Purchase Solution

# Discussion on Supply and Demand and Private and Public Goods

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Explain the law of supply, and why the supply curve slopes upward? How is the market supply curve derived from the supply curves of individual producers?

- Identify what the major determinants of price elasticity of demand are? Use those determinants and your own reasoning in judging whether demand for each of the following products is probably elastic or inelastic: (a) bottled water; (b) toothpaste; (c) Crest toothpaste; (d) ketchup; (e) diamond bracelets; and (f) Microsoft's Windows operating system.

- Use the distinction between the characteristics of private and public goods to determine whether the following should be produced through the market system or by government: (a) French fries; (b) airport screening; (c) court systems; (d) mail delivery; and (e) medical care. State why you answered as you did in each case.

##### Solution Summary

The solution shows the characteristics and mechanics of supply and demand. It distinguishes also the difference between private and public goods.

##### Solution Preview

The law of supply states that as price increases, quantity sold by the business firms increases also. The supply curve slopes upward because of its direct proportionality relationship with price. Sellers will sell when the price of the product is high. On the other hand, when the price of the product is low, suppliers will restrict selling the product. Using a graph, the supply curve is derived by plotting in this manner: the y-axis (vertical axis) signifies the supply data and the x-axis (horizontal axis) signifies the price. The completed graph will show that the supply curve will be upward sloping.

Learning All (2012) identifies these major determinants of the price elasticity of demand:
1. Number of close substitutes within the market - The more (and closer) substitutes available in the market the more elastic demand will be in response to a change in price. In this case, the substitution effect will be quite strong.
2. Percentages of income spent on a good - It may be the case that the smaller the proportion of income spent taken up with purchasing the good or service the more inelastic demand will be.
3. Time period under consideration - Demand tends to be more elastic in the long run rather than in the short run. For example, after the two world oil price shocks of the 1970's - the "response" to higher oil prices was modest in the immediate period after price increases, but as time passed, people found ways to consume less petroleum and other oil products. This included measures to get better mileage from their cars; higher spending on insulation in homes and car pooling for commuters. The demand for oil became more elastic in the long-run.

Web Finance (2012) defines elastic demand as demand that increases or decreases as the price of an item goes down or up. The definition of inelastic demand in economics is that the quantity demanded by buyers doesn't change as much as the price does (Amadeo, 2012).

Elastic or inelastic: (a) bottled water; (b) toothpaste; (c) Crest toothpaste; (d) ketchup; (e) diamond ...

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