasing dramatically. Second,
because prices had dropped so much from 1996 through 2003, producers closed
unprofitable mines and cut production.
What would a decline in demand do to the price of copper? To find out, we can
use the linear supply and demand curves.
FIGURE 2.20
COPPER PRICES, 1965–2011
Copper prices are shown in both nominal (no adjustment for inflation) and real
(inflation-adjusted) terms. In real terms, copper prices declined steeply from the
early 1970s through the mid-1980s as demand fell. In 1988–1990, copper prices
rose in response to supply disruptions caused by strikes in Peru and Canada but
later fell after the strikes ended. Prices declined during the 1996–2002 period but
then increased sharply starting in 2005.
FIGURE 2.21
COPPER SUPPLY AND
DEMAND
The shift in the demand
curve corresponding to a
20-percent decline in
demand leads to a 10.7-
percent decline in price.
EXAMPLE 2.4 THE EFFECTS OF 9/11 ON THE SUPPLY AND
DEMAND FOR NEW YORK CITY OFFICE SPACE
FIGURE 2.10
SUPPLY AND DEMAND FOR NEW YORK CITY OFFICE SPACE
Following 9/11 the supply curve shifted to the left,
but the demand curve also shifted to the left, so that the average rental price fell.

Supply Demand

Uploaded by

Copyright:

Available Formats

Supply Demand

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Supply Demand

Uploaded by

Copyright:

Available Formats

Supply and Demand Applications

• Supply of gasoline decreases

An increase in the demand

Price (per gallon)

Quantity (in gallons)

• Milk is the main

• Assuming that butter is a

• Excess supply is therefore 2668.5 - 1882.3 = 786.2 million bushels.

The quantity of apartments rented is 1,120,000 since Q is measured in tens of thousands of

• At a rental rate of $900,

Worldwide recessions in 1980 and 1982 contributed to the decline of copper

You might also like