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Chapter 3: Problem 4

Briefly explain whether you agree with the following statement: "When there is a shortage of a good, consumers eventually give up trying to buy it, so the demand for the good declines, and the price falls until the market is finally in equilibrium."

Short Answer

Expert verified
No, the statement is not fully accurate. A shortage of a good typically results in an increase in price, not a decrease. The new elevated price can then balance the market by driving down demand or encouraging more supply until equilibrium is reached.

Step by step solution

01

Understanding the Statement

The statement suggests that when there is scarcity of a product, customers will stop attempting to buy it leading to a decrease in demand. Meanwhile, according to the law of demand and supply, when demand declines, the price should fall until the market reaches equilibrium.
02

Analyze Market Dynamics

From a standard economics perspective, when there's a shortage of a good, it typically means that at the current price level, the demand for the good exceeds its supply. Consumers may compete for the scarce resources, which can increase the market price. In theory, this increase in price encourages suppliers to produce more of the goods (increased supply) and may discourage some consumers from buying (reduced demand), until the market reaches an equilibrium.
03

Conclusion

Given the dynamics of supply, demand, and price in a market, it is not wholly correct to conclude that consumers giving up on a product due to its scarcity leads to a decrease in its price. Instead, shortage can drive prices up because high demand with low supply often results in heightened prices. In the real world, it's also important to consider factors like the necessity of the good, availability of substitutes, consumer purchasing power, and supplier capacity.

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Most popular questions from this chapter

In recent years, a number of cities have passed taxes on carbonated sodas to help reduce obesity and raise tax revenues. An article in the New York Times observed, "With that public momentum, a soda tax may be coming to a city near you." If this forecast is correct, what will be the effect on the demand for premium bottled water? Briefly explain. Source: Anahad O'Connor and Margot Sanger-Katz, “As Soda Taxes Gain Wider Acceptance, Your Bottle May Be Next," New York Times, November 26, 2016.

[Related to Solved Problem 3.3 on page 88\(]\) An article discusees the market for autographs by Mickey Mantle, the superstar center fielder for the New York Yankees during the 1950 s and 1960 s, "At card shows, golf outings, charity dinners, Mr. Mantle signed his name over and over." One expert on sports autographs was quoted as saying, "He was a real good signer.... He is not rare." Yet the article quoted another expert as saying, "Mr. Mantle's autograph ranks No. 3 of most-popular autographs, behind Babe Ruth and Muhammad Ali." A baseball signed by Mantle is likely to sell for the relatively high price of \(\$ 250\) to \(\$ 400\). By contrast, baseballs signed by Whitey Ford, a teammate of Mantle's on the Yankees, typically sell for less than \(\$ 150\). Use one graph to show both the demand and supply for autographs by Whitey Ford and the demand and supply for autographs by Mickey Mantle. Show how it is possible for the price of Mantle's autographs to be higher than the price of Ford's autographs, even though the supply of Mantle autographs is larger than the supply of Ford autographs.

What is a supply schedule? What is a supply curve?

State whether each of the following events will result in a movement along the demand curve for McDonald's Quarter Pounder hamburgers or whether it will cause the curve to shift. If the demand curve shifts, indicate whether it will shift to the left or to the right and draw a graph to illustrate the shift. a. The price of Burger King's Whopper hamburger declines. b. McDonald's distributes coupons for \(\$ 1.00\) off the purchase of a Quarter Pounder. c. Because of a shortage of potatoes, the price of French fries increases. d. McDonald's switches to using fresh, never-frozen beef patties in its Quarter Pounders. e. The U.S. economy enters a period of rapid growth in incomes.

A news article about virtual reality headsets observed, "For any hardware platform, it is critical to attract outside developers and build a virtuous cycle in which popular software titles drive hardware sales, which in turn brings in more software developers." The article referred to two types of software: games, such as Final Fantasy, that were already available for video game consoles, and software intended only for use with virtual reality headsets. As both these types of software become available, are they likely to make virtual reality headsets closer or less close substitutes for video game consoles? Briefly explain. Source: Takashi Mochizuki, "Sony's Virtual-Reality Headset Confronts Actual Reality of Modest Sales," Wall Street Journal, February 27 , 2017
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