Supply & Demand Scenarios

1. Supply & Demand Scenarios Economic Reasoning

2. Scenario #1 Roses are red, violets are blue; 1. Using supply and demand analysis, explain why the price of roses always seems to rise just before Valentines Day. 2. Suppose a freeze killed one-half of the rose crop just before Valentines Day; how would this effect the price of roses? Why? 3. What would happen in the market for fine chocolates if one-half of the rose crop freezes? Why?

3. Scenario #2 A story on the front page of The Wall Street Journal on October 22, 1996, told about troubles in the Bob Evans Restaurants. The Bob Evans chain, which started as a truckers’ diner in the late 1940s, currently includes 380 restaurants with annual sales of more than $800 million. However, at the annual shareholders meeting disappointment and anger were the order of the day and the meeting focused on reported declines in the quality of food and service, and on the declining price of the company’s stock. In searching for an explanation for the plight of the Bob Evans chain, the Journal noted that, rising hog prices combined with Americans’ healthier eating habits have stalled sales of fried foods and meat products, which account for almost 25% of the company’s revenue. 1. Use your understanding of supply and demand to analyze the impact of the conditions described in the statistic at the end of the article summary. Which issues effect demand? Which issues effect supply? 2. Has the quantity of food demanded by consumers declined over the last year? How will that affect the supply provided by the restaurant this year? Will these changes affect the menu prices?

4. Scenario #3 Two years ago the city of Denver had an initiative on the general election ballot that asked voters to raise Denver’s minimum wage to 40% above the national minimum wage. • How would things in Denver have changed if it had passed? (What would be the same? What would be different?) • Predict the effect of this legislation on market(s) for labor in Denver, in the suburbs, and outside of the metropolitan area. • Where would you rather work (in Denver or the suburbs)? Where would you be most likely to get a job, in or out of the city? • Your uncle Charlie is thinking about opening a small restaurant in Denver or the surrounding suburbs. Where would you advise him to open his restaurant, in Denver or in one of the suburbs? Why?

5. Scenario #4 Many local governments around the nation are concerned with the problem of teenage smoking. A wide variety of legislation has been passed with the intent of reducing sales of cigarettes to minors. Methods currently in use include: a.) Requiring a picture ID before purchase; b.) Banning cigarette machines in public access areas—moving cigarette machines behind the counter in bars and restaurants; c.) Fining underage purchasers of cigarettes; d.) Fining those who sell cigarettes to minors. 1. Analyze the above options in terms of their cost of each protective measure. (What is the cost and who bears it?) Predict the impact of each option on the demand, supply, and price in the market for cigarettes. 2. What is the difference in market impacts of fining the buyer vs. fining the seller of cigarettes?

6. Scenario #5 The Dutch city of Amsterdam has had effective rent control since the Second World War. Despite its considerable charm, Amsterdam has many decaying and burned-out buildings. This is surprising, since everyone agrees that there is a severe housing shortage in Amsterdam. Tinje is a woman who lives in a rent-controlled apartment building facing a canal. A few years ago Tinje paid a plumber to install a shower in her apartment after years of futile requests to her landlord for a shower. If she leaves the apartment (which she is unlikely to do), she expects to charge the incoming tenant for the shower. 1. What is meant by a "shortage" of housing? 2. Using supply-demand analysis, can you give a plausible reason why Tinje’s landlord would be so unresponsive to her requests for a shower? Why didn’t Tinje just move rather than paying for the shower herself? 3.Can supply, demand, and price analysis help to explain why there are a number of decaying and burned-out buildings in Amsterdam? Why?

7. Scenario #6 Suppose you run a lawn mowing business: you charge $15 per lawn and you can mow five lawns in an eight-hour day. You currently have more people asking you to mow their lawns than you can satisfy so you are considering hiring someone to help. Your other option is to buy or rent a riding lawn mower that will enable you to mow seven lawns each day. You find that your friend Jim, a good worker, will work for $8 per hour or you can rent a riding mower for $100 per week plus $25 for gas and oil. You estimate that you can sign up an additional 25 customers. 1. Should you hire Jim or rent the mower and do the work yourself? Which would be more profitable? 2. What if the mower enabled you to mow eight lawns per day, would your decision be the same?