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Unitended Consequences: Application of Supply and Demand

Mastering the economic way of thinking means learning to reason in terms of supply and demand. Here are additional questions on which you can practice. Your answers are less important than the reasoning with which you arrive at those answers. You should probably begin in each case by sketching a small supply and demand graph. Then ask yourself whether the event described would affect the supply curve or the demand curve, in which direction the curve would move, and what effect that would have on the price and the quantity exchanged. Don't be content merely to conclude that the price will rise or the price will fall. Would you expect a large or a small change in price or in the quantity exchanged? You will usually have to supply some information from your own experience. Keep in mind that the answer will often depend on the length of time you are allowing for adjustments to occur. Are you predicting a very short-run effect or are you thinking about the long-run effect?

(a.) Suppose scientist discover that eating soybeans prevents cancer and heart disease.
(i) What effect would you predict on the price of soybeans?
(ii) What effect would you predict on the price of feed corn (which can usually be grown on land suitable for growing soybeans)?
(b.) What effect would you expect each of the following to have (or to have had) on the market for domestically grown cotton?
(i) Nylon is invented.
(ii) The cotton gin is invented.
(iii) The boll weevil becomes extinct
(iv) Foreign cotton growers bring in an exceptionally large harvest.
(c.) Suppose that all states adopt a serious no-fault rule to cover automobile accidents, so that it becomes impossible to sue for damages after an accident.
(i) What effect would you predict on the cost of hiring a lawyer to draw up a will?
(ii) If only one state moves to no fault, what effect would you predict on the cost of hiring lawyers to draw up wills in that state? Would you expect a larger or smaller effect than in the preceding question?
(d.) Suppose the dental hygienists of the country persuade everyone to floss at least three times each day. What effect would you predict on the price of dental floss?
(e.) If it takes five times as much grain to provide a nourishing diet to people who run that grain through beef cattle before eating it than it takes to provide a nourishing diet to those who eat the grain directly, do those who what beef cause hunger among poor people in the world?
(f.) Here is a somewhat different kind of question, one for which you obviously can't supply information from your own experience. Suppose you discover that consumers are currently purchasing 20 times as many widgets as they were purchasing 10 years ago. Would you expect the price of a widget to be higher or lower today than it was 10 years ago? Under what circumstances would you expect it to be higher? Under what circumstances would you expect it to be lower?
(g.) What effect would you predict on the price of rental housing in an area if several major new employers set up operations in the area?
(h.) If the city council passes an ordinance requiring all apartments owners in a particularly congested area to provide one off street parking places for each apartment that they rent out, what effect would you predict on the level of rents in that area and on the number of apartment units being rented?
(i.) If the city council did require provisions of parking spaces but simply prohibited all on-street parking on the streets in this congested area, what effect would predict on the level of rents in the area and on the number of apartments units being rented?
(j.) What effect would you predict on the price of gasoline if automobile manufacturers succeeded in doubling the number of miles that drivers can obtain per gallon?

Solution Preview

(a). Suppose scientist discover that eating soybeans prevents cancer and heart disease.

(i) What effect would you predict on the price of soybeans?
Upon knowing the benefits of eating soybeans, people afflicted with cancer and heart disease will turn to patronizing soybeans. This will result to a surge in the demand from soybeans. The price of soybeans will increase if the surge in demand is not met with increased supply.

(ii) What effect would you predict on the price of feed corn (which can usually be grown on land suitable for growing soybeans)?
With the attention focused on soybeans, we can deduce that farmers will be replacing their agricultural produce with this product (soybean). The adverse effect is that there will be few feed corn farmers. The supply of feed corn will be drastically reduced which will eventually increase its price.

(b.) What effect would you expect each of the following to have (or to have had) on the market for domestically grown cotton?

(i) Nylon is invented.
Nylon is a substitute product for cotton. The market for domestically grown cotton will go down.

(iii) The cotton gin is invented.
Cotton gin makes extraction of cotton faster. With this invention, demand for cotton will increase.

(iv) The boll weevil becomes extinct
This insect, a type of beetle, feasts on cotton buds and flowers. Its presence stunts the growth of cotton. The perpetual absence of this insect will result to bountiful cotton production. This will in turn lower the price of cotton.

(v) Foreign cotton growers bring in an exceptionally large harvest.
Foreign cotton will saturate the presence of cotton in the local market. This will result to lesser local price of cotton.

(c) Suppose that all states adopt a serious no-fault rule to cover ...

Solution Summary

The solution shows how market dynamics affect supply curve, demand curve, and price.

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