Markets in Action

Key Terms

* Demand
* Exchange
* Transaction costs
* Supply
* Marginal analysis
* Market clearing price

Lesson Objectives

The purpose of assignment 4 is to encourage you to practice applying the concepts you have been introduced to in the first three assignments, and to help you transfer your knowledge from simple examples, to more complex problems that have been reported in the news. On the questions below, your answers are less important than the reasoning with which you arrive at those answers. Does the event described affect supply? demand? both? neither? Does it cause supply or demand to increase? decrease? What effect will the change have on the price and the quantity exchanged in the market? Would you expect a large or a small change in price or in the quantity exchanged? Keep in mind that the answer will often depend on the length of time you are allowing for adjustments to occur. (You may find it useful to sketch a small supply and demand graph to guide their thinking.)

1. Using supply and demand analysis explain why the price of roses always seems to rise just before Valentines day.
1. How would a freeze that killed one-half of the rose crop effect the price? Why?
2. What would happen in the market for fine chocolates if one-half of the rose crop freezes? Why?

OR

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 on the family farm, 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 sausage sales, which account for almost 25% of the company's revenue.

1. Hypothesize about the equilibrium price, quantity supplied and quantity demanded this year at Bob Evans as opposed to last year.


Definitions

Demand - The relationship between prices and the corresponding quantities of a good or service buyers are willing to purchase at any given point in time.

Exchange - Trade or voluntary agreements between buyers and sellers.

Marginal analysis - A comparison of the costs and benefits of consuming or producing an additional unit.

Market clearing price - The price at which all that suppliers are willing to sell equals all that buyers are willing to purchase; the price at which quantity demanded equals quantity supplied; the price that "Clears" the market.

Supply - The relationship of prices to the quantities of a good or service sellers are willing to offer for sale, at any given point in time.

Transaction costs - The resources (like time and energy) that are used in making an exchange. An example of a transaction cost is time spent shopping or the time and energy necessary to negotiate a contract.