Supply and Demand
The current war in Iran and subsequent blocking of the Strait of Hormuz is causing prices for oil to rise.
Is this a supply or a demand shifter? Which category of shifter is it?
Supply
Natural/Artificial Disaster/World Events
The last ten years has seen an increase in healthy living and eating campaigns.
Draw what happens to the supply/demand graph for unhealthy sugary drinks as a result. Explain how the equilibrium price and quantity for sugary drinks has changed.
Demand decreases, consumer tastes and expectations
price and quantity should have decreased
Peets Coffee offers a light roast espresso, while the Starbucks across the street offers dark roast. Andytown has a special drink called a Snowy Plover, while Diamond Coffee sells specialized croissants. All have varied prices and few control more than 1-2% of the San Francisco market
Monopolistic competition
Specialty products, many producers, no control over market/prices, more about brand and the differentiated product than price.
The bees of a honey producer in your city keep escaping and causing injuries to neighbors.
Type of externality- positive/negative, production/consumption,
How do we best solve it
Negative- production
Laws requiring a certain standard of containment for bees
Fines for every injured person near bee farms
Farmers in Nowhereville, Iowa all use the same open grazing land. Each farmer keeps adding more cows to gain profits.
Farmers set a contract limit on the number of cattle they can graze
Government enforces the grazing limits.
An economic boom is caused by decreased fuel costs, a long period of tech company growth, and good agricultural harvests. This leads to American families having more money to take luxury vacations to the Swiss Alps.
Is the increase in vacations a supply or a demand shifter? Which category of shifter is it?
Demand
Change in income- more money, more buying
After the release of the Toyota Prius, several other car companies entered the electric car market.
Draw what happens to the supply/demand graphs for electric cars as a result. Explain what happens to equilibrium price and quantity.
Supply increase- number of producers changes
Quantity increase, price decrease
Ford purchases aluminum for use in cars from many different suppliers. None of the aluminum is any different than the others, and the prices from all suppliers match global supply/demand trends.
What kind of market is aluminum?
Perfect competition- identical products, no price control for each supplier
The streets around a local bar are notorious for accidents involving impaired drivers.
Type of externality- positive/negative, production/consumption,
How do we best solve it
Negative- consumption
Hefty fines/jailtime for all who drive impaired
Fines for the bar for not cutting off drinkers/letting them drive
Ships in the Pacific benefit from the presence of the Point Reyes Lighthouse station. It prevents them from crashing into rocks. Many ships can use this lighthouse at once, and most simply pass right by it, but upkeep can get quite expensive.
Public goods- lighthouse provides a service enjoyed by many, but paid for by none of the ships
Tolls/taxes for ships coming from a location where the lighthouse would have been used- allows the government to pay for it
Every year, the Game Developers Conference meets in San Francisco, driving up prices for hotel rooms and Ubers.
Is this a supply or demand shifter? What category of shifter is it?
Demand
Change in number of consumers- more people leads to more purchases which leads to higher prices
Chicken and beef prices have gone up significantly in the last 12 months.
Draw what has happened to the supply/demand graph for pork as a result. Explain how equilibrium price and quantity for pork changed
Demand increase as Substitute good increases in price
Prices will increase and quantity will increase
One reason that new social media networks struggle to take off is that everyone prefers to be where their friends already are, digitally speaking. It's no wonder that larger networks dominate, and why Facebook, Instagram, YouTube, and X make up about 65% of social media web traffic. Costs of creating and advertising a new network are simply insane.
Oligopoly- a few producers control significant market share, high startup costs, barriers to entry
In a relatively poor city, 75% of high school students end up getting a college education, thereby increasing community investment, tax rates, and decreasing crime rates. The entire city then improves and becomes wealthier
Type of externality- positive/negative, production/consumption,
How do we best solve it
Positive- production of educated people
Pay students to attend colleges, pay colleges subsidies to increase financial aid
Scientific research about human health, the environment, and space travel generally benefits everyone in society, but companies are rarely incentivized to invest in such research because it makes little to no money.
Public Goods-
Governments need to tax people to invest in basic scientific research
More solar panels on homes reduces greenhouse gas emissions and pollution. The government decides to give solar companies subsidies to reduce the price of solar panels.
Is this a supply or a demand shifter and why? What category of shifter is it?
Supply
Government Policies/Change is cost of production- subsidies represent a government policy used to encourage a positive externality by reducing costs to producers
A new environmental regulation forces chemical plants in Texas and Louisiana to treat their wastewater and emissions rather than releasing it into the environment
Draw what happens to the supply/demand graph as a result. Explain what happens to equilibrium price/quantity.
Supply decrease- government regulation/cost of production
Price should increase, quantity decrease
Ticketmaster has been the primary first-hand ticket seller for concerts, sporting events, and festivals for about 25 years. However, their prices are inflated by about 35% above official retail value, even for events that are selling few tickets. Other companies like LiveNation entered the market, but later merged with Ticketmaster or were bought outright.
Monopoly- inflated prices- control over price despite demand
Horizontal integration in action- ticket companies are merging
A nightclub plays loud music late into the night. People living nearby have trouble sleeping, even though they do not go to the club.
Type of externality- positive/negative, production/consumption,
How do we best solve it
Negative- production/consumption
Fines for the club when the noise gets too loud,
Factories pump dangerous chemicals into the air as they produce their goods. Every time they release polluted air, the quantity of breathable air decreases. No one owns the air and it wouldn't be profitable to treat the polluted air.
Tragedy of the Commons
Clean air is a common good, shared by all, but can be depleted- we should charge factories for every unit of pollution produced
Force them to pay for air treatment.
Set caps on pollution allowed in factories
Apple discovered a way to produce more cellphones using the same resources as before. As a result, prices for phones decrease and more people are able to purchase the iPhone game "BART Bikers" where teenagers ride their bikes on top of BART trains.
Determine whether these two shifts are supply or demand shifters. Also determine the category of shift.
1. Cell Phones- Supply- changes in production costs
2. Game "BART Bikers"- Demand- change in price of complementary goods
Yale announced that they will now be doubling the size of their undergraduate class and reducing tuition by 25%.
Draw what happens to the supply/demand graph for Harvard Admissions as a result. Explain what happens to price/quantity. Assume Yale and Harvard students participate in the same market
Demand decrease, change in price of substitute good
Price decreases, quantity decreases.
After the breakup of AT&T in the 1990s, two other competitors emerged: T-Mobile and Verizon. Together they make about 90% of all phone services. Explain the transformation of market structures in the phone industry, and the problems that emerge from this transformation
Transforms from monopoly to oligopoly- 1 producer to 3 producers
Price controls- the companies can charge more than market value for phone services- prices can keep increasing
Collusion- prevent competition by making anti-competitive deals- no innovation or price drops
As more people take public transit, traffic congestion decreases and air pollution around the city drops significantly
Type of externality- positive/negative, production/consumption,
How do we best solve it
Positive- consumption
Subsidy to public transit orgs to decrease fare costs
Discounts/passes to certain groups of people to encourage transit ridership
Everyone loves beautiful ocean views and beaches. However, the production and use of plastic causes ocean pollution as plastic products are dumped into the Pacific, Atlantic, and Indian Oceans. As more plastic is dumped, beautiful beaches and ocean views are replaced by garbage patches
Tragedy of the Commons
Once the plastic is sent into the ocean, it destroys the natural resources in the Ocean
Tax on plastic good usage for people
Tax on plastic production for companies
Force waste companies to hold plastics in a less dangerous/polluting place