Deck 3: A: - Demand, Supply, and Market Equilibrium

Question 1

Suppose a producer sells 1,000 units of a product at $5 per unit one year, 2,000 units at $8 the next year, and 3,000 units at $10 the third year.Is this evidence that the law of demand is violated? Explain.

Answer 1

No.The law of demand shows the relationship between price and quantity demanded.In general, as price falls the quantity demanded will increase.One of the assumptions, however, is that all other things are equal or held constant.In this case, this assumption may have been violated and that is why it seems there is a positive relationship between price and quantity.The most likely explanation for the set of events is that demand for the product increased from one year to the next.If that was true, then price would rise and the equilibrium quantity would increase.

Question 2

Describe and give a reason for the law of supply.

Answer 2

The law of supply indicates that, other things being equal, producers will produce and be willing to sell more of their product at a high price than at a low price.This means that there is a direct relationship between price and quantity supplied.The basic explanation is that, given product costs, a higher price means greater profits and thus more incentive for business to increase the quantity supplied.

Question 3

Suppose that a decrease in the price of feed grain leads to a dramatic decrease in the price of beef.Use the income effect and the substitution effect to explain why there was an increase in the quantity of beef purchased.

Answer 3

The income effect predicts that the quantity of beef purchased will rise when beef prices fall because people will now be able to afford more.The purchasing power of their income rises when prices fall, assuming other things remain the same.
The 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.

Question 4

Define "demand."

Question 5

State the law of demand and explain why the other-things-equal assumption is critical to it.

Question 6

What effect should each of the following have upon the demand for MP3 players? Explain your reasoning in each case.(a) the development of reasonably-priced smart phones that compete with MP3 players
(b) an increase in population and incomes
(c) a substantial increase in the number and quality free downloadable MP3s
(d) consumer expectations of substantial price increases in MP3 players
(e) a decrease in the price of MP3 players

Question 7

Define "supply."

Question 8

Explain how the prices of related goods also affect demand.

Question 9

What is the difference between a change in supply and a change in quantity supplied?

Question 10

Give examples of two substitute goods and two complementary goods.In each case explain why the goods are substitutes or complements.

Question 11

The Federal government is considering passing an excise tax that would increase the price of a pack of cigarettes by $1.00.What would be the likely effect of this change on the demand and supply of cigarettes? What is likely to happen to cigarette prices and the quantity consumed if the tax bill is enacted?

Question 12

List five basic determinants of market demand that could cause demand to decrease.

Question 13

The demand schedules of three individuals (Tom, Dick, and Harry) are shown.If they are the only three buyers of CDs, complete the market demand schedule for CDs.Graphically, is the market demand for a product the horizontal or vertical sum of the individual demand schedules?

Question 14

Differentiate between a normal (superior) and an inferior good.

Question 15

What are some of the characteristics of a market that can be described by a demand and supply model?

Question 16

What is the difference between a change in demand and a change in quantity demanded?

Question 17

What effect will each of the following have upon the supply of television sets? Explain your reasoning in each case.(a) an increase in the price of electronic equipment used in producing television sets
(b) a decline in the number of firms producing television sets
(c) a large new tariff on imported Japanese TV sets
(d) new inexpensive satellite dishes which make televisions more popular among consumers

Question 18

Give two explanations for the law of demand.

Question 19

Newspaper item: "Due to lower grain prices, consumers can expect retail prices of choice beef to begin dropping slightly this spring with pork becoming cheaper after midsummer," the Agriculture Department predicted."This reflects increasing supply," the department said.Is the term "supply" used correctly? What effects might this announcement have on consumer demand? Explain.

Question 20

List six basic determinants of market supply that could cause supply to increase.

Question 21

The price of gold is lower today than several decades ago.Yet, the production of gold is greater than in the past.How is this possible without violating the law of supply?

Question 22

"Government-set prices undermine the rationing function of competitive prices." Explain carefully in terms of both price ceilings and price floors.

Question 23

Evaluate.A decrease in supply causes price to rise which, in turn, causes supply to rise.Therefore, a decrease in supply will not have lasting effects.

Question 24

Despite a lower price for its product, the widget industry is selling fewer units.How is this possible if the law of demand has not been violated? Give and explain two distinct reasons.

Question 25

Assuming no government intervention, describe the market behaviour that should result if the price of a product is below its equilibrium price; then describe the behaviour that should occur if the price is above its equilibrium price.

Question 26

Describe in words how one can recognize the market equilibrium point in a graph of a demand schedule and a supply schedule.

Question 27

Using the schedules given, plot the demand curve and the supply curve on the below graph.Label the axes and indicate for each axis the units being used to measure price and quantity.Then answer the questions. (a) Give the equilibrium price and quantity for wheat.(b) Indicate the equilibrium price and quantity on the graph by drawing lines from the intersection of the supply and demand curves to the price and quantity axes.(c) If the Federal government decided to support the price of wheat at $4.00 per ton, tell whether there would be a surplus or shortage and how much it would be.(d) Demonstrate your answer to part (c) on your graph being sure to label the quantity you designated as the shortage or surplus.

Question 28

Evaluate.An increase in demand causes price to rise which, in turn, causes demand to fall.Therefore, an increase in demand will not have lasting effects.

Question 29

In the spaces below each of the following, indicate the [increase (+), decrease (-), or indeterminate (ind)] on equilibrium price (P) and equilibrium quantity (Q) of each of these changes in demand and/or supply.

Question 30

Use the data in the following table to explain the economic effects of a price floor at $6.

Question 31

Use the data in the following table to explain the economic effects of a price ceiling at $9.

Question 32

What is a price ceiling and what are its economic effects?

Question 33

What is a price floor and what are its economic effects?

Question 34

In the space below each of the following, indicate the effect [increase (+), decrease (-)] on equilibrium price (P) and equilibrium quantity (Q) of each of these changes in demand and/or supply.

Question 35

Given the products below and the events that affect them, indicate what happens to demand or supply, and the equilibrium price and quantity.Identify the determinant of demand or supply that causes the shift.(a) Blue jeans.The wearing of blue jeans becomes less fashionable among consumers.(b) Computers.Parts for making computers fall in price because of improvements in technology.(c) Lettuce.El Nino produces heavy rains that destroy a significant portion of the lettuce crop.(d) Chicken.Beef prices rise because severe winter weather reduces cattle herds.

Question 36

Use the data in the following table to explain the economic effects of a price ceiling at $6, at $5, and at $4.

Question 37

Economist Jones defines an increase in supply as a decrease in the prices needed to ensure various amounts of a good being offered for sale.Economist Brown defines an increase in supply as an increase in the amounts that producers will offer at various possible prices.Economist Cole 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.Which, if any, of these is defining an increase in supply correctly? Explain.

Question 38

Use the data in the following table to explain the economic effects of a price floor at $8, at $9, and at $10.Explain the economic effects.

Question 39

Using the schedules given, plot the demand curve and the supply curve on the below graph.Label the axes and indicate for each axis the units being used to measure price and quantity.Then answer the questions. (a) Give the equilibrium price and quantity for oats.(b) Indicate the equilibrium price and quantity on the graph by drawing lines from the intersection of the supply and demand curves to the price and quantity axes.(c) If the Federal government decided to support the price of oats at $1.40 per ton, tell whether there would be a surplus or shortage and how much it would be.(d) Demonstrate your answer to part (c) on your graph being sure to label the quantity you designated as the shortage or surplus.

Question 40

Given the products below and the events that affect them, indicate what happens to demand, supply, equilibrium quantity, and equilibrium price.Identify the determinant of demand and supply that causes the shifts.(a) Calculators.More schools require students to buy and use calculators; improved productivity shortens the time it takes to make calculators.(b) Gasoline.Oil production declines due to a crisis in the Middle East; people take more car vacations and drive more.(c) New homes.The average incomes fall as the economy moves into recession; the productivity of home construction workers and builders increases.(d) Tobacco.The government cut its subsidy to tobacco farmers; more people quit smoking.

Question 41

What are the consequences for equilibrium price and quantity if there is an equal increase in the supply and demand for sushi?

Question 42

Explain the consequences on the primary and secondary markets for pre-setting below equilibrium prices for the popular women's figure skating event at the Olympic games?

Question 43

What are the consequences of an increase in the demand for Euros on the equilibrium price and quantity of Euros? Does the Canadian dollar appreciate or depreciate as a result? Explain.

Question 44

(a) Using the schedules given, determine the demand equation and the supply equation. (b) What is the intercept of the demand equation? What is the slope of the demand equation?
(c) What is the intercept of the supply equation? What is the slope of the supply equation?
(d) What is the equilibrium price and quantity?

Question 45

What are the consequences for equilibrium price and quantity if the supply of pink salmon has increased and the demand for pink salmon has decreased? Assume that supply has increased more than demand has decreased

Question 46

What are the consequences of reduced supply of lettuce for equilibrium price and quantity?

Question 47

Determine the equilibrium price and quantity in each of the following.(a) Demand is represented by the equation, P = 28 - .2QD and supply by the equation P = 8 + .3QS.(b) Demand is represented by the equation, P = 30 - .5QD and supply by the equation P = 5 + .5QS.(c) Demand is represented by the equation, P = 20 - .3QD and supply by the equation P = 4 + .2QS.

Question 48

(a) Determine the equilibrium price and quantity if demand is represented by the equation, P = 40 - .2QD and supply by the equation P = 10 + .4QS.(b) Suppose demand changes and is now represented by the equation P = 52 - .2QD.Has demand increased or decreased? What is the new equilibrium price and quantity?
(c) Suppose instead supply changes and is now represented by the equation P = 16 + .4QS.Has supply increased or decreased? What is the new equilibrium price and quantity?

Question 49

What are the consequences for equilibrium price and quantity if the supply of gasoline has decreased and the demand for gasoline has increased? Assume that the increase in demand outweighs the decrease in supply.

Question 50

Demand is represented by the equation, P = 80 - 0.3QD and supply by the equation P = 30 + 0.2QS.(a) Determine the equilibrium price and quantity.(b) What are the economic effects of a price ceiling at $41?
(c) What are the economic effects of a price ceiling at $72?
(d) What are the economic effects of a price floor at $62?
(e) What are the economic effects of a price floor at $37?

Question 51

Despite a higher price for widgets, buyers are purchasing more units.How is this possible if the law of demand has not been violated? Give and explain two distinct reasons.