Deck 5: Using Supply and Demand

Question 1

What is an excise tax? Demonstrate the effect of an excise tax paid by suppliers on equilibrium quantity and price.

Answer 1

An excise tax is a tax levied on a specific good.The effect of an excise tax is to shift up the supply curve by the amount of the tax.This results in a new equilibrium with a lower quantity exchanged and a higher price.In the diagram below, the original equilibrium is point A with price of P₀ and equilibrium quantity of Q₀.Imposing the excise tax results in a shift upward of the supply curve from S₀ to S₁ by the amount of the tax.The new equilibrium is point B with equilibrium price P₁ > P₀ and quantity Q₁ < Q₀.

Question 2

Demonstrate graphically and explain verbally the impact on supply and demand equilibrium of an effective price floor.

Answer 2

The imposition of an effective price floor (P_F) will result in a price that is higher than the market equilibrium price (P_F < P_E) and will also cause a surplus (Q_S > Q_D).
The diagram:

Question 3

Use a supply/demand diagram to explain the effects of a government-imposed price ceiling that is above the equilibrium price.What will be the effective quantity and price in this situation?

Answer 3

The equilibrium quantity will be the market-determined quantity since the price ceiling is above equilibrium price.It is ineffective.Market forces will result in a price of P_E and quantity of Q_E.Since P_E < P_C the market outcome is not altered by the government imposed price ceiling.
The diagram:

Question 4

Start by drawing a supply and demand equilibrium situation.Using your diagram, demonstrate graphically and explain verbally the impact of an increase in demand on equilibrium price and quantity.What could cause this shift?

Question 5

What is a living wage? Why did many states find it necessary to establish a living wage?

Question 6

Demonstrate graphically and explain verbally the impact on supply and demand equilibrium of an effective price ceiling.

Question 7

What is a price ceiling? What happens to the relationship between quantity demanded and supplied with an effective price ceiling?

Question 8

How does total size of expenditures in a third-part payer market compare to the total size of expenditures in a market with no third-party payer?

Question 9

Start by drawing a supply and demand equilibrium situation.Using your diagram, demonstrate graphically and explain verbally the impact of an increase in demand and an increase in supply on equilibrium price and quantity.

Question 10

What is a price floor? What happens to the relationship between quantity demanded and supplied with an effective price floor?

Question 11

Start by drawing a supply and demand equilibrium situation.Using your diagram, demonstrate graphically and explain verbally the impact of a decrease in demand and an increase in supply on equilibrium price and quantity.

Question 12

A musical group called "The Grateful Dead" sold out concert after concert and typically provided a good living for scalpers (who buy tickets and resell them).Explain (using a supply and demand diagram) how The Grateful Dead's ticket pricing policy set an effective ceiling on the price of concert tickets.If there were a fixed number of seats at their concerts, what was the shape of the supply curve for these seats?

Question 13

What is a tariff? Demonstrate the effect of a tariff on equilibrium quantity and price.Does the equilibrium price rise by the amount of the tariff? Why or why not?

Question 14

Many state governments support higher education through subsidies.(A subsidy is like a negative excise tax).Consider the following supply and demand for college education at State U, which shows the equilibrium that would prevail without subsidies: annual tuition is $20,000 with Q₀ enrolled students.Suppose the state provides a $10,000 per year subsidy paid to State U for each student enrolled.What impact will this subsidy have on the equilibrium tuition level and number of enrolled students? Explain.

Question 15

What is a price ceiling? What is a price floor? Give a real world example of each.What happens to the relationship between quantity demanded and the quantity supplied with an effective price ceiling? What happens to the relationship between quantity demanded and the quantity supplied with an effective price floor? What is likely to happen if there is a shortage of rent controlled apartments? What is likely to happen if there is a surplus of price supported grain?

Question 16

In the 1990s and into the fist decade of the 2000s, the war in Iraq reduced that nation's petroleum production and exports to levels that are well below pre-war levels.At the same time as a result of the rapid growth of the Chinese economy, world demand for petroleum products increased significantly.Both events had significant impacts on world oil prices.How would the simple supply and demand model apply to this case?

Question 17

Explain the shifts in demand and/or supply that can result in the following observations: (Assume the demand curve is downward sloping and the supply curve is upward sloping.)
(a) Both price and quantity rise.
(b) Price rises, quantity falls.
(c) Price rises, quantity doesn't change.
(d) Quantity rises, price doesn't change.

Question 18

What is a third-party payer market? Give an example.

Question 19

Americans over the age of 65 are covered by Medicare.For them, the medical market is a third-payer market.What is a third-party payer market? How does total quantity of medical services provided in a third-payer market, such as Medicare, compare to a market in which the purchaser of medical services pays the full cost? How does price of medical services provided in a third-part payer market, such as Medicare, compare to the price in a market in which the purchaser of medical services pays the full cost? If third-payer markets, such as Medicare, benefit buyers by providing a greater quantity of services and sellers by yielding a higher price, who is hurt by such a payments system?

Question 20

Define an excise tax and give three examples.Explain the relationship between a tariff and an excise tax.Use supply and demand analysis to explain why the equilibrium price of apples will rise and the equilibrium quantity will fall if an excise tax is levied on apples.Explain why the price of apples will not rise by the full amount of the tax.

Question 21

What are quantity restrictions? Use a supply/demand diagram to demonstrate the effect of quantity restrictions on equilibrium price and quantity of a good when there is an increase in demand.

Question 22

The market for tennis racquets in a small town is represented by the following demand and supply equations:
Q_D = 200 - P
Q_S = -50 + P
Calculate the following (treat each point as a separate scenario):
(a) The equilibrium price and quantity.
(b) The equilibrium price and quantity after a $10 tax on the supplier.
(c) The equilibrium price and quantity after a $10 tax on the consumer.
(d) The equilibrium price and quantity after the government sets a price ceiling of $100.
(e) The equilibrium price and quantity after the government sets a price floor of $110.
(f) The equilibrium price and quantity after the government sets a quantity restriction of 75 units and an increase in the demand for racquets by 50.

Question 23

Demonstrate graphically and explain verbally the impact of a third-party payer market on supply and demand equilibrium in this case.Be sure to discuss equilibrium quantity, price received by suppliers, price paid by consumers, and total expenditures.