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Chapter3 Demand and Supply
Chapter3 Demand and Supply
Chapter 3 in Economics clearly demonstrates that supply and demand analysis is a powerful tool for understanding equi-
librium prices and quantities. The information there is fully sufficient for moving forward in the book, but you may find
that additional examples of supply and demand are helpful. This optional Internet chapter provides several concrete il-
lustrations of changes in supply and demand. It also applies supply and demand analysis to nonpriced goods (goods owned
in common and not bought and sold in markets). Finally, it demonstrates how markets confer “benefit surpluses” to con-
sumers and producers and “efficiency gains” to society.
Your instructor may assign all, some, or none of this chapter, depending on time availability and preferences.
Changes in Supply and Demand we represent as a leftward shift of the supply curve from S1
to S2 in Figure 3W.1. At each price, consumers desire as
As shown in Figure 3.6 of the textbook, changes in sup- much lettuce as before, so the freeze does not affect the de-
ply and demand cause changes in price, quantity, or both. mand for lettuce. That is, demand curve D1 does not shift.
The following applications demonstrate this fact in sev- What are the consequences of the reduced supply of
eral real-world markets. The simplest situations are those lettuce for equilibrium price and quantity? As shown in
in which either supply changes while demand remains Figure 3W.1, the leftward shift of the supply curve dis-
constant or demand changes while supply remains con- rupts the previous equilibrium in the market for lettuce
stant. Let’s consider two such simple cases first, before and drives the equilibrium price up from P1 to P2.
moving on to more complex applications. Consumers respond to that price hike by reducing the
quantity of lettuce demanded from Q1 to Q2. Equilibrium
in the market is restored, now at P2 and Q2.
Lettuce Consumers who are willing and able to pay price P2
Every so often we hear on the news that extreme weather obtain lettuce; consumers unwilling or unable to pay that
has severely reduced the size of some crop such as lettuce, price do not. Some consumers continue to buy as much let-
oranges, or cherries. Suppose, for example, that a severe tuce as before, even at the higher price. Others buy some
freeze destroys a sizable portion of the lettuce crop. This lettuce but not as much as before, and still others forgo
circumstance implies a significant decline in supply, which lettuce altogether. The latter two groups use the money
3W-1
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3W-2 BONUS WEB CHAPTER 3WEB | Applications and Extensions of Supply and Demand Analysis
S2 S1
S1
Price (per pound)
P2
P2
D1
D2
D1
0 Q2 Q1
Quantity (pounds) 0 Q1 Q2
Quantity (flags)
Pink Salmon P2
D1
D2
Now let’s see what happens when both supply and de-
mand change at the same time. Two decades ago, people 0 Q1 Q2
who caught salmon earned as much as $1 for each pound Quantity (pounds)
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BONUS WEB CHAPTER 3WEB | Applications and Extensions of Supply and Demand Analysis 3W-3
a result of these changes, the supply of pink salmon greatly FIGURE 3W.4
increased and the supply curve shifted to the right, as The market for gasoline. An increase in the demand for gasoline, as
from S1 to S2 in Figure 3W.3. shown by the shift from D1 to D2, coupled with a decrease in supply, as
Over the same years, the demand for pink salmon de- shown by the shift from S1 to S2, boosts equilibrium price (here from P1
creased, as represented by the leftward shift from D1 to D2 to P2). In this case, equilibrium quantity increases from Q1 to Q2 because
the increase in demand outweighs the decrease in supply.
in Figure 3W.3. That decrease resulted from increases in
consumer income and reductions of the price of substitute S2
products. As buyers’ incomes increased, consumers shifted P2
S1
demand away from canned fish and toward higher-quality
fresh or frozen fish, including more-valued Atlantic,
3W-4 BONUS WEB CHAPTER 3WEB | Applications and Extensions of Supply and Demand Analysis
Shortage
Olympic Figure Skating Finals D
Tickets for the women’s figure skating championship at
the Olympics are among the world’s “hottest tickets.” The 0 Q1 Q2
popularity of this event and the high incomes of buyers Quantity (tickets)
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BONUS WEB CHAPTER 3WEB | Applications and Extensions of Supply and Demand Analysis 3W-5
price. Wherever there are shortages and secondary mar- smaller ice arenas than used for figure skating and by
kets, we can safely assume that price was set below the charging less for tickets. Nevertheless, the stands are
equilibrium price. (Refer to Chapter 3’s Last Word on rarely full for the preliminary contests, which compete
scalping for other implications of below-equilibrium prices.) against final events in other winter Olympic sports.)
equilibrium ticket prices from a rock star to fans also benefited the star.
Surplus In the past few years, many stars have rethought this strategy.Ticket
prices for rock concerts have skyrocketed, sometimes to more than
a b
P1 $100 for the most desirable seats.Why the change of heart? According
to concert promoters, the growing practice of illegally downloading
P2 songs and albums from the Internet has not only reduced royalty in-
come to the superstars but also reduced the value of free publicity. If
concert goers and others are downloading CDs rather than buying
D
them, why subsidize concert goers with below-equilibrium ticket prices?
0 Q2 Q1 The superstars are, in effect, taking back a gift.
Quantity (tickets)
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3W-6 BONUS WEB CHAPTER 3WEB | Applications and Extensions of Supply and Demand Analysis
Nonpriced Goods: taking buffalo primitive, the number of bison killed each
The American Bison year did not threaten the sustainable bison population.
Although there was no actual market for buffalo, we
We can extend our discussion of shortages and surpluses can apply supply and demand analysis to this situation.
by applying those ideas to nonpriced goods (or re- The vertical supply curve S1 in Figure 3W.8a represents
sources). Such goods (or resources) are owned in common the sustainable supply of buffalo—the stable population
by society and available for the taking on public lands. size based on reproduction rates, death rates, and avail-
Because they are not bought and sold in markets, their able habitat. The supply curve is vertical in this nonmar-
price is effectively zero. We are speaking, for example, of ket situation because the number of buffalo is indepen-
clams and seashells on public beaches, fish and reptiles in dent of “price.” In reality, there is no price other than zero
public waters, and wild game and mushrooms on public for nonpriced goods. The demand curve D1 in Figure
land. Although there is no actual market for these non- 3W.8a represents the weak demand for buffalo prior to
priced goods, supply and demand analysis provides keen the westward expansion. This is a hypothetical demand
insights about them. curve showing the quantity of buffalo that would be de-
Consider the plight of the American bison (commonly manded at each price if such a price existed.
called the “buffalo”). Once numbering in the hundreds of Figure 3W.8a indicates that at price zero the quantity
thousands across the plains and plateaus of the American of buffalo demanded was Q1 compared to the quantity
west, these animals were nearly wiped out by hunters and supplied of Q2. So there was a large surplus of buffalo, rep-
loss of habitat during the 1800s. What happened? resented by distance ba ( Q2Q1) in this early period of
Buffalo roamed on the vast public lands in the American history. Bison were plentiful and there was no
American west. They were, in effect, a nonprice good immediate threat to their sustainable supply.
owned in common by the inhabitants and available for the This situation changed dramatically as the railroad
taking. Before the railroad expanded westward, only penetrated the American west. The railroad brought many
Native Americans hunted the buffalo. Because the num- more hunters, who sold buffalo hides for use in coats and
ber of Native Americans was small and their means of rugs. Moreover, many individuals shot hundreds of buffalo
FIGURE 3W.8
The “market” for buffalo (a) before the railroad and (b) after the railroad. (a) Prior to the railroad and the develop-
ment of the American west, the demand for buffalo D1 was slight relative to the sustainable supply, S1. Because buffalo were owned
in common, no actual market existed and they were available at a price of zero. At that price, quantity supplied, Q2, exceeded
quantity demanded, Q1, and a large surplus (ba) of buffalo existed. (b) After the railroad and the development of the American
west, the demand for buffalo D2 was strong relative to the sustainable supply, S2. Because buffalo were owned in common, no ac-
tual market existed and they were available at a price of zero. At that price, quantity demanded Q4 exceeded the quantity of
buffalo Q3 that could be killed annually without diminishing their numbers. Shortages, such as dc, eventually nearly wiped out the
bison in the American west.
S1 D2 S2
D1
Price (per bison)
Surplus Shortage
a b c d
0 Q1 Q2 0 Q3 Q4
Quantity (bison) Quantity (bison)
(a) (b)
Prerailroad Postrailroad
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BONUS WEB CHAPTER 3WEB | Applications and Extensions of Supply and Demand Analysis 3W-7
a day simply for “sport.” The increase in hunters, in Land Management lands. Buffalo numbers have increased
essence, reflected an increase in the demand for buffalo. so dramatically in Yellowstone National Park—there are
The railroad also enabled economic development that now 3500—that park officials are considering selective
converted public lands to private farms and ranches. Those shooting by park rangers to thin the herd.
land-use changes decreased the available range for buffalo Moreover, in recent decades some private landowners
and thus their sustainable supply. have introduced buffalo on their ranches. The most
Figure 3W.8b illustrates the circumstance for the buf- prominent such landowner is Ted Turner, the founder of
falo following the railroad’s extension into the American CNN, who has scores of ranches in the west with large
west. The demand curve for buffalo D2 is positioned much buffalo herds. Recently, he announced a plan to open a se-
farther to the right than demand curve D1 in Figure 3W.8a. ries of restaurants that would include buffalo-meat op-
This reflects the increased buffalo hunting enabled by tions on the menu. A nonpriced good, once owned only
train transportation. The sustainable supply curve S2 is in common, is being converted to a private, positively
positioned to the left of the S1 curve in the prior period, priced good produced on private land, as cattle are, and
reflecting diminished habitat. Because buffalo continued bought and sold in markets. If this conversion is success-
to be owned in common, their price remained zero. ful, buffalo will become far more common in the American
At price zero in Figure 3W.8b, the quantity of buffalo west because there will be a profit incentive to increase
supplied is Q3 and the quantity demanded is Q4. The sur- their numbers.
plus of bison in the prerailroad era gave way to a short-
age, as represented by distance dc ( Q4Q3). Moreover,
the shortage was relative to the sustainable level of the Q U I C K R E V I E W 3W.2
herd, not the actual number of buffalo available to hunters.
Each year, given the zero price, hunters shot more buffalo • A surplus of a nonpriced good (a good owned in com-
than were being naturally reproduced. So the sustainable mon) occurs when, at zero price, the quantity available
(quantity supplied) exceeds the quantity demanded.
supply of buffalo declined each year. In Figure 3W.8b,
this would be depicted as successive leftward shifts of the • A shortage of a nonpriced good owned in common oc-
curs when, at zero price, the quantity demanded exceeds
supply curve. Eventually, the combination of zero price,
the quantity available (quantity supplied).
excess demand, and declining supply nearly exhausted
(used up) the availability of buffalo in the American west. • Faced with increases in demand, nonpriced goods tend
to be overconsumed and eventually exhausted unless they
The plight of the buffalo occurred because there was
are rationed by nonprice means.
no price mechanism to equate quantity supplied and quan-
tity demanded and no profit incentive to sustain the herd
size. Nonpriced goods tend to get overconsumed and
eventually exhausted. This tendency holds for all non- Consumer and Producer Surplus
priced goods that face excess demand, including fish in
public waters, clams and oysters on public beaches, water Our final goal for this chapter is to extend the analysis of
in some rivers, trees used for fuel in sub-Saharan Africa, supply and demand. Specifically, we want to examine the
and so on. following reality: Consumers and producers obtain “ben-
Where price does not ration and demand is strong efit surpluses” through market transactions. These sur-
relative to supply, society must devise some other ra- pluses vary in size among the separate buyers and sellers.
tioning mechanism to limit consumption. Modern man-
agement of fish and game, for example, uses rationing
mechanisms such as licenses (which limit the number of
Consumer Surplus
fishers and hunters), seasons (which limit the time of fish- The benefit surplus received by a consumer or consumers
ing and hunting), and limits (which limit the number of in a market is called consumer surplus—the difference be-
fish and animals taken). Those mechanisms were not in tween the maximum price a consumer is (or consumers are)
place during the period in which the buffalo declined. willing to pay for a product and the actual price. In nearly all
Today, there are about 350,000 bison in the United markets, consumers individually and collectively gain
States. Although that number is small relative to the pre- greater total utility in dollar terms (total satisfaction) from
railroad era, the remaining herds are generally thriving. their purchases than the amount of their expenditures
Hunting of buffalo is not allowed on public lands such as ( product price quantity). This utility surplus arises
national parks, state parks, national forests, and Bureau of because all consumers pay the equilibrium price even
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3W-8 BONUS WEB CHAPTER 3WEB | Applications and Extensions of Supply and Demand Analysis
FIGURE 3W.9 oranges for the $8 equilibrium price (column 3), five of
Consumer surplus. Consumer surplus—shown as the green them obtain a consumer surplus. Column 4 shows that Bob
triangle—reflects the differences between the maximum prices con- receives a consumer surplus of $5 ( $13 $8); Barb, $4
sumers are willing to pay for a product and the lower equilibrium price, ( $12 $8); Bill, $3 ( $11 $8); Bart, $2 ($10 $8);
here assumed to be $8. For quantity Q1, consumers are willing to pay the and Brent, $1 ($9 $8). Only Betty receives no consumer
sum of the amounts represented by the green triangle and the blue rec-
surplus because her maximum willingness to pay of $8
tangle. Because they need pay only the amount shown as the blue rectan-
matches the $8 equilibrium price.
gle, the green triangle reflects consumer surplus.
Obviously, most markets have more than six people.
Suppose there are many other consumers besides Bob,
Consumer Barb, Bill, Bart, Brent, and Betty in the market repre-
surplus
sented by Figure 3W.9. It is reasonable to assume that
many of these additional people are willing to pay more
Price (per bag)
Equilibrium
price $8
than $8 for a bag of oranges. By adding together the in-
P1 dividual consumer surpluses obtained by our named and
unnamed buyers, we obtain the collective consumer sur-
plus in this specific market. To obtain the Q1 bags of or-
anges represented in Figure 3W.9, consumers collectively
are willing to pay the total amount shown by the sum of
D
the green triangle and blue rectangle under the demand
0 Q1 curve and to the left of Q1. But consumers need pay only
Quantity (bags) the amount represented by the blue rectangle ( P1
Q1). So the green triangle is the consumer surplus in this
market. It is the sum of the vertical distances between the
though many would be willing to pay more than that price demand curve and the $8 equilibrium price at each quan-
to obtain the product. tity up to Q1. Alternatively, it is the sum of the gaps be-
Consider Figure 3W.9, where we assume the equilib- tween maximum willingness to pay and actual price, such
rium price, P1, of oranges is $8 per bag. The portion of as those we calculated in Table 3W.1.
the demand curve D lying above the $8 equilibrium price Consumer surplus and price are inversely (negatively)
shows that many consumers of oranges would be willing related. Given the demand curve, higher prices reduce
to pay more than $8 per bag rather than go without consumer surplus; lower prices increase it. To test this,
oranges. draw in an equilibrium price above $8 in Figure 3W.9 and
Consider Table 3W.1, for example, where column 2 re- observe the reduced size of the triangle representing con-
veals that Bob is willing to pay a maximum of $13 for a bag sumer surplus. When price rises, the gap narrows be-
of oranges; Barb, $12; Bill, $11; Bart, $10; and Brent, $9. tween the maximum willingness to pay and the actual
Betty, in contrast, is willing to pay only the $8 equilibrium price. Next, draw in an equilibrium price below $8 and
price. Because all six buyers listed in Table 3W.1 obtain the see that consumer surplus increases. When price falls, the
gap widens between maximum willingness to pay and ac-
tual price.
TA B L E 3W.1
Consumer Surplus
Producer Surplus
(2) (3)
Maximum Actual Price (4)
Like consumers, producers also receive a benefit surplus in
(1) Price Willing (Equilibrium Consumer markets. This producer surplus is the difference between
Person to Pay Price) Surplus the actual price a producer receives (or producers receive) and
the minimum acceptable price. Sellers collectively receive a
Bob $13 $8 $5 ( $13 $8)
producer surplus in most markets because most sellers are
Barb 12 8 4 ( $12 $8)
Bill 11 8 3 ( $11 $8)
willing to accept a lower-than-equilibrium price if that is
Bart 10 8 2 ( $10 $8) required in order to sell the product. That lower accept-
Brent 9 8 1 ( $9 $8) able price is shown by the portion of the supply curve in
Betty 8 8 0 ( $8 $8) Figure 3W.10 lying to the left of and below the assumed
$8 equilibrium price.
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BONUS WEB CHAPTER 3WEB | Applications and Extensions of Supply and Demand Analysis 3W-9
price $8
There is a direct (positive) relationship between equi-
P1 librium price and the amount of producer surplus. Given
Producer the supply curve, lower prices reduce producer surplus;
surplus higher prices increase it. If you pencil in a lower equilib-
rium price than $8, you will see that the producer surplus
triangle gets smaller. The gaps between the minimum ac-
ceptable payments and the actual prices narrow when the
0 Q1 price falls. If you pencil in an equilibrium price above $8,
Quantity (bags) the size of the producer surplus triangle increases. The
gaps between minimum acceptable payments and actual
prices widen when the price increases.
Suppose that Carlos, Courtney, Chuck, Cindy, Craig,
and Chad are six of the many sellers of oranges in the Efficiency Revisited
market. Due to differences in production costs, suppose In Figure 3W.11 we bring together the demand and supply
that Carlos’ minimum acceptable payment for a bag of or- curves of Figures 3W.9 and 3W.10 to show the equilibrium
anges is $3, as shown in column 2 of Table 3W.2, whereas price and quantity and the previously described regions of
Courtney’s minimum acceptable payment is $4, Chuck’s is
$5, Cindy’s is $6, Craig’s is $7, and Chad’s is $8. But each
seller receives as payment the equilibrium price of $8. FIGURE 3W.11
As shown in column 4, Carlos thus obtains a producer Efficiency: maximum combined consumer and producer surplus.
surplus of $5 ( $8 $3); Courtney, $4 ( $8 $4); At quantity Q1 the combined amount of consumer surplus, shown as the
Chuck, $3 ( $8 $5); Cindy, $2 ( $8 $6); Craig, $1 green triangle, and producer surplus, shown as the blue triangle, is
( $8 $7); and Chad, zero ( $8 $8). maximized. Efficiency occurs because, at Q1, maximum willingness to pay,
reflected by the points on the demand curve, equals minimum acceptable
price, reflected by the points on the supply curve.
TA B L E 3W.2
Consumer S
Producer Surplus
surplus
(2) (3)
Price (per bag)
Carlos $3 $8 $5 ( $8 $3)
Courtney 4 8 4 ( $8 $4) Producer
Chuck 5 8 3 ( $8 $5) surplus
Cindy 6 8 2 ( $8 $6) D
Craig 7 8 1 ( $8 $7)
Chad 8 8 0 ( $8 $8) 0 Q1
Quantity (bags)
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3W-10 BONUS WEB CHAPTER 3WEB | Applications and Extensions of Supply and Demand Analysis
consumer and producer surplus. All markets that have FIGURE 3W.12
downward-sloping demand curves and upward-sloping sup- Efficiency losses. Quantity levels less than or greater than the effi-
ply curves yield consumer and producer surplus. cient quantity, Q1, create efficiency losses. The brown triangle shows the
The equilibrium quantity in Figure 3W.11 reflects efficiency loss associated with underproduction Q2, whereas the gold
economic efficiency. In the terminology of Chapter 2, triangle illustrates the efficiency loss associated with overproduction Q3.
productive efficiency is achieved because competition forces a
producers to use the best techniques and combinations of S
Efficiency
resources in growing and selling oranges. Production costs d losses f
of each level of output are minimized. Allocative efficiency
3W-12 BONUS WEB CHAPTER 3WEB | Applications and Extensions of Supply and Demand Analysis
S U M M A RY
1. A decrease in the supply of a product increases its equilib- lower price actually paid. Collectively, consumer surplus is
rium price and reduces its equilibrium quantity. In contrast, represented by the triangle under the demand curve and
an increase in the demand for a product boosts both its above the actual price.
equilibrium price and its equilibrium quantity. 6. Producer surplus is the difference between the minimum
2. Simultaneous changes in supply and demand affect equilib- price that a producer is willing to accept for a product and
rium price and quantity in various ways, depending on the the higher price actually received. Collectively, producer
relative magnitudes of the changes in supply and demand. surplus is shown by the triangle above the supply curve and
Equal increases in supply and demand, for example, leave below the actual price.
equilibrium price unchanged. 7. Graphically, the combined amount of producer and con-
3. Sellers set prices of some items such as tickets in advance sumer surplus is represented by the triangle to the left of
of the event. These items are sold in the primary market the intersection of the supply and demand curves that is be-
that involves the original seller and buyers. If preset prices low the demand curve and above the supply curve. At the
turn out to be below the equilibrium prices, shortages oc- equilibrium price and quantity in competitive markets, mar-
cur and scalping in legal or illegal secondary markets arises. ginal benefit equals marginal cost, maximum willingness to
The prices in the secondary market then rise above the pre- pay equals minimum acceptable price, and the combined
set prices. In contrast, surpluses occur when the preset amount of consumer surplus and producer surplus is
prices happen to exceed the equilibrium prices. maximized.
4. Nonpriced goods such as fish in public waters and game on 8. Output levels that are either less than or greater than the
public lands are owned in common and therefore not bought equilibrium output create efficiency losses—reductions in
and sold in markets. A surplus of a nonpriced good occurs the combined amount of consumer surplus and producer
when the sustainable quantity of the good exceeds the quan- surplus. Underproduction creates efficiency losses because
tity demanded. A shortage of a nonpriced good occurs when output is not being produced for which maximum willing-
the quantity demanded exceeds the sustainable quantity. In ness to pay exceeds minimum acceptable price. Over-
this latter case, the good tends to be overconsumed and, production creates efficiency losses because output is being
without protection, may eventually be exhausted. produced for which minimum acceptable price exceeds max-
5. Consumer surplus is the difference between the maximum imum willingness to pay.
price that a consumer is willing to pay for a product and the
T E R M S A N D C O N C E P T S
S T U DY Q U E S T I O N S
1. Suppose the supply of apples sharply increases because of 4. Assume that both the supply of bottled water and the de-
perfect weather conditions throughout the growing season. mand for bottled water rise during the summer but that
Assuming no change in demand, explain the effect on the equi- supply increases more rapidly than demand. What can you
librium price and quantity of apples. Explain why quantity conclude about the directions of the impacts on equilibrium
demanded increases even though demand does not change. price and equilibrium quantity?
2. Assume the demand for lumber suddenly rises because of a 5. For each stock in the stock market, the number of shares
rapid growth of demand for new housing. Assume no change sold daily equals the number of shares purchased. That
in supply. Why does the equilibrium price of lumber rise? is, the quantity of each firm’s shares demanded equals
What would happen if the price did not rise under the de- the quantity of its shares supplied. So, if this equality
mand and supply circumstances described? always occurs, why do the prices of stock shares ever
3. Suppose both the demand for olives and the supply of olives change?
decline by equal amounts over some time period. Use graph- 6. Why are shortages or surpluses more likely with preset
ical analysis to show the effect on equilibrium price and prices, such as those on tickets, than flexible prices, such as
quantity. those on gasoline?
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7. Use this table to answer the questions that follow: there are no such limits on the number of fish that can be
bought at a fish market or grocery store?
Quantity Demanded, Quantity Supplied, 11. Distinguish between the terms “maximum willingness to
Thousands Price Thousands pay” and “minimum acceptable price.” How do they relate,
respectively, to consumer and producer surplus?
80 $25 60
75 35 60
12. “Freely made exchanges in competitive markets benefit
70 45 60
both buyers and sellers.” Use the concepts of consumer sur-
65 55 60
plus and producer surplus to verify this statement.
60 65 60 13. Draw a supply and demand graph and identify the areas of
55 75 60 consumer surplus and producer surplus. Given the demand
50 85 60 curve, what impact will an increase in supply have on the
amount of consumer surplus shown in your diagram?
Explain why.
a. If this table reflects the supply of and demand for tick- 14. Refer to Table 3W.1. If the six people listed in the table are
ets to a particular World Cup soccer game, what is the the only consumers in the market and the equilibrium price
stadium capacity? is $11 (not the $8 shown), how much consumer surplus will
b. If the preset ticket price is $45, would we expect to see the market generate?
a secondary market for tickets? Explain why or why
15. Refer to Table 3W.2. If the six people listed in the table are
not. Would the price of a ticket in the secondary mar-
the only producers in the market and the equilibrium price
ket be higher than, the same as, or lower than the price
is $6 (not the $8 shown), how much producer surplus will
in the primary (original) market?
the market generate?
c. Suppose for some other World Cup game the quanti-
ties of tickets demanded are 20,000 lower at each ticket 16. Use the ideas of marginal benefit and marginal cost and the
price than shown in the table. If the ticket price re- ideas of consumer surplus and producer surplus to explain
mains $45, would the event be a sellout? Explain why why economists say competitive markets are efficient. Why
or why not. are below- or above-equilibrium levels of output inefficient,
according to these two sets of ideas?
8. Advanced Analysis Most scalping laws make it illegal to
sell—but not to buy—tickets at prices above those printed 17. (Last Word) How does a generic drug differ from its brand-
on the tickets. Assuming that is the case, use supply and de- name, previously patented equivalent? Explain why the
mand analysis to explain why the equilibrium ticket price in price of a brand-name drug typically declines when an
an illegal secondary market tends to be higher than in a le- equivalent generic drug becomes available? Explain how
gal secondary market. that drop in price affects consumer surplus and allocative
efficiency.
9. States in the Great Plains have for years fought (often
through lawsuits) over the amounts of water each is entitled 18. Web-Based Question: Gasoline prices—how high (or low)
to use from the shared Missouri River for various purposes now? Go to the website of the Office of Energy Statistics,
such as irrigation, maintaining river levels for navigation, www.eia.doe.gov, and follow the links to find the current
and providing recreational opportunities in reservoirs. Use retail price of gasoline. How does the current price of reg-
supply and demand analysis to explain why such battles ular gasoline compare with the price a year ago? What must
have occurred. have happened to either supply, demand, or both to explain
the observed price change?
10. Why are there legal daily “limits” on the number of fish
that can be caught in the nation’s public waters whereas