Price Elasticity

This concept isn't difficult, but can be extremely confusing the first time you study it. It's so surprisingly straight-forward that I don't want to give away the details about how best to approach this topic in a "public" forum. I'll email you with some tips and examples!
Love you, mom

Price Ceilings and Floors

Price floors and ceilings (i.e., government intervention in the free market!) can be set above, below, or at equilibrium, but to have any affect, price ceilings must be set at a price below equilibrium, and price floors must be set at a price above equilibrium.

Would you like to see some sample questions related to floors and ceilings?

Demand & Supply Answers

1. a decrease in supply; P* rises, Q* falls

2. an increase in demand; P* rises, Q* rises

3. a decrease in supply; P* rises, Q* falls

4. an increase in demand; P* rises, Q* rises

5. an increase in supply; P* falls, Q* rises

6. a decrease in demand; P* falls, Q* falls

Demand & Supply

A few things to remember with respect to demand & supply .....

Be sure you understand the difference between a "change in quantity demanded (supplied)" and a "change in demand (supply)". They are two very different concepts!

Know the factors that will shift the demand or supply curve --- memorize them if you have to.

Be able to determine the equilibrium values of price and quantity.

If the demand or supply curves shift, be able to determine the new equilibrium value of price and quantity.

Answer the following questions that relate to the (nonorganic) cotton market. Draw a graph for each question and show the change in either demand or supply given the scenarios below. Also, determine the change in the equilibrium price and quantity. Show this on your graphs as well.

1. Suppose workers in the cotton market receive a substantial wage increase.
2. People prefer more natural fibers such as cotton rather than synthetics.
3. The cotton crop is damaged by severe weather.
4. The price of wool, a good substitute for cotton, rises.
5. Because of pesticides, the growth of the (nonorganic) cotton crop increases dramatically.
6. There's a huge shift in production and consumption toward organic cotton clothing.

Draw nice, neat graphs. Answers to follow!

Answers to PPF questions

2. 1 unit of butter

3. 2 units of butter

4. because resources are not perfectly substitutable

5. an increase in resources or technology

Production Possibilities Frontier

Given the following options to produce two goods (guns and butter) using a fixed amount of resources and technology, and assuming full-employment:

Option A --- 0 guns, 10 butter
Option B --- 1 gun, 9 butter
Option C --- 2 guns, 7 butter
Option D --- 3 guns, 4 butter
Option E --- 4 guns, 0 butter

1. Draw the PPF.
2. State the opportunity cost of the first gun produced, in terms of butter sacrificed.
3. State the opportunity cost of the second gun produced, in terms of butter sacrificed.
4. Why is the opportunity cost of gun #2 higher than the opportunity cost of gun #1? Yes, the opportunity cost tends to increase, but why?
5. What would have to happen for the economy above to be able to produce Option F --- 4 guns and 10 butter? Be specific.

Opportunity Cost

Think of opportunity cost as the value of the next best alternative action that's been sacrificed. The cost of doing something is calculated in terms of what you can no longer accomplish, not in terms of how much money you spend! Opportunity cost (or as it's sometimes called in economics --- the true cost, or the economic cost) and money cost are two completely different concepts.

Therefore ....
If you can spend the next hour studying for an exam (Option A) or working for an hourly wage of $10 (Option B), the opportunity cost of studying for an hour equals $10, because you forego the chance to earn $10 in the same hour. This is really why it makes sense to go to school when you're young (when your earning potential is low) and not when you're older and sacrificing big bucks!


See if you can answer this question correctly:

Suppose you have $20 to spend and assume you intend to spend the entire amount. You can spend the $20 on movie tickets that cost $10 each, or you can spend the $20 on paperback books that cost $5 each, or some combination of both. What is the opportunity cost of going to see a movie?
a. the sacrifice of a second movie
b. the sacrifice of a 1st and 2nd book
c. the sacrifice of a 3rd and 4th book
d. the sacrifice of two movies
e. the sacrifice of four books

Correct answer given later!