Mankiw, page 86,

7. Using supply and demand diagrams, show the effect of the following
events on the market for sweatshirts.

a. A hurricane in South Carolina damages the cotton crop.

Damage to the cotton crop increases the cost of offering a unit of cotton for
those sellers whose crop was destroyed. This is because to sell the same amount
that they had been planning to before the hurricane hit, they would have to
start from scratch growing cotton. So the amount they would be willing to sell
at any given price decreases compared to the pre-hurricane amount.

The supply curve thus shifts left. The new equilibrium point is at a higher
price and lower quantity than the pre-hurricane equilibrium.

Note: When considering each of these events, we assume that all other
factors remain the same.
b. The price of leather jackets falls.

As an article of clothing that one could wear instead of a sweatshirt, leather

jackets could be considered as substitutes for sweatshirts. A decrease in the
price of a substitute good for sweatshirts causes the demand for sweatshirts to
decrease.

Thus the demand curve for sweatshirts shifts left. The new equilibrium price
is lower and the new quantity bought and sold is lower than before the change.
c. All colleges require morning exercise in appropriate attire.

Since appropriate attire includes sweatshirts, some students might need more
sweatshirts than before the change. Thus the demand curve shifts to the right
(a little).

The new equilibrium price is higher than it was before and the new equilib-
rium quantity is higher than before.
d. New (more productive) knitting machines are invented.

Suppose the new knitting machines can knit 1 sweatshirt in 10 minutes,

1
whereas the old knitting machines needed 20 minutes for 1 sweatshirt. Then a
sweatshirt can be made using less electricity, so the cost of each sweatshirt is
now less.

This makes each sweatshirt more profitable, so at any given price, producers
are willing to offer more sweatshirts. The supply curve shifts to the right.

The new equilibrium price for sweatshirts is lower and the new quantity of
sweatshirts is higher than before the change.

11. Because bagels and cream cheese are often eaten together, they are com-
plements.

a. We observe that both the equilibrium price of cream cheese and the
equilibrium quantity of bagels have risen. What could be responsible for this
pattern – a fall in the price of flour or a fall in the price of milk?

The equilibrium price of cream cheese could rise for two reasons – an increase
in demand or a decrease in supply. An increase in demand could be due to a
decrease in the price of bagels as they are complements. A decrease in supply
could be due to an increase in the price of milk as milk is an input for cream
cheese.

A decrease in the price of bagels could be due to an increase in supply of

bagels or a decrease in demand for bagels. But of these, only an increase in sup-
ply of bagels would be compatible with an increase in the equilibrium quantity
of bagels.

An increase in supply of bagels would be due to a fall in the price of flour,

an input for bagels. Thus a fall in the price of flour would be responsible for
the pattern change.

13. Market research has revealed the following information about the market
for chocolate bars. The demand schedule can be represented by the equation

QD = 1600 − 300P,

where QD is the quantity demanded and P is the price. The supply schedule
can be represented by the equation

QS = 1400 + 700P,

where QS is the quantity supplied. Calculate the equilibrium price and quantity
in the market for chocolate bars.

2
 The equilibrium price is the price at which demand and supply are equal.
Thus to find the equilibrium price we have to set the demand schedule equal to
the supply schedule and solve for P .

1600 − 300P = 1400 + 700P

Then adding 300P to both sides and subtracting 1400 from both sides, we
get

200 = 1000P.
Dividing both sides by 1000, we get P = 0.2, or 20 cents.
Now to get the equilibrium quantity, plug in 0.2 for P in either the demand
schedule or the supply schedule (both are the same for P = 0.2).

Using the demand schedule, we get

Q = 1600 − 300 × 0.2 = 1600 − 60 = 1540.

So the equilibrium quantity of chocolate bars is 1540 and the equilibrium

price is 0.2.

Study Guide, page 65.

You are watching a national news broadcast. It is reported that a typhoon

is heading for the Washington coast and that it will likely destroy much of this
year’s apple crop. Your roommate says, ”If there are going to be fewer apples
available, I’ll bet that apple prices will rise. We should buy enormous quanti-
ties of apples now and put them in storage. Later we will sell them and make
a killing.”

1. If this information about the storm is publicly available so that all buyers
and sellers in the apple market expect the price of apples to rise in the future,
what will happen immediately to the supply and demand of apples and the
equilibrium price and quantity of apples?
Expecting the price of apples to rise in the near future, sellers of apples will
lower the amount of apples they sell now, storing them for later. The supply
curve for apples now shifts to the left.

Expecting the price of apples to rise soon, buyers of apples would buy more
apples at any price now, as apples now are a close substitute for apples in the
near future. So the demand curve for apples shifts to the right.

3
 These two changes together cause the price of apples now to rise unambigu-
ously. However, the effect on amount of apples bought and sold now depends
on the relative sizes of the shifts in demand and supply. If the shift of supply
to the left is larger, then the quantity decreases; if the shift of demand to the
right is larger, then quantity increases.

2. Can you ”beat the market” with public information? That is can you use
publicly available information to help you buy something cheap and quickly sell
it at a higher price? Why or why not?

If the information is publicly available, you will not be the only one who
wants to buy the good cheap and sell it at a higher price. The price will begin
to rise as soon as the information becomes available. So you won’t be able to
get the full benefit of buying cheap.

3. Suppose a friend of yours works for the U.S. Weather Bureau. She calls
you and provides you with inside information about the approaching storm –
information not available to the public. Can you ”beat the market” with inside
information? Why?

You can beat the market this way, by buying a lot (but not enough to make
others suspicious) and waiting for the price to rise, then selling.

Why don’t sellers restrict their quantity offered to get a higher price?

In a competitive market, if a seller alone restricts quantity offered, it can’t

affect the equilibrium price because there are enough other sellers that buyers
will buy from.

In a monopoly though, sellers have the possibility of raising the price by

restricting amount offered. Whether or not they benefit from doing that depends
on the elasticity of the demand curve for their product. This determines how
much demand will fall when price rises.