Individual Markets: Demand and Supply: A. Short-Answer, Essays, and Problems

Individual Markets: Demand and Supply
CHAPTER 3
A. Short-Answer, Essays, and Problems
1. Explain what is meant by a purely competitive market.
2. Define demand.
New . !tate the law of demand and explain why is the other"thin#s"e$ual assumption critical to
it%
New &. 'ive three explanations for the law of demand(
). !uppose the price of beef fell dramatically as the price of feed #rain decreased. *se the
income effect and the substitution effect to explain why there was an increase in the
$uantity of beef purchased.
+. ,he demand schedules of three individuals -,om. Dick. and /arry0 are shown. 1f they
are the only three buyers of 2Ds. complete the market demand schedule for 2Ds.
'raphically. is the market demand for a product the hori3ontal or vertical sum of the
individual demand schedules%
4uantity demanded. 2Ds
Prie !om Dik "arry !otal
51) 1 & 6 77777
1 ) 1 77777
11 + + ) 77777
8 16 9 16 77777
9 1) : 1+ 77777
9. ;ist five basic determinants of market demand that could cause demand to decrease.
-,he text mentions seven possibilities.0
:. Differentiate between a normal -superior0 and an inferior #ood.
New 8. Explain how the prices of related #oods also affect demand.
16. 'ive examples of two substitute #oods and two complementary #oods. 1n each case
explain why the #oods are substitutes or complements.
11. <hat is the difference between a chan#e in demand and a chan#e in $uantity demanded%
Chapter 3
12. !uppose a producer sells 1.666 units of a product at 5) per unit one year. 2.666 units at
5: the next year. and .666 units at 516 the third year. 1s this evidence that the law of
demand is violated% Explain.
1. <hat effect should each of the followin# have upon the demand for portable 2D"=>?
players% Explain your reasonin# in each case.
-a0 the development of improved. low"priced D@D players that compete with 2D"=>?
players
-b0 an increase in population and incomes
-c0 a substantial increase in the number and $uality of 2D"=>? music
-d0 consumer expectations of substantial price increases in 2D"=>? players
1&. Define supply.
New 1). Describe and #ive a reason for the law of supply.
1+. ;ist six basic determinants of market supply.
19. ,he *.!. 2on#ress is considerin# passin# an excise tax that would increase the price of
a pack of ci#arettes by 51.66. <hat would be the likely effect of this chan#e on the
demand and supply of ci#arettes% <hat is likely to happen to ci#arette prices and the
$uantity consumed if the tax bill is enacted%
1:. <hat is the difference between a chan#e in supply and a chan#e in $uantity supplied%
18. Newspaper item( Due to lower #rain prices. consumers can expect retail prices of
choice beef to be#in droppin# sli#htly this sprin# with pork becomin# cheaper after
midsummer. the A#riculture Department predicted. ,his reflects increasin# supply.
the department said. Does the statement use the term supply correctly% <hat effects
mi#ht this announcement have on consumer demand% Explain.
26. <hat effect will each of the followin# have upon the supply of television sets% Explain
your reasonin# in each case.
-a0 an increase in the price of electronic e$uipment used in producin# television sets
-b0 a decline in the number of firms producin# television sets
-c0 a lar#e new tariff on imported Bapanese ,@ sets
-d0 new inexpensive satellite dishes which make televisions more popular amon#
consumers
&
21. 'iven the products below and the events that affect them. indicate what happens to
demand. supply. e$uilibrium $uantity. and e$uilibrium price. 1dentify the determinant of
demand and supply that causes the shifts.
-a0 2alculators. ?ore schools re$uire students to buy and use calculatorsC improved
productivity shortens the time it takes to make calculators.
-b0 'asoline. >il production declines due to a crisis in the ?iddle EastC people take
more car vacations and drive more.
-c0 New homes. ,he avera#e incomes fall as the economy moves into recessionC the
productivity of home construction workers and builders increases.
-d0 ,obacco. ,he #overnment cut its subsidy to tobacco farmersC more people $uit
smokin#.
22. Economist Bones defines an increase in supply as a decrease in the prices needed to
ensure various amounts of a #ood bein# offered for sale. Economist Drown defines an
increase in supply as an increase in the amounts that producers will offer at various
possible prices. Economist 2ole defines an increase in supply as an increase in the
amount firms will offer in the market which is caused by an increase in the price of the
product. <hich. if any. of these is definin# an increase in supply correctly% Explain.
2. Assumin# no #overnment intervention. describe the market behavior that should result if
the price of a product is below its e$uilibrium priceC then describe the behavior that
should occur if the price is above its e$uilibrium price.
2&. Describe in words how one can reco#ni3e the market e$uilibrium point in a #raph of a
demand schedule and a supply schedule.
2). *sin# the schedules #iven. plot the demand curve and the supply curve on the below
#raph. ;abel the axes and indicate for each axis the units bein# used to measure price
and $uantity. ,hen answer the $uestions.
)
Chapter 3
#uantity demanded #uantity supplied
Prie $bushels o% oats& Prie $bushels o% oats&
51.)6 16.666 51.)6 &6.666
1.&6 1).666 1.&6 ).666
1.6 26.666 1.6 6.666
1.26 2).666 1.26 2).666
1.16 6.666 1.16 26.666
1.66 ).666 1.66 1).666
-a0 'ive the e$uilibrium price and $uantity for oats.
-b0 1ndicate the e$uilibrium price and $uantity on the #raph by drawin# lines from the
intersection of the supply and demand curves to the price and $uantity axes.
-c0 1f the Eederal #overnment decided to support the price of oats at 51.&6 per bushel.
tell whether there would be a surplus or shorta#e and how much it would be.
-d0 Demonstrate your answer to part -c0 on your #raph bein# sure to label the $uantity
you desi#nated as the shorta#e or surplus.
2+. *sin# the schedules #iven. plot the demand curve and the supply curve on the below
Prie $bushels o% wheat& Prie $bushels o% wheat&
5&.26 12).666 5&.26 26.666
&.66 1)6.666 &.66 226.666
.:6 19).666 .:6 216.666
.+6 266.666 .+6 266.666
.&6 22).666 .&6 186.666
.26 2)6.666 .26 1:6.666
.66 29).666 .66 196.666
-a0 'ive the e$uilibrium price and $uantity for wheat.
+
-c0 1f the Eederal #overnment decided to support the price of wheat at 5&.66 per bushel.
29. 1n the space below each of the followin#. indicate the effect Fincrease -G0. decrease -H0I
on e$uilibrium price -P0 and e$uilibrium $uantity -Q0 of each of these chan#es in
demand andJor supply.
P Q
-a0 1ncrease in demand. supply constant 77777777 77777777
-b0 1ncrease in supply. demand constant 77777777 77777777
-c0 Decrease in demand. supply constant 77777777 77777777
-d0 Decrease in supply. demand constant 77777777 77777777
2:. 'iven the products below and the events that affect them. indicate what happens to
demand or supply. and the e$uilibrium price and $uantity. 1dentify the determinant of
demand or supply that causes the shift.
-a0 Dlue Keans. ,he wearin# of blue Keans becomes less fashionable amon# consumers.
-b0 2omputers. Larts for makin# computers fall in price because of improvements in
technolo#y.
-c0 ;ettuce. El Nino produces heavy rains that destroy a si#nificant portion of the
lettuce crop.
-d0 2hicken. Deef prices rise because severe winter weather reduces cattle herds.
28. 1n the spaces below each of the followin#. indicate the Fincrease (+), decrease (), or
indeterminate -%0I on e$uilibrium price -P0 and e$uilibrium $uantity -Q) of each of
these chan#es in demand andJor supply.
P Q
-a0 1ncrease in demand. increase in supply 7777777777 777777777
-b0 1ncrease in demand. decrease in supply 7777777777 777777777
-c0 Decrease in demand. decrease in supply 7777777777 777777777
-d0 Decrease in demand. increase in supply 7777777777 777777777
9
Chapter 3
6. 1n each case below. indicate the effect Fincrease -G0C decrease -0C indeterminate -ind0I
upon e$uilibrium price -P0 and e$uilibrium $uantity -Q0 and illustrate the chan#e
#raphically. <here you believe the effect is indeterminate. two #raphical illustrations
may be necessary to demonstrate your point.
P Q
-b0 Decrease in supply. demand constant 777 777
New 1. -;ast <ord0 2an ticket scalpin# be Kustified% Explain usin# economic analysis.
:
'. Answers to Short-Answer, Essays, and Problems
1. Explain what is meant by a purely competitive market.
A purely competitive market is an institution or mechanism which brin#s to#ether lar#e
numbers of independently actin# buyers and sellers who want to exchan#e some
standardi3ed product. 1f the product is not standardi3ed. then the market is not purely
competitive. althou#h it may be very competitive. Examples of purely competitive
markets are a central #rain exchan#e. a stock market or a market for forei#n currencies
where there are many buyers and sellers actin# independently. Ftext( E p. &6C ?A p. &6C
?1 p. &6I
2. Define demand.
Demand is a schedule which shows the various amounts of a product buyers are willin#
and able to purchase at each price in a series of possible prices durin# a specified period
of time. Demand portrays alternative priceJ$uantity possibilities which can be set down
in a table. ,he key point to be reco#ni3ed is that demand is more than a statement of
$uantity purchased at a certain price. it is a schedule of $uantities which will be
demanded at various prices. other thin#s bein# e$ual. for a specified period of time.
Ftext( E p. &1C ?A p. &1C ?1 p. &1I
New . !tate the law of demand and explain why is the other"thin#s"e$ual assumption critical to
it%
,he law states that. other thin#s bein# e$ual. as price increases. the correspondin#
$uantity demanded falls. =estated. there is an inverse relationship between price and
$uantity demanded with everythin# else held constant. ,he other"thin#s"e$ual
assumption refers to constant prices of related #oods. income. tastes. and other thin#s
that affect demand besides price. ,he law of demand only looks at the relationship
between price and $uantity demanded. Ftext( E p. &1C ?A p. &1C ?1 p. &1I
New &. 'ive three explanations for the law of demand(
Eirst. it is explained by common sense. Leople tend to buy more of a product at a lower
price than at a hi#her price. !econd. there is diminishin# mar#inal utility( a decrease in
satisfaction that results with an increase in the amounts of a #ood or service. ,he second
unit of a #ood yields less satisfaction -or utility0 than the first. ,hird. there are income
and substitution effects. <ith an income effect. a lower price increases the purchasin#
power of money income. enablin# you to buy more at lower price. <ith a substitution
effect a lower price #ives an incentive to substitute the lower"priced #ood for a now
relatively hi#h"priced #ood. Ftext( E p. &1C ?A p. &1C ?1 p. &1I
). !uppose the price of beef fell dramatically as the price of feed #rain decreased. *se the
income effect and the substitution effect to explain why there was an increase in the
$uantity of beef purchased.
,he income effect predicts that the $uantity of beef purchased will rise when beef prices
fall because people will now be able to afford more. ,he purchasin# power of their
income rises when prices fall. assumin# other thin#s remain the same.
,he substitution effect predicts that the lower price of beef will lead consumers of
substitute foods such as chicken and pork to buy more of the relatively less expensive
beef and to buy less chicken or pork or other beef substitutes whose prices have not
fallen. Ftext( E p. &2C ?A p. &2C ?1 p. &2I
8
Chapter 3
+. ,he demand schedules of three individuals -,om. Dick. and /arry0 are shown. 1f they
are the only three buyers of 2Ds. complete the market demand schedule for 2Ds.
'raphically. is the market demand for a product the hori3ontal or vertical sum of the
individual demand schedules%
51) 1 & 6 77777
1 ) 1 77777
11 + + ) 77777
8 16 9 16 77777
9 1) : 1+ 77777
,he market demand is the hori3ontal sum of the individual schedules.
51) 1 & 6 )
1 ) 1 8
11 + + ) 19
8 16 9 16 29
9 1) : 1+ 8
Ftext( E pp. &2"&C ?A p. &2"&C ?1 p. &2"&I
9. ;ist five basic determinants of market demand that could cause demand to decrease.
-,he text mentions seven possibilities.0
-a0 2onsumersM tastes become less favorable toward the item.
-b0 ,he number of buyers decreases.
-c0 1ncomes fall and the item is a normal #ood.
-d0 1ncomes rise and the item is an inferior #ood.
-e0 A decrease in the price of a substitute product.
-f0 An increase in the price of a complementary product.
-#0 2onsumers expect lower prices in the future. Ftext( E pp. &"&+C ?A pp. &"&+C ?1
pp. &"&+I
:. Differentiate between a normal -superior0 and an inferior #ood.
A normal -superior0 #ood is one whose demand varies directly with income as is true for
most #oods and services the more income one earns. the more one is willin# and able to
buy. /owever. there are exceptions. called inferior #oods. whose demand varies
inversely with income. 1nferior #oods are those whose demand increases when incomes
fall and vice versa. Ftext( E pp. &&"&)C ?A pp. &&"&)C ?1 pp. &&"&)I
New 8. Explain how the prices of related #oods also affect demand.
Substitute goods are those that can be used in place of each other.
The price of the substitute and demand for the other good are directly
related. If the price of Coke rises, demand for Pepsi should increase.
Complementary goods are those that are used together like tennis
balls and rackets. When goods are complements, there is an inverse
relationship between the price of one and the demand for the other.
Some goods are not related to each other and are independent goods.
In these cases, a change in price of one will not aect the demand for
the other. !te"t# $ p. %&' () p. %&' (I p. %&*
&6
16. 'ive examples of two substitute #oods and two complementary #oods. 1n each case
explain why the #oods are substitutes or complements.
,he pair of substitute #oods #iven should correspond to the explanation that they are
substitutes because when the price of one chan#es. the demand for the other chan#es in
the same direction. <hen the price of butter rises. one expects the demand for
mar#arine to increaseC when the price of butter falls. one expects the demand for
mar#arine to fall as butter lovers switch back to butter consumption.
,he pair of complementary #oods should fit the explanation that they are complements
because when the price of one chan#es. the demand for the other is inversely related.
<hen the price of tennis e$uipment rises. the demand for tennis"club memberships
should fall -if tennis playin# is a normal #ood0. Ftext( E p. &)C ?A p. &)C ?1 p. &)I
11. <hat is the difference between a chan#e in demand and a chan#e in $uantity demanded%
A chan#e in demand is a shift in the entire demand curve either to the left -a decrease in
demand0 or to the ri#ht -an increase in demand0. Demand refers to the entire schedule
or curve. Dy contrast. a chan#e in $uantity demanded is a movement alon# an existin#
demand curve or schedule from one price"$uantity combination to another. A chan#e in
product price causes the chan#e in $uantity demanded. Ftext( E pp. &)"&+C ?A p. &)"&+C
?1 p. &)"&+I
12. !uppose a producer sells 1.666 units of a product at 5) per unit one year. 2.666 units at
5: the next year. and .666 units at 516 the third year. 1s this evidence that the law of
demand is violated% Explain.
No. ,he law of demand shows the relationship between price and $uantity demanded.
1n #eneral. as price falls the $uantity demanded will increase. >ne of the assumptions.
however. is that all other thin#s are e$ual or held constant. 1n this case. this assumption
may have been violated and that is why it seems there is a positive relationship between
price and $uantity. ,he most likely explanation for the set of events is that demand for
the product increased from one year to the next. 1E that was true. then price would rise
and the e$uilibrium $uantity would increase. Ftext( E. pp. &1"&2C ?A pp. &1"&2C ?1 pp.
&1"&2I
1. <hat effect should each of the followin# have upon the demand for portable 2D"=>?
players% Explain your reasonin# in each case.
-a0 the development of improved. low"priced D@D players that compete with 2D"=>?
players
-b0 an increase in population and incomes
-c0 a substantial increase in the number and $uality of 2D"=>? music
-d0 consumer expectations of substantial price increases in 2D"=>? players
-a0 <ould cause a decrease in demand for 2D"=>? players. assumin# that D@D
players are substitutes for 2D"=>? players.
-b0 <ould cause an increase in demand because there are more consumers and they
have more income to spend. ,his assumes that 2D"=>? players are a normal #ood and
more would be bou#ht with hi#her incomes.
-c0 !hould increase demand since increased number and $uality of 2D"=>? musicMs
variety of pro#rams should make ownin# a 2D"=>? player more desirable.
&1
Chapter 3
-d0 !hould increase current demand because expectations about the future have chan#ed
and may prompt them to buy now to beat the future price increase. Ftext( E pp. &"&)C
?A pp. &"&)C ?1 pp( &"&)I
1&. Define supply.
,he definition of supply is very similar to that of demand. !upply is a schedule which
shows the various amounts of a product sellers are willin# and able to produce and offer
for sale at each price in a series of possible prices durin# a specified period. other thin#s
bein# e$ual. Ftext( E p. &+C ?A p. &+C ?1 p. &+I
New 1). Describe and #ive a reason for the law of supply.
,he law of supply indicates that producers will produce and sell more of their product at
a hi#h price than at a low price. ,his means that there is a direct relationship between
price and $uantity supplied. ,he basic explanation is that. #iven product costs. a hi#her
price means #reater profits and thus more incentive for business to increase the $uantity
supplied. Ftext( E p. &9C ?A p. &9C ?1 p. &9I
1+. ;ist six basic determinants of market supply.
-a0 =esource prices
-b0 2han#es in technolo#y
-c0 ,axes and subsidies
-d0 Lrices of other related #oods
-e0 Expectations
-f0 Number of sellers Ftext( E pp. &:"&8C ?A pp. &:"&8C ?1 pp. &:"&8I
19. ,he *.!. 2on#ress is considerin# passin# an excise tax that would increase the price of
a pack of ci#arettes by 51.66. <hat would be the likely effect of this chan#e on the
demand and supply of ci#arettes% <hat is likely to happen to ci#arette prices and the
$uantity consumed if the tax bill is enacted%
1n the short run. the excise tax would decrease the supply of ci#arettes because in
essence it increases the cost of production. ,he decrease in supply would increase the
price of ci#arettes and decrease the $uantity of ci#arettes consumed. ,he demand for
ci#arettes would not chan#e. but the $uantity demanded would decrease. Ftext( E pp.
&:"&8C ?A pp. &:"&8C ?1 pp. &:"&8I
1:. <hat is the difference between a chan#e in supply and a chan#e in $uantity supplied%
A chan#e in supply is a shift in the entire supply curve either to the left -a decrease in
supply0 or to the ri#ht -an increase in supply0. A chan#e in supply. therefore. is a chan#e
in the entire supply schedule or curve. 1n contrast. a chan#e in $uantity supplied is a
movement alon# an existin# supply curve or schedule from one price"$uantity
combination to another. A chan#e in product price causes the chan#e in $uantity
supplied. Ftext( E p. &8C ?A p. &8C ?1 p. &8I
18. Newspaper item( Due to lower #rain prices. consumers can expect retail prices of
choice beef to be#in droppin# sli#htly this sprin# with pork becomin# cheaper after
midsummer. the A#riculture Department predicted. ,his reflects increasin# supply.
the department said. Does the statement use the term supply correctly% <hat effects
mi#ht this announcement have on consumer demand% Explain.
,he announcement does use the term supply correctly because the drop in price
predicted is a result of lower resource -#rain0 prices. ,his means that producers of beef
&2
and pork will lower prices for each $uantity on the existin# supply schedule assumin#
all other thin#s remain e$ual.
2onsumer demand at present mi#ht decrease as consumers wait to make bi# purchases
of beef and pork in the future when prices are predicted to drop. Dy sprin#. if beef
prices drop. there should be an increase in the $uantity of beef demanded and probably a
decrease in the demand for pork. which is a substitute for beef. Dy midsummer. if pork
prices drop. there will be an increase in the $uantity of pork demanded. and dependin#
on what is then happenin# with beef prices. a decline in the demand for beef. 1f beef
prices had continued to fall. it is hard to say whether there would be much of a chan#e in
demand due to the price of the substitute pork fallin#. ?ore likely. there would be only
a movement alon# the curve for beef if the price continued to fall. Ftext( E pp. &"&8C
?A pp. &"&8C ?1 pp. &"&8I
26. <hat effect will each of the followin# have upon the supply of television sets% Explain
your reasonin# in each case.
-a0 an increase in the price of electronic e$uipment used in producin# television sets
-b0 a decline in the number of firms producin# television sets
-c0 a lar#e new tariff on imported Bapanese ,@ sets
-d0 new inexpensive satellite dishes which make televisions more popular amon#
consumers
-a0 ,his should decrease the supply because a hi#her price must be char#ed for each
$uantity due to the risin# price of resources. ,he supply curve will shift to the left.
-b0 ,he outcome is indeterminate because we donMt know why the firms left the
industry. Lerhaps remainin# firms are more efficient and will produce more. >n the
other hand. there may be Kust a few firms remainin# and the resultin# decline in
competition could lead to hi#her prices for each $uantity. or a decrease in supply.
-c0 A hi#her tariff will cause a decrease in the supply of imported television sets
because costs. i.e.. taxes. have risen. Decause the supply of Bapanese ,@ sets is part of
the total market supply. the effect is to decrease the market supply.
-d0 New inexpensive satellite dishes should have no effect on the supply schedule.
/owever. demand should increase resultin# in a hi#her e$uilibrium price and #reater
$uantity supplied. Note that supply does not shift. but that the $uantity supplied
chan#es. Ftext( E pp. &:"&8C ?A pp. &:"&8C ?1 pp. &:"&8I
21. 'iven the products below and the events that affect them. indicate what happens to
demand. supply. e$uilibrium $uantity. and e$uilibrium price. 1dentify the determinant of
demand and supply that causes the shifts.
-a0 2alculators. ?ore schools re$uire students to buy and use calculatorsC improved
productivity shortens the time it takes to make calculators.
-b0 'asoline. >il production declines due to a crisis in the ?iddle EastC people take
more car vacations and drive more.
-c0 New homes. ,he avera#e incomes fall as the economy moves into recessionC the
productivity of home construction workers and builders increases.
-d0 ,obacco. ,he #overnment cut its subsidy to tobacco farmersC more people $uit
smokin#.
&
Chapter 3
-a0 ,he demand for calculators increases because of an increase in the number of
buyers. ,he supply of calculators increases because of a fall in resource prices
-productivity reduces resource costs0. ,he e$uilibrium $uantity increases. but what
happens to the e$uilibrium price is indeterminant and depends on the ma#nitudes of the
shifts.
-b0 ,he supply of #asoline increases because of a rise in resource price -oil prices
increase due to a cutback in production0. ,he demand for #asoline increases due to an
increase in the taste for takin# drivin# vacations. ,he e$uilibrium price increases. but
what happens to the e$uilibrium $uantity is indeterminant and depends on the
ma#nitudes of the shifts.
-c0 ,he demand for new homes decreases because of a decline in consumer incomes.
,he supply of new homes increases because of a fall in the price of labor resources
-productivity increases reduce resource costs0. ,he e$uilibrium price decreases. but
what happens to the e$uilibrium $uantity is indeterminant and depends on the
ma#nitudes of the shifts.
-d0 ,he supply of tobacco decreases because of a cut in #overnment subsidies for
tobacco. ,he demand for tobacco decreases due to a decline in the taste for smokin#
tobacco. ,he e$uilibrium $uantity decreases. but what happens to the e$uilibrium price
is indeterminant and depends on the ma#nitudes of the shifts. Ftext( E pp. &"&). &:"&8C
?A pp. &"&). &:"&8C ?1 pp. &"&). &:"&8I
22. Economist Bones defines an increase in supply as a decrease in the prices needed to
ensure various amounts of a #ood bein# offered for sale. Economist Drown defines an
increase in supply as an increase in the amounts that producers will offer at various
possible prices. Economist 2ole defines an increase in supply as an increase in the
amount firms will offer in the market which is caused by an increase in the price of the
product. <hich. if any. of these is definin# an increase in supply correctly% Explain.
Economists Drown and Bones are both correct. Drown reco#ni3es that a shift in supply
means #reater $uantities will be supplied at each of the various prices #iven for the
ori#inal supply schedule. 1n other words. more will be supplied at each of the prices on
the ori#inal schedule. Bones is correct if a decrease in prices would actually ensure the
various amounts of a #ood bein# offered for sale at lower prices than the ori#inal. 1t is
an e$uivalent statement to DrownMs. 2ole is not correct. 2ole is definin# a chan#e in
the $uantity supplied. or a movement alon# the supply curve. not an increase in supply.
Ftext( E pp. &9"&8C ?A pp. &9"&8C ?1 pp. &9"&8I
2. Assumin# no #overnment intervention. describe the market behavior that should result if
the price of a product is below its e$uilibrium priceC then describe the behavior that
should occur if the price is above its e$uilibrium price.
1f the price of a product is below its e$uilibrium price. the $uantity demanded will be
#reater than the $uantity supplied and the price will be bid up as buyers compete to
obtain the product and sellers reali3e that they can raise the price. As the price rises. the
$uantity supplied will increase and the $uantity demanded decrease until the two are
e$ual at the so"called e$uilibrium or market"clearin# price.
1f the price of a product is above its e$uilibrium price. the $uantity supplied will be
#reater than the $uantity demanded and a temporary surplus exists. As sellers compete.
the price will fall and the $uantity demanded will increase and the $uantity supplied will
decrease until the two are e$ual at the e$uilibrium or market"clearin# price. Ftext( E pp.
)6")2C ?A pp. )6")2C ?1 pp. )6")2I
2&. Describe in words how one can reco#ni3e the market e$uilibrium point in a #raph of a
demand schedule and a supply schedule.
&&
,he market e$uilibrium point is the point where the demand curve intersects the supply
curve. ,he $uantity vertically below this point is the e$uilibrium $uantity and the price
hori3ontally opposite this point is the e$uilibrium price. Ftext( E pp. )6")2C ?A pp. )6"
)2C ?1 pp. )6")2I
2). *sin# the schedules #iven. plot the demand curve and the supply curve on the below
Prie $bushels o% oats& Prie $bushels o% oats&
51.)6 16.666 51.)6 &6.666
1.&6 1).666 1.&6 ).666
1.6 26.666 1.6 6.666
1.26 2).666 1.26 2).666
1.16 6.666 1.16 26.666
1.66 ).666 1.66 1).666
-a0 'ive the e$uilibrium price and $uantity for oats.
-a0 ,he e$uilibrium price and $uantity for oats will be 51.26 and 2).666 bushels.
-b0 ,he e$uilibrium price and $uantity on the #raph are labeled Pe and Qe.
there would be a surplus of ).666 H 1).666 N 26.666 bushels.
-d0 !ee surplus labeled on above fi#ure. Ftext( E pp. &8")1C ?A pp. &8")1C ?1 pp. &8"
)1I
2+. *sin# the schedules #iven. plot the demand curve and the supply curve on the below
&)
6
16 26 6 &6
51.66
51.)6
Q
e
P
e
S
D
4uantity -1.666s0
L
r
i
c
e
!urplus
) 1) 2) )
Chapter 3
Prie $bushels o% wheat& Prie $bushels o% wheat&
5&.26 12).666 5&.26 26.666
&.66 1)6.666 &.66 226.666
.:6 19).666 .:6 216.666
.+6 266.666 .+6 266.666
.&6 22).666 .&6 186.666
.26 2)6.666 .26 1:6.666
.66 29).666 .66 196.666
-a0 'ive the e$uilibrium price and $uantity for wheat.
-a0 ,he e$uilibrium price and $uantity for wheat will be 5.+6 and 266.666 bushels.
-b0 ,he e$uilibrium price and $uantity on the #raph are labeled P
e
and Q
e
.
there would be a surplus of 226.666 H 1)6.666 N 96.666 bushels.
-d0 !ee surplus labeled on fi#ure. Ftext( E pp. &8")1C ?A pp. &8")1C ?1 pp. &8")1I
29. 1n the space below each of the followin#. indicate the effect Fincrease -G0. decrease -H0I
on e$uilibrium price -P0 and e$uilibrium $uantity -Q0 of each of these chan#es in
demand andJor supply.
P Q
-b0 1ncrease in supply. demand constant 77777777 77777777
-c0 Decrease in demand. supply constant 77777777 77777777
-d0 Decrease in supply. demand constant 77777777 77777777
-a0 G. GC -b0 H. GC -c0 H. HC -d0 G. H Ftext( E pp. )2")C ?A )2")C E pp. )2")I
&+
2:. 'iven the products below and the events that affect them. indicate what happens to
demand or supply. and the e$uilibrium price and $uantity. 1dentify the determinant of
demand or supply that causes the shift.
-a0 Dlue Keans. ,he wearin# of blue Keans becomes less fashionable amon# consumers.
-b0 2omputers. Larts for makin# computers fall in price because of improvements in
technolo#y.
-c0 ;ettuce. El Nino produces heavy rains that destroy a si#nificant portion of the
lettuce crop.
-d0 2hicken. Deef prices rise because severe winter weather reduces cattle herds.
-a0 Demand for blue Keans decreased because of a decline in buyer tastes for blue Keans.
thus decreasin# the e$uilibrium price and $uantity.
-b0 !upply of computers increases because of an improvement in technolo#y. thus
decreasin# the e$uilibrium price and increasin# the e$uilibrium $uantity.
-c0 !upply of lettuce decreases because of a fall in the number of suppliers. thus
increasin# the e$uilibrium price and decreasin# the e$uilibrium $uantity.
-d0 Demand for chicken increases because of an increase in the price of a substitute
food -beef prices rose because of a supply decrease0. thus increasin# the e$uilibrium
price and $uantity. Ftext( E pp. &+. &8. )2C ?A pp. &+. &8.)2C ?1 pp. &+. &8.)2I
28. 1n the spaces below each of the followin#. indicate the Fincrease (+), decrease (), or
indeterminate -%0I on e$uilibrium price -P0 and e$uilibrium $uantity -Q) of each of
these chan#es in demand andJor supply.
P Q
-a0 1ncrease in demand. increase in supply 7777777777 777777777
-b0 1ncrease in demand. decrease in supply 7777777777 777777777
-a0 %. GC -b0 G. %C -c0 %. HC -d0 H. %C Ftext( E pp. )2")&C ?A pp. )2")&C ?1 pp. )2")&I
6. 1n each case below. indicate the effect Fincrease -G0C decrease -0C indeterminate -ind0I
upon e$uilibrium price -P0 and e$uilibrium $uantity -Q0 and illustrate the chan#e
#raphically. <here you believe the effect is indeterminate. two #raphical illustrations
may be necessary to demonstrate your point.
P Q
-b0 Decrease in supply. demand constant 777 777
&9
Chapter 3
P Q
-a0 1ncrease in demand. supply constant G
-b0 Decrease in supply. demand constant G
-c0 Decrease in demand. decrease in supply ind
-d0 Decrease in demand. increase in supply ind
Ftext( E pp. )2")&C ?A pp. )2")&C ?1 pp. )2")&I
New 1. -;ast <ord0 2an ticket scalpin# be Kustified% Explain usin# economic analysis.
,icket scalpin# refers to the practice of resellin# tickets at a price hi#her than stated
on the ticket. ,his economic activity often occurs with athletic and artistic events. 1t
can be Kustified for several reasons. Eirst. ticket resales are voluntary O both buyer and
seller must feel that they #ain or they would not a#ree to the transaction. !econd.
scalpin# simply redistributes tickets from those who value them less than money to
those who value them more than the money theyMre willin# to pay. ,hird. sponsors of
the event may be inKured. but if that is the case. they should have priced the tickets
hi#her. Eourth. spectators are not hurt because those who want to #o the most to the
event are #ettin# the tickets. 1n summary. both seller and buyer benefit and event
sponsors are the only ones who may lose. but that is due to their own error in pricin#
and they would have lost from this error whether or not the scalpin# occurred. Ftext( E
p. ))C ?A( p. ))C ?1( p. ))I
&:

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