Microeconomics Study Guide: Supply, Demand, and Elasticity (Hockey Markets)

Q1. If the price of hotdogs rises significantly, how will the market (supply & demand) and equilibrium price and quantity change for each of the following markets?

• Ketchup market

• Tomato market

• Tomato juice market

• Orange juice market

Background

Topic: Complements, Substitutes, and Market Equilibrium

This question tests your understanding of how a change in the price of one good (hotdogs) affects related markets, especially complements (like ketchup and mustard) and substitutes (like orange juice), and how these changes impact equilibrium price and quantity.

Key Terms and Concepts:

• Complementary goods: Goods that are often used together (e.g., hotdogs and ketchup). If the price of one rises, demand for the other usually falls.

• Substitute goods: Goods that can replace each other (e.g., tomato juice and orange juice).

• Market equilibrium: The point where supply equals demand, determining the market price and quantity.

• Demand curve shift: A change in demand (not just quantity demanded) due to factors other than the good's own price.

• Supply curve shift: A change in supply due to factors like input costs.

Step-by-Step Guidance

1. Start by identifying which goods are complements or substitutes to hotdogs in each market listed.

2. For each market, consider how a significant increase in the price of hotdogs will affect the demand for the related good (increase, decrease, or no change).

3. Draw a supply and demand diagram for each market. Indicate the initial equilibrium and then show the direction of the demand or supply shift (left or right).

4. Predict how the shift will affect the equilibrium price and quantity in each market (will they rise, fall, or stay the same?).

5. For markets where the related good is an input (e.g., tomatoes for ketchup), consider how changes in demand for the final good affect the input market.

Try solving on your own before revealing the answer!

Q2a. Calculate the elasticity of demand for each price interval in the hockey jersey market table.

Background

Topic: Price Elasticity of Demand

This question tests your ability to calculate the price elasticity of demand using the midpoint (arc elasticity) formula for each price interval in a demand schedule.

Key Terms and Formulas:

• Price Elasticity of Demand ($E_d$): Measures how much the quantity demanded of a good responds to a change in its price.

Midpoint (Arc Elasticity) Formula:

$E_d = \frac{\frac{Q_2 - Q_1}{(Q_1 + Q_2)/2}}{\frac{P_2 - P_1}{(P_1 + P_2)/2}}$

• $Q_1$ and $Q_2$ are the quantities at the two prices $P_1$ and $P_2$.

Step-by-Step Guidance

1. For each price interval, identify $P_1$, $P_2$, $Q_1$, and $Q_2$ from the table.

2. Calculate the average quantity: $(Q_1 + Q_2)/2$ and the average price: $(P_1 + P_2)/2$ for each interval.

3. Compute the change in quantity: $Q_2 - Q_1$ and the change in price: $P_2 - P_1$.

4. Plug these values into the midpoint formula for elasticity for each interval.

5. Interpret the sign and magnitude of each elasticity value (elastic, inelastic, or unit elastic).

Try solving on your own before revealing the answer!

Q2b. Using a properly labelled graph, illustrate the market for jerseys given the cost to manufacture each jersey is $50.

Background

Topic: Supply and Demand Graphs, Cost Curves

This question asks you to draw a supply and demand graph for the jersey market, showing the demand curve and the supply curve (which is influenced by the cost of production).

Key Terms and Concepts:

• Supply curve: Shows the relationship between price and quantity supplied. For a constant marginal cost, the supply curve is horizontal at the cost level.

• Demand curve: Plots the price and quantity pairs from the demand schedule.

• Equilibrium: The intersection of supply and demand curves.

Step-by-Step Guidance

1. Plot the demand curve using the price and quantity pairs from the table.

2. Draw the supply curve as a horizontal line at $P = 50$, since the cost to manufacture each jersey is $50$.

3. Label the axes: Price on the vertical axis, Quantity on the horizontal axis.

4. Mark the equilibrium point(s) where the demand curve intersects the supply curve.

Try sketching the graph before checking the answer!

Q2c. At a price of $300 per jersey, what is the current revenue and quantity of jerseys sold? Show this on your graph.

Background

Topic: Total Revenue, Demand Curves

This question tests your ability to find total revenue at a given price and quantity, and to represent this on a supply and demand graph.

Key Terms and Formulas:

• Total Revenue (TR): The total amount received from sales, calculated as $TR = P \times Q$.

Step-by-Step Guidance

1. From the demand schedule, find the quantity sold at $P = 300$.

2. Calculate total revenue using the formula $TR = P \times Q$.

3. On your graph, locate the point corresponding to $P = 300$ and the associated quantity.

4. Draw a rectangle from the origin to this point to visually represent total revenue.

Try calculating and marking this on your graph before revealing the answer!

Q2d. Based on your elasticity calculations, should the team raise or lower the price of their jerseys? Explain.

Background

Topic: Price Elasticity and Revenue

This question tests your understanding of how elasticity affects total revenue and optimal pricing decisions.

Key Terms and Concepts:

• Inelastic demand: $|E_d| < 1$; total revenue moves in the same direction as price.

• Elastic demand: $|E_d| > 1$; total revenue moves in the opposite direction of price.

Step-by-Step Guidance

1. Review your elasticity calculations for the relevant price range.

2. Determine whether demand is elastic or inelastic at the current price.

3. Recall the relationship between elasticity and total revenue: if demand is inelastic, increasing price increases revenue; if elastic, decreasing price increases revenue.

4. Use this logic to decide whether the team should raise or lower the price to maximize revenue.

Try reasoning through this before checking the answer!

Q2e. Suppose 25% of jerseys sold have the name and number of the team’s top player. Show his demand curve on your graph.

Background

Topic: Market Segmentation, Demand Curves

This question asks you to represent a subset of the market (jerseys for a specific player) as a separate demand curve on your graph.

Key Terms and Concepts:

• Market segmentation: Dividing the market into groups based on characteristics (e.g., player-specific jerseys).

• Demand curve for a segment: A demand curve representing only a portion of the total market.

Step-by-Step Guidance

1. Calculate 25% of the quantity sold at each price point to estimate the demand for the top player's jerseys.

2. Plot these points on your existing graph to create a new, lower demand curve (label it appropriately, e.g., D1).

3. Compare this curve to the total market demand curve (D0).

Try plotting this segment before checking the answer!

Q2f. The top player has been traded to another team. Why is his jersey now sold for $100?

Background

Topic: Shifts in Demand, Market Response to Changes in Preferences

This question tests your understanding of how changes in consumer preferences (due to a player's trade) affect demand and pricing.

Key Terms and Concepts:

• Demand shift: A change in demand due to factors like changes in consumer preferences.

• Clearance pricing: Lowering prices to sell off inventory when demand falls.

Step-by-Step Guidance

1. Explain how the player's trade affects fans' desire to buy his jersey (demand decreases).

2. Describe how a leftward shift in the demand curve leads to a lower equilibrium price.

3. Discuss why the team might lower the price to $100 to clear out remaining inventory.

Try explaining this scenario before checking the answer!