Microeconomics: Why Diamonds Cost More Than Water
A tour of microeconomics, from rent caps and elasticities to monopolies, cartels, pollution and wages, through the ideas that most surprise newcomers.
Try 3 questions
1. If a government caps apartment rents well below the market equilibrium, what typically happens to the supply of rental housing over time?
- It grows as more renters can afford it
- It shrinks as landlords offer fewer units
- It stays the same, since buildings exist
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Answer: It shrinks as landlords offer fewer units
A binding rent ceiling lowers the return on renting, so owners convert, neglect or stop building units, and quantity supplied falls while demand rises.
2. A frost destroys half of a country's coffee crop. What happens to the market price and the quantity of coffee sold?
- Price rises and quantity sold falls
- Price falls and quantity sold falls
- Price rises and quantity sold rises
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Answer: Price rises and quantity sold falls
The frost shifts supply to the left; moving up along the demand curve, the new equilibrium has a higher price and a smaller quantity.
3. When the price of a good itself falls, how do economists describe the resulting response of buyers?
- Quantity demanded rises along the curve
- The whole demand curve shifts to the right
- The supply curve shifts left in response
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Answer: Quantity demanded rises along the curve
A good's own price moves buyers along a fixed demand curve; only other factors, like income or tastes, shift the curve itself.
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