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What is the equilibrium price? What is the equilibrium quantity? Fill in the surplus-shortage column and use it to explain why your answers are correct.

Graph the demand for wheat and the supply of wheat. Be sure to label the axes of your graph correctly. Label equilibrium price P and equilibrium quantity Q.

Why will $3.40 not be the equilibrium price in this market? Why not $4.90? "Surpluses drive prices up; shortages drive them down." Do you agree?

Now suppose that the government establishes a ceiling (legal maximum) price of, say, $3.70 for wheat. Explain carefully the effects of this ceiling price. Demonstrate your answer graphically. What might prompt government to establish a ceiling price?

Part One • An Introduction to Economics and the Economy

8. KEY QUESTION How will each of the following changes in demand and/or supply affect equilibrium price and equilibrium quantity in a competitive market; that is, do price and quantity rise, fall, or remain unchanged, or are the answers indeterminate because they depend on the magnitudes of the shifts? Use supply and demand diagrams to verify your answers.

a. Supply decreases and demand is constant.

b. Demand decreases and supply is constant.

c. Supply increases and demand is constant.

d. Demand increases and supply increases.

e. Demand increases and supply is constant.

f. Supply increases and demand decreases.

g. Demand increases and supply decreases.

h. Demand decreases and supply decreases.

9. "Prices are the automatic regulator that tends to keep production and consumption in line with each other." Explain.

10. Explain: "Even though parking meters may yield little or no revenue, they should never theless be retained because of the rationing function they perform."

11. Critically evaluate: "In comparing the two equilibrium positions in Figure 3-6a, I note that a larger amount is actually purchased at a higher price. This refutes the law of demand."

12. Suppose you go to a recycling centre and are paid $.25 per kilogram for your aluminum cans. However, the recycling firm charges you $.20 per bundle to accept your old newspapers. Use demand and supply diagrams to portray both markets. Explain how different government policies with respect to the recycling of aluminum and paper might account for these different market outcomes.

13. Advanced analysis: Assume that demand for a commodity is represented by the equation P = 10 - .2Qd and supply by the equation P = 2 + .2Qs, where Qd and Qs are quantity demanded and quantity supplied, respectively, and P is price. Using the equilibrium condition Qs = Qd, solve the equations to determine equilibrium price. Now determine equilibrium quantity. Graph the two equations to substantiate your answers.

14. (Last Word) Discuss the economic aspects of ticket scalping, specifying gainers and losers.

NtERNEt appLication question m

Changes in Demand—Baby Diapers and Retirement Villages Other things equal, an increase in the number of buyers for a product or service will increase demand. Baby diapers and retirement villages are two products designed for different population groups. The U.S. Census www.census.gov/ ipc/www/idbpyr.html provides population pyramids (graphs that show the distribution of population by age and sex) for countries for the current year, 2025, and 2050. View the population pyramids for Mexico, Japan, and Canada. Which country would you expect to have the greatest percentage increase in demand for baby diapers in the year 2050? For retirement villages? Which country would you expect to have the greatest absolute increase in demand for baby diapers? For retirement villages?

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