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Supply and Demand

Supply and Demand. Activities and Definitions. Equilibrium in the Wheat Market. Q s = 1800 + 240P Q d = 3550 - 266P Price is in dollars per bushel Quantity is in millions of bushels per year Find the equilibrium price and quantity Price Elasticities of Demand and Supply

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Supply and Demand

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  1. Supply and Demand Activities and Definitions

  2. Equilibrium in the Wheat Market • Qs = 1800 + 240P • Qd = 3550 - 266P • Price is in dollars per bushel • Quantity is in millions of bushels per year • Find the equilibrium price and quantity • Price Elasticities of Demand and Supply • EDp = (ΔQD%)/(ΔP%) = (P/Q)(ΔQD/ΔP) • Esp = (ΔQS%)/(ΔP%) = (P/Q)(ΔQS/ΔP) • Calculate these elasticities • Calculate Consumer and Producer Surplus

  3. Taxes and Price Supports in the Wheat Market • Qs = 1800 + 240P • Qd = 3550 - 266P • Suppose a tax of $0.50 per bushel is levied on wheat produced by farmers in the U.S. • Find the new price and quantity • Calculate the tax revenue and Economic Surplus • Suppose a price floor of $5.00 per bushel is imposed on the wheat market (w/o the tax) • Find the quantities supplied and demanded, the surplus quantity (if any), and Economic Surplus under the price floor

  4. A Price Ceiling on Natural Gas • QS = 15.90 + 0.72PG + 0.05PO • QD = 0.02 – 1.8PG + 0.69PO • Q is in Tcf, PG in $/mcf, and PO = $50/barrel • Verify that PG = $6.40, Q = 23Tcf in equilibrium • Suppose a price ceiling of $3.00/mcf is imposed • Calculate the quantities supplied and demanded at the ceiling price • Is there a surpus? A shortage? • Calculate Economic Surplus before and after the ceiling

  5. Shifts in Supply and Demand • Natural Gas Market • QS = 15.90 + 0.72PG + 0.05PO • QD = 0.02 – 1.8PG + 0.69PO • Equilibrium PG = $6.40, Q = 23 Tcf; PO = $50 • Suppose the price of oil increases to $80 per barrel • Find the new equilibrium price and quantity

  6. Shifts in Supply and Demand • World Crude Oil Market • QS = 32 + 0.04P • QD = 35.3 – 0.03P • P is in $/barrel and Q is in billions of barrels (bb) • Verify P = $47.14 in equilibrium and Q = 33.89 • Suppose OPEC reduces its supply of crude oil by 3 bb/year • Find the new equilibrium price and quantity

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