Market Forces: Demand and Supply

Q1:Deal with a politically embarrassing surplus that was caused by a price floor that the government recently imposed. Your first suggestion is to get rid of the price floor, but the politicians don’t want to do that. Instead, they present you with the following list of options that they hope will get rid of the surplus while keeping the price floor. Identify each one as either could work or can’t work.

  1. Restricting supply.
  2. Decreasing demand.
  3. Purchasing the surplus at the floor price.

Q2: In some countries, such as France, every corpse is available for doctors to “harvest” for organs unless the deceased, while still alive, signed a form forbidding the organs to be harvested. In the USA, it is the opposite: No harvesting is allowed unless the deceased had signed, while still alive, an organ donor form authorizing doctors to harvest any needed organs. Use supply and demand figures to show in which country organ shortages are likely to be less severe.

Qu3: Governments can use subsidies to increase demand. For instance, the government can pay farmers to use organic fertilizers rather than traditional fertilizers. That subsidy increases the demand for organic fertilizer. Consider two industries, one in which supply is nearly vertical and the other in which supply is nearly horizontal. Assume that firms in both industries would prefer a higher market equilibrium price because a higher market equilibrium price would mean higher profits.

Which industry would probably spend more resources lobbying the government to increase the demand for its output? (Assume that both industries have similarly sloped demand curves.)

  1. The industry with a nearly flat supply curve.
  2. The industry with a nearly vertical supply curve.


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