The Economic Way of Thinking 13th Edition by David Prychitko, Peter Boettke, Paul Heyne

Exercise 6

Mastering the economic way of thinking means learning to reason in terms of supply and demand. Here are additional questions on which you can practice. Some are harder than others. You should probably begin in each case by sketching a small supply and demand graph. Then ask yourself whether the event described would affect the supply curve or the demand curve, in which direction the curve would move, and what effect that would have on the price and the quantity exchanged. Don't be content merely to conclude that the price will rise or the price will fall. Would you expect a large or a small change in price or in the quantity exchanged? You will usually have to supply some information from your own experience. Keep in mind that the answer will often depend on the length of time you are allowing for adjustments to occur. Are you predicting a very short-run effect or are you thinking about the long-run effect?
(a) What would happen to the market-clearing price of acoustic guitars in Figure 5-1 if
(i) People turned on to some accordion craze and started losing interest in learning to play the guitar?
(ii) The price of electric guitars were to fall substantially?
(iii) A number of acoustic guitar makers decide to exit the market and make violins instead?
(b) Suppose scientists discover that eating soybeans prevents cancer and heart disease.
(i) What effect would you predict on the price of soybeans?
(ii) What effect would you predict on the price of feed corn (which can usually be grown on land suitable for growing soybeans)?
(c) What effect would you expect each of the following to have (or to have had) on the market for domestically grown cotton?
(i) Nylon is invented.
(ii) The cotton gin is invented.
(iii) The boll weevil (a crop killer) becomes extinct.
(iv) Foreign cotton growers bring in an exceptionally large harvest.
(d) Suppose that all states adopt a serious no-fault rule to cover automobile accidents, so that it becomes impossible to sue for damages after an accident.
(i) What effect would you predict on the cost of hiring a lawyer to draw up a will?
(ii) If only one state moves to no-fault, what effect would you predict on the cost of hiring lawyers to draw up wills in that state? Would you expect a larger or smaller effect than in the preceding question?
(e) Suppose the dental hygienists of the country persuade everyone to floss at least three times each day. What effect would you predict on the price of dental floss?
(f) If it takes five times as much grain to provide a nourishing diet to people who run that grain through beef cattle before eating it than it takes to provide a nourishing diet to those who eat the grain directly, do those who eat beef cause hunger among poor people in the world?
(g) Here is a somewhat different kind of question, one for which you obviously can't supply information from your own experience. Suppose you discover that consumers are currently purchasing 20 times as many widgets as they were purchasing 10 years ago. Would you expect the price of a widget to be higher or lower today than it was 10 years ago? Under what circumstances would you expect it to be higher? Under what circumstances would you expect it to be lower?
(h) What effect would you predict on the price of rental housing in an area if several major new employers set up operations in the area?
(i) If the city council passes an ordinance requiring all apartment owners in a particularly congested area to provide one off-street parking place for each apartment that they rent out, what effect would you predict on the level of rents in that area and on the number of apartment units being rented?
(j) If the city council did not require provision of parking spaces, but simply prohibited all on-street parking on the streets in this congested area, what effect would you predict on the level of rents in the area and on the number of apartment units being rented?
(k) What effect would you predict on the price of gasoline if automobile manufacturers succeeded in doubling the number of miles that drivers can obtain per gallon?
(l) As colleges and universities adopt more online testing programs, what effect would this have on the price of old-fashioned no. 2 pencils? Would you expect the price change to be small or quite large? What does that say about the price elasticity of supply of no. 2 pencils?