Download CHAPTER 3 SUPPLY AND DEMAND

CHAPTER 3
SUPPLY AND DEMAND
PROBLEM SET
1. False. Slowing down oil production would correspond to a leftward shift of the
supply curve. Assuming demand is unchanged, this leftward shift in supply would lead
to a price increase, not decrease. Therefore, it must be that the situation described –
falling oil prices and falling quantity of oil produced – was caused by a leftward shift
(decrease) in demand.
2. The demand curve for beef shifted to the left as consumers switched to other meats. At
the same time, the supply curve for beef also shifted to the left, as farmers destroyed
their herds. Since both of these shifts lead to a lower equilibrium quantity of beef, we
know with certainty that equilibrium quantity will decrease. However, we cannot
know whether the price of beef will rise, fall, or stay the same. The answer depends on
the relative sizes of the two shifts. If demand shifts more than supply, then the price of
beef will fall. If supply shifts more than demand, then the price of beef will rise. If the
two shifts exactly offset each other, the price of beef will remain constant.
Graphically, the three alternative outcomes are as follows:
3. a. Coffee supply declines from S1 to S2. Equilibrium price increases from P1 to P2;
equilibrium quantity declines from Q1 to Q2.
Price
S2
S1
P2
P1
D1
Q2
Quantity
Q1
b. Since the price of a substitute has fallen, demand for coffee should decrease.
Demand decreases from D1 to D2. Equilibrium price and quantity decline from P1,
Q1 to P2, Q2.
Price
S1
P1
P2
D1
D2
Q2
Q1
Quantity
c. An increase in wages of coffee workers should result in a decrease in supply.
Supply decreases from S1 to S2; equilibrium price increases from P1 to P2 and
quantity declines from Q1 to Q2.
Price
S2
S1
P2
P1
D1
Q2
Quantity
Q1
d. This announcement would undoubtedly cause a decrease in demand, from D1 to
D2, resulting in a lower equilibrium price and quantity.
Price
S1
P1
P2
D1
D2
Q2
Q1
Quantity
e. If consumers expect higher coffee prices in the future, they would try to stock up
on coffee now, causing an increase in current demand. If producers, too, expect
the price to rise, they may withhold coffee, waiting to sell it at higher prices later.
This will cause a decrease in supply. The combined effect of the shifts in supply
and demand is a rise in equilibrium price. The equilibrium quantity, however,
could rise or fall, depending on which shift is greater.
Price
S2
S1
P2
P1
D2
D1
Quantity
4. a.
Monthly
rent ($)
Quantity (1,000s)
b. $1400 is the equilibrium price, and 19,000 is the equilibrium quantity.
c. At a rent of $1000, there is excess demand of 11,000 apartments. This excess
demand will drive the price up.
d. The supply curve will shift leftward from S1 to S2, as shown in part a. The
resulting shortage at the initial equilibrium price will drive the price up and the
equilibrium quantity down (to $1800 and 15,000 units in the example shown).
5.
a.
b. The equilibrium price is $25, and the equilibrium quantity is 1500 alarm clocks.
c. A result of a decrease in the price of a substitute, the demand curve for alarm
clocks will shift leftward, for example from D1 to D2. The equilibrium price and
the equilibrium quantity will both fall.
d. The demand curve and the supply curve would shift leftward. The equilibrium
quantity traded would fall, but the effect on equilibrium price would depend on the
relative sizes of the shifts.
6.
a.
b. The equilibrium price is $200, and the equilibrium quantity is 450 scooters.
c. As shown in part a, the supply curve would shift leftward, for example from S1 to
S2. The equilibrium price would rise and the equilibrium quantity would fall.
d. The supply curve would shift leftward, while the demand curve would shift
rightward. The price per scooter would increase, but the effect on equilibrium
quantity would depend on the relative sizes of the shifts.
7. a. The supply and demand curves are S1 and D1, respectively.
Price
S1
$1.40
P2
D1
D2
Q2
140
Quantity
b. Equilibrium price = $1.40; Equilibrium quantity = 140
c. Since automobiles and gasoline are complements, a rise in automobile prices will
lead to a decline in demand for gas, as illustrated by the shift from D1 to D2.
8. a. Since denim is a major input into the production of jeans, an increase in the price
of denim would lead to a leftward shift of the supply curve, which would result in a
higher equilibrium price, and a lower equilibrium quantity.
Price
S2
S1
P2
P1
D1
Q2
Quantity
Q1
b. Assuming jeans are a normal good (this seems a plausible assumption), a decline
in income would result in a decrease in demand; equilibrium price and quantity
both decrease.
Price
S1
P1
P2
D2
Q2
Q1
D1
Quantity
9. a. The supply curve shifted to the left.
b. The demand curve shifted to the left.
c. The supply curve shifted to the right.
10.
The mistake is in the assumption that a higher price will lead to a rightward shift in
supply. Instead, we know that an increase in price of oranges (caused by the rightward
shift in demand) will only cause a movement up along the supply curve, without
shifting the supply curve. This will result in a higher equilibrium price and a larger
equilibrium quantity traded.
11. a. The statement confuses demand and quantity demanded. The higher prices due
following Hurricane Katrina were the result of an interruption in supply. Consumers
responded by decreasing the quantity of gasoline they demanded. This is a movement
along a fixed demand curve, and not a reduction in demand.
b.
The devastation following the hurricane disrupted gasoline supplies, leading to a
leftward shift of the supply curve from S1 to S2. As a result, the price per gallon
increased from P1 to P2 and the quantity of gasoline exchanged fell from Q1 to Q2.
Price Per
Gallon Of
Gasoline
S2
S1
P2
P1
B
A
D1
Q2 Q1
Quantity of
Gasoline (gallons)
(gallons)
c.
When refineries were repaired, supply returned to (roughly) its original position. The
diagram would be similar to that in part (b) but with the shift of supply reversed –
from S2 to S1. The price per gallon fell and quantity increased.
d.
For the most part, consumers passively responded to changed supply conditions by
adjusting their purchases along a fixed demand curve.
12.
a.
The equilibrium price and equilibrium quantity both rise.
b. The equilibrium price and equilibrium quantity both fall.
c. The equilibrium price and equilibrium quantity both rise.
d. The equilibrium price falls and the equilibrium quantity rises.
e. The equilibrium price rises and the equilibrium quantity falls.
13. a.
P
S2
S1
P2
P1
D2
D1
Q1 Q2
Q
b.
P
S1
S2
P2
P1
D2
D1
Q1
Q2
Q
c. False. It is possible that the supply curve shifted leftward, if at the same time the
demand curve shifted to the right. Then, we can have an equilibrium where P2>P1 and
Q2>Q1.
P
S2
P2
S1
P1
D2
D1
Q1 Q2
Q
d. True, as demonstrated by the graph in part c.
14.
P
S2
S1
P1
P2
ʹ′
P1
A
B
D1
Aʹ′
D2
Q
The original equilibrium point is represented by A, where supply (S1) and demand (D1)
intersect. If the demand curve shifts leftward (to D2), with the supply curve unchanged, the
new equilibrium point would be A′. At A′ both the price and quantity would be lower than at
A. However, a simultaneous leftward shift in supply to S2 (OPEC reducing oil production)
brings us to the equilibrium point B. At B, again both the price and quantity are lower than at
A. OPEC restricting oil production ensured that the new equilibrium price P2 is higher than
P1′. Yet, by reducing supply OPEC could not prevent the drop in price, as we see that P2 is
still lower than P1.
MORE CHALLENGING
15. Set quantity demanded equal to quantity supplied:
500 – 50P = 50 + 25P
450 = 75P
Peq. = 6
Substitute for P in either equation to find that the equilibrium quantity is Qeq. = 200.
16. As people move to Manhattan due to its lower crime rate, the demand for rental
housing in Manhattan increases, leading to higher rents in Manhattan. People who can
no longer afford Manhattan rents move to other neighborhoods in the New York area
(housing in other neighborhoods being a substitute for housing in Manhattan). This
shifts the demand curve for rental housing in these other neighborhoods to the right,
driving up rents in these areas and making their original residents worse off.
17. The key here is to realize that the analyst is observing different equilibrium points, not
necessarily points on the same demand curve. While an upward-sloping demand curve
in some markets is not a total impossibility, another, more likely, explanation is that
the demand curve has shifted rightward each year. In this case, the observed
equilibrium points might be tracing out a more-or-less stable, upward sloping supply
curve.