Question

If an estate sale causes some original letters written by John Wilkes Booth to be discovered, what will happen to supply and market price?

Answer 1

Lincoln is one of the greatest presidents, and many people collect anything he wrote. The demand for letters written by Lincoln surely would seem to be much greater than the demand for letters written by Booth. Yet, when R.M. Smythe and Co. auctioned off on the same day a letter written by Lincoln and a letter written by Booth, the Booth letter sold for $31,050, and the Lincoln letter sold for only $21,850.

This problem is about prices being determined at market equilibrium.

The demand for Lincoln’s letters is much greater than the demand for Booth’s letters, but the supply of Booth’s letters is very small. Historians believe that only eight letters written by Booth exist today. (Note that the supply curves for letters written by Booth and by Lincoln are upward sloping, even though only a fixed number of each of these letters is available and, obviously, no more can be produced. The upward slope of the supply curves occurs because the higher the price, the larger the quantity of letters that will be offered for sale by people who currently own them.)

• Increases in demand can be caused by any change in a variable that affects demand except price. For example, demand will increase if income increases (for a normal good), income decreases (for an inferior good), the price of a substitute increases, the price of a complement decreases, taste for the good increases, population increases, or the expected future price of the product increases. A decrease in demand results in a lower equilibrium price and lower equilibrium quantity. Decreases in demand can be caused by any change in a variable that affects demand except the price of the product itself. For example, demand will decrease if income decreases (for a normal good), income increases (for an inferior good), the price of a substitute decreases, the price of a complement increases, taste for the good decreases, population decreases, or the expected future price of the product decreases.
• Increases in supply result from: a decrease in an input price, positive technological change, a decrease in the price of a substitute in production, an increase in the number of firms in the market, and a lower expected future product price. A decrease in supply results in a higher equilibrium price and a lower equilibrium quantity. Decreases in supply result from the following nonprice factor changes: an increase in an input price, negative technological change, an increase in the price of a substitute in production, a higher expected future product price, and a decrease in the number of firms in the market.