Download B. The Supply

Microeconomics chapter 3
Prepared by Dr. L. Al Khalifa
Chapter 3: Main points
What is the difference between the money price and the relative price?
- The money price of a good is the number of dinars that must be given up in exchange for
it. The money price of a bag is 5 dinars.
- The relative price is the highest value thing you give up when you buy a good (the
opportunity cost). It is calculated as the following:
If the money price of a meal 2 BD and the money price of a cup of coffee 1 BD. Then the
relative price of a meal is 2/1 cups of coffee (we divide the money price of a meal by the
money price of a cup of coffee) and the relative price of a cup of coffee is ½ meal (we
divide the money price of a cup of coffee by the money price of a meal).
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The theory of demand and supply refers to relative prices. When we say a fall in price of
a good, we mean that its relative price decreased relative to the average price of other
goods and services.
The Demand
- The demand curve or schedule shows the entire relationship between the price of a good
and the quantity demanded of the same good.
- The quantity demanded of a good or service is the amount that consumers plan to buy
during a given period at a particular price.
- According to the law of demand, other things remaining the same, the higher the price of
a good, the smaller is the quantity demanded; and the lower the price of a good, the
greater is the quantity demanded.
- There are three conditions for the demand. If you demand something, then you:
1. want it,
2. can afford it, and
3. plan to buy it.
Why there is a negative relationship between the price and the quantity demanded?
For two reasons:
1. Substitution effect
Other things remaining the same, as the price (opportunity cost) of a good rises, people buy
less of that good and more of its substitutes.
2. Income effect
Other things remaining the same, as the price rises and people’s income remains unchanged,
people must decrease the quantities demanded of the good.
What is the difference between a change in the demand and a change in the quantity
demanded of a good?
A.
- The demand for a good (D) is the entire relationship between all possible prices and the
quantities that people demand at every possible price.
- The demand is represented by the demand curve.
- If the demand increases the demand curve shifts to the right.
- If the demand decreases, the demand curve shifts to the left.
- Many factors cause the demand for a good to increase or decrease, these factors include:
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Microeconomics chapter 3
Prepared by Dr. L. Al Khalifa
1. The price of a substitute in consumption has a positive relationship with the
demand for a good. For example if the price of coke increases, the demand for Pepsi
increases; and if the price of coke decreases, the demand for Pepsi decreases.
2. The price of a complement in consumption has a negative relationship with the
demand for a good. For example if the price of CDs increases, the demand for CD
players decreases, and if the price of CDs decreases, the demand for CD players
increases.
3. Income has a positive relationship with the demand for normal goods and a negative
relationship with the demand for inferior goods. For example if income increases the
demand for normal and good quality coffee increases and the demand for low quality
coffee decreases.
4. The numbers of buyers and preferences have a positive relationship with the
demand for a good. For example a decrease in the number of buyers or a decrease in
preferences decrease the demand for sport cars.
5. Expected future prices of a good by consumers have a positive relationship with the
demand for a good. For example if buyers expect the price of a computer will
decrease in the future, the demand now for computers decreases; and if buyers expect
the price of a computer will increase in the future, the demand now for computers
increases.
B.
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The quantity demanded (QD) of a good is a point on the demand curve.
A change in the quantity demanded is a movement from one point to another on the same
curve.
An increase in the price of the good itself causes a movement up on the demand curve
and a decrease in the quantity demanded. For example if the price of orange per kilo
increases the quantity demanded of oranges decreases.
A decrease in the price of the good itself causes a movement down on the demand curve
and an increase in the quantity demanded. For example if the price of orange per kilo
decreases the quantity demanded of oranges increases.
The Supply
- The supply curve or schedule shows the entire relationship between the price of a good
and the quantity supplied of the same good.
- The supply curve shows us the minimum-supply price at which suppliers are willing to
sell one more unit. The demand curve shows us the maximum price consumers are
willing to pay for additional unit (marginal benefit).
- The quantity supplied of a good or service is the amount that producers (sellers-suppliers)
plan to sell during a given period at a particular price.
- According to the law of supply, other things remaining the same, the higher the price of a
good, the higher is the quantity supplied; and the lower the price of a good, the lower is
the quantity supplied.
- There are three conditions for the supply of a good. The firm must:
4. have the resources and technology to produce it,
5. be able to profit from producing it, and
6. plan to produce it and sell it.
Why there is a positive relationship between the price and the quantity supplied?
For one reason:
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Microeconomics chapter 3
Prepared by Dr. L. Al Khalifa
As the quantity produced increases, the marginal cost of producing the good increases.
Therefore, producers increase the production only if the price rises to cover the increase in
the marginal cost. If the price decreases, they reduce the production to reduce marginal cost.
What is the difference between a change in the Supply and a change in the quantity
Supplied of a good?
A.
- The Supply (S) is the entire relationship between all possible prices and the quantities
that producers plan to supply at every possible price.
- The Supply is represented by the Supply curve.
- If the Supply increases the Supply curve shifts to the right.
- If the Supply decreases, the Supply curve shifts to the left.
- Many factors cause the Supply of a good to increase or decrease, these factors include:
1. Prices of productive resources (wages or salaries, rents, interests and profit)
The prices of resources have a negative relationship with the Supply. For example, other
factors remaining the same if wages increase, the supply decreases.
2. The price of a substitute in production has a negative relationship with the supply of a
good. For example if the price a substitute in production increases, the supply of CDs
decreases; and if the price of a substitute in production decreases, the supply of CDs
increases.
3. The price of a complement in production has a positive relationship with the supply of a
good. For example if the price of beef increases, the supply of leather increases, and if the
price of beef decreases, the supply of leather decreases.
4. Technology has a positive relationship with the supply of a good. A positive technology
change increases the supply and a negative technology change decreases the supply.
5. The number of suppliers (firms) has a positive relationship with the supply of a good. For
example an increase in the number of firms increases the supply.
6. Expected future prices of a good by suppliers have a negative relationship with the supply
of a good. For example if sellers expect the price of a computer will decrease in the
future, the supply now of computers increases; and if sellers expect the price of a
computer will increase in the future, the supply now of computers decreases.
B.
- The quantity Supplied (QS) of a good is a point on the Supply curve.
- A change in the quantity supplied is a movement from one point to another on the same
curve.
- An increase in the price of the good itself causes a movement up on the Supply curve and
an increase in the quantity supplied. For example if the price of orange per kilo increases
the quantity supplied of oranges increases.
- A decrease in the price of the good itself causes a movement down on the Supply curve
and a decrease in the quantity supplied. For example if the price of orange per kilo
decreases the quantity supplied of oranges decreases.
Market Equilibrium
- Market Equilibrium occurs when the quantity supplied of a good equals the quantity
demanded
- The equilibrium price is the relative price at which the quantity demanded equals the
quantity supplied.
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Microeconomics chapter 3
Prepared by Dr. L. Al Khalifa
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The equilibrium quantity is the amount bought and sold at the equilibrium price.
A market always moves towards its equilibrium because the price adjusts to regulates
buying and selling plans as the following:
1. If the price is below the equilibrium price → QS < QD → there is shortage → firms
increase the price and production.
2. If the price is above the equilibrium price → QS > QD → there is surplus → firms
decrease the price and production.
3. At the equilibrium price QS = QD, there is equilibrium → the price does not change.
How changes in demand affect market? equilibrium?
- An increase in demand shifts the D curve to the right and increases the equilibrium price
and equilibrium quantity.
A decrease in demand shifts the D curve to the left and decreases the equilibrium price
and equilibrium quantity.
How changes in supply affect market equilibrium?
- An increase in supply shifts the S curve to the right and decreases the equilibrium price
and increases equilibrium quantity.
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A decrease in supply shifts the S curve to the left and increases the equilibrium price and
decreases the equilibrium quantity.
How an increase in both the demand and the supply affect market equilibrium?
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If there is an increase in the demand and the supply, the equilibrium quantity increases
and the equilibrium price may increase (if the increase of D > the increase of S), decrease
(if the increase of S > the increase of D) or remain the same (if the increase of S = the
increase of D).
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If there is a decrease in the demand and the supply, equilibrium quantity decreases and
equilibrium price may increase, decrease or remain the same (EP is undetermined)
How an increase in demand and a decrease in supply affect market equilibrium?
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If there is an increase in the demand and a decrease in the supply, the equilibrium price
increases and the equilibrium quantity may increase (if the increase of D > the decrease
of S), decrease (if the decrease of S > the increase of D) or remain the same (if the
decrease of S = the increase of D).
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If there is a decrease in the demand and an increase in the supply, the equilibrium price
decreases and the equilibrium quantity may increase, decrease or remain the same.
Chapter 3: Questions
A. The Demand
1. The money price of a good is __________________.
a. the amount of money needed to buy it
b. the relative price of a good
c. the ratio of its money price to the money price of the next best alternative good.
d. its the opportunity cost
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Microeconomics chapter 3
Prepared by Dr. L. Al Khalifa
2. According to the law of demand, ceteris paribus,________________
a. as the price of a good rises, the quantity supplied tends to rise as well.
b. as the price of a good falls, the quantity supplied tends to fall as well.
c. as the price of a good rises, the quantity demanded tends to fall.
d. as the price of a good falls, the quantity demanded tends to fall as well.
Price
a
b
c
D1
D2
Quantity
3. A movement from a to b, means_________________________________.
a. an increase in demand
b. a decrease in demand
c. an increase in quantity demanded
d. a decrease in quantity demanded
Price
a
b
c
D1
D2
Quantity
4. A movement from c to b means….
a. an increase in demand
b. a decrease in demand
c. an increase in quantity demanded
d. a decrease in quantity demanded
5. Suppose that people buy less of good 1 when the price of good 2 falls. These goods are…
a. complements.
b. substitutes.
c. normal.
d. inferior.
6. If you demand something, then you __________________.
a. want it
b. can afford it
c. have made a definite plan to buy it
d. all of the above
7. _________________is the amount that consumers plan to buy during a particular time period,
and at a particular price.
a. The quantity demanded
b. The quantity supplied
c. The demand
d. The supply
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Microeconomics chapter 3
Prepared by Dr. L. Al Khalifa
8. __________________ refers to the entire relationship between the price of the good and
quantity demanded of the good.
a. The quantity demanded
b. The quantity supplied
c. The demand
d. The supply
9. The law of demand results from____________________.
a. substitution effects
b. income effects
c. a and b
d. none of the above
10. A demand curve ________________________.
a. is a willingness-and-ability-to-pay curve
b. shows the relationship between the quantity demanded of a good and its price when all other
influences on consumers’ planned purchases remain the same
c. is a minimum-supply-price curve.
d. both a and b correct
Price
D1
D2
Quantity
11. Which of the following could cause the shift in the demand curve illustrated in the above
figure?
a. An increase in the price of the good itself.
b. A rise in the price of a substitute.
c. A rise in the price of a complement.
d. A fall in the price of the good itself.
12. A 10 million pound decrease in the quantity of peaches demanded might be attributable to
a. a decrease in the price of oranges (hence people buy more of this peach substitute and fewer
peaches).
b. a decrease in consumer income.
c. an increase in consumer income.
d. an increase in the price of peaches.
13. A change in the demand for peaches during this period cannot possibly be the result of a
change in _______________________________.
a. the price of peaches
b. consumer income
c. consumer preferences
d. the prices of peach substitutes or complements
e. the expected future price of peaches
14. The quantity that people plan to buy increases at each and every price, when___________.
a. the quantity demanded increases
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Microeconomics chapter 3
Prepared by Dr. L. Al Khalifa
b. the quantity demanded decreases
c. the demand increases
d. the demand decreases
15. A rise in the price, other things remaining the same, brings___________________
a. an increase in the quantity demanded
b. a decrease in the quantity demanded
c. an increase in the demand
d. a decrease in the demand
B. The Supply
1. If a firm supplies a good or service, then the firm_____________________.
a. has the resources and the technology to produce it
b. can profit form producing it
c. has made a definite plan to produce and sell it
d. all of the above
2. According to the law of Supply, ceteris paribus,
a. as the price of a good rises, the quantity supplied tends to falls.
b. as the price of a good falls, the quantity supplied tends to fall as well.
c. as the price of a good rises, the quantity demanded tends to fall.
d. as the price of a good falls, the quantity demanded tends to rise.
Price
S1
a
S2
b
c
3. A movement from c to b means….
a. an increase in supply
b. a decrease in supply
c. an increase in quantity supplied
d. a decrease in quantity supplied
4. A movement from a to b means….
a. an increase in supply
b. a decrease in supply
c. an increase in quantity supplied
d. a decrease in quantity supplied
5. __________________ refers to the entire relationship between the price of the good and
quantity supplied of the good.
a. The quantity demanded
b. The quantity supplied
c. The demand
d. The supply
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Microeconomics chapter 3
Prepared by Dr. L. Al Khalifa
6. A supply curve ________________________.
a. is a willingness-and-ability-to-pay curve
b. shows the relationship between the quantity demanded of a good and its price when all other
influences on consumers’ planned purchases remain the same
c. is a minimum-supply-price curve.
d. none of the above
7. _________________is the quantity of a good that producers plan to sell during a particular
time period, and at a particular price.
a. The quantity demanded
b. The quantity supplied
c. The demand
d. The supply
8. A change in the supply for peaches during this period cannot possibly be the result of a change
in _______________________________.
a. the price of peaches
b. technology
c. prices of resources
d. the number of suppliers
e. the expected future price of peaches
9. The quantity that producers plan to supply increases at each and every price,
when___________.
a. the quantity supplied increases
b. the quantity supplied decreases
c. the supply increases
d. the supply decreases
10. __________________, if there is an increase in the number of producers or an advance in
technology.
a. The quantity supplied increases
b. The quantity supplied decreases
c. The supply increases
d. The supply decreases
11. Which of the following influences does NOT shift the supply curve?
a. A rise in the wage paid workers.
b. Development of new technology.
c. People deciding that they want to buy more of the product.
d. A decrease in the number of suppliers.
12. An increase in the number of producers of gruel __________the supply of gruel and shifts the
supply curve of gruel_________.
a. increases; rightward
b. increases; leftward
c. decrease; rightward
d. decrease; leftward
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Microeconomics chapter 3
Prepared by Dr. L. Al Khalifa
13. An increase in the cost of producing video tapes shifts the supply curve of video tape
__________and shifts the demand curve for video tape__________.
a. rightward; leftward
b. leftward; leftward
c. leftward; not at all
d. not at all; leftward
14. In addition to showing the quantity that will be supplied at different prices, a supply curve
may be viewed as the___________________________________.
a. Willingness-and-ability to pay curve.
b. marginal benefit curve.
c. minimum-supply price curve.
d. maximum-supply price curve.
C. Market Equilibrium
1. Q= 500 – 2P
Q= 100 + 6P
Suppose that the above are the demand and supply equations for rental cars. What is the position
of the market if the price is 30?
a. Shortage
b. Surplus
c. Equilibrium
d. can not be answered from the data above
2. Q= 500 – 2P
Q= 100 + 6P
Based on the above equations, the equilibrium quantity is ___________.
a. 50
b. 400
c. 120
d. 260
3. In a market, at the equilibrium price,____________________________________________.
a. neither buyers nor sellers can do business at a better price
b. buyers are willing to pay a higher price, but sellers do not ask for a higher price
c. buyers are paying the minimum price they are willing to pay for any amount of output and
sellers are charging the maximum price they are willing to charge for any amount of production.
d. none of the above is true.
Price (dollars per unit)
S
4. In the figure at the price of $8 there
is_______________________.
a. shortage and the price will rise
b. shortage and the price will fall
c. surplus and the price will rise
d. surplus and the price will fall
8
D
Quantity (units per hour)
5. If the markets for Twinkies is in equilibrium, then_________________________________.
a. Twinkies must be a normal good
b. producers would like to sell more at the current price
c. consumers would like to buy more at the current price
d. the quantity supplied equals the quantity demanded
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Microeconomics chapter 3
Prepared by Dr. L. Al Khalifa
6. In the market of oil, the development of a new deep sea drilling technology __________the
demand curve for oil and _____________the supply curve of oil.
a. shifts rightward; shifts rightward
b. does not shift; shifts rightward
c. shifts leftward; shift leftward
d. does not shift; shift leftward
7. Which of the following definitely causes a product’s equilibrium price to rise?
a. An increase in both demand and supply.
b. A decrease in both demand and supply.
c. An increase in demand combined with a decrease in supply.
d. A decrease in demand combined with an increase in supply.
8. In the market for chocolate chip cookies, an increase in supply will result in ___________.
a. an increase in both price and quantity
b. an increase in price and a decrease in quantity
c. a decrease in both price and quantity
d. a decrease in price and an increase in quantity
9. The number of firms producing computer memory chips decreases. As a result, the price of a
memory chip___________ and the quantity of memory chips_____________.
a. rises; increases
b. rises; decreases
c. falls; increases
d. falls; decreases
10. If there is a shortage of a good, the quantity demanded __________the quantity supplied and
the price will________.
a. is less than; rise
b. is less than; fall
c. is greater than; rise
d. is greater than; fall
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