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Review and Applying the Principles (KEY) – Chapter 6
Review Questions (complete this on your own)
“All markets are necessarily in equilibrium
at all points in time.” Agree or disagree.
Explain.
DISAGREE. MARKETS ARE
SOMETIMES IN SURPLUS OR
SHORTAGE. MARKETS MOVE
TO EQUILIBRIUM OVER TIME.
Alfred Marshall, the British economist,
compared supply and demand to the two
blades of a pair of scissors. Explain his
thinking.
Some NBA players receive annual
incomes of several million dollars.
Explain their high salaries in terms of
supply and demand.
MARSHALL’S POINT WAS
THAT JUST AS IT TAKES TWO
BLADES (NOT ONE ALONE) OF
A PAIR OF SCISSORS TO CUT
SOMETHING, IT TAKES BOTH
SUPPLY AND DEMAND (NOT
ONE ALONE) TO DETERMINE
PRICE.
HIGH SALARIES ARE A
RESULT OF HIGH DEMAND
AND LOW SUPPLY. THE
BASKETBALL PLAYERS
SUPPLY A CERTAIN LEVEL
OF BASKETBALL
PERFORMANCE THAT
VERY FEW PEOPLE IN THE
WORLD CAN SUPPLY.
COMBINE THIS LOW
SUPPLY WITH A HIGH
DEMAND FOR WATCHING
BASKETBALL AND WE
NOW UNDERSTAND WHY
NBA PLAYERS ARE PAID
HIGH SALARIES.
Applying the Principles
CHAPTER 6, SECTION 1
In a market, supply and demand work together to determine the price of a good. Write your answers to questions 122-127 in
the blanks provided to be sure you understand the different market conditions and how they affect price.
122.
What market condition exists when quantity supplied is greater than quantity demanded? SURPLUS
123.
What happens to price when the market condition in question 122 exists? PRICE FALLS
124.
What market condition exists when quantity demanded is greater than quantity supplied? SHORTAGE
125.
What happens to price when the market condition in question 124 exists? PRICE RISES
126.
What market condition exists when quantity demanded is equal to quantity supplied? EQUILIBRIUM
127.
Do markets tend to move toward shortage, surplus or equilibrium? EQUILIBRIUM
2
Suppose that in the market for gadgets, the quantities demanded and supplied at various prices are as shown in the following
table, and answer question 128.
SUPPLY AND DEMAND IN THE GADGET MARKET
Quantity
Demanded
450
400
350
300
250
200
150
100
Quantity
Supplied
50
100
150
200
250
300
350
400
$0.70
$0.60
Price
Price
$0.10
$0.20
$0.30
$0.40
$0.50
$0.60
$0.70
$0.80
$0.90
$0.80
$0.50
$0.40
$0.30
$0.20
$0.10
0
50 100 150 200 250 300 350 400 450 500
Quantity
128.
Use the information in the table to draw the supply and demand curves for the gadget market on the following grid. Label the
vertical axis "Price" and label the horizontal axis "Quantity." Use the prices and quantities demanded in the table to plot the
demand curve. Label it Dl. Use the prices and quantities supplied in the table to plot the supply curve. Label it Sl.
Use the graph you created in question 128 to answer questions 129-136.
129.
The equilibrium price in the gadget market is $0.50.
130.
At the equilibrium price, sellers want to sell 250 gadgets and buyers want to buy 250 gadgets.
131.
If the price of gadgets rises to $0.70, sellers will want to sell 350 gadgets and buyers will want to buy 150 gadgets.
132.
A price rise to $0.70 will result in a SURPLUS (surplus or shortage) of 200 gadgets.
133.
If the market condition in question 131 exists, prices will FALL (rise or fall) and price will settle at $0.50.
134.
If the price of gadgets falls to $0.30, sellers will want to sell 150 gadgets and buyers will want to buy 350 gadgets.
135.
A price fall to $0.30 will results in a SHORTAGE (surplus or shortage) of 200 gadgets.
136.
If the market condition in question 134 exists, prices will RISE (rise or fall) and price will settle at $0.50.
Price is a way for buyers and sellers to communicate with each other. It signals a change in the market for a good. Fill in each
blank in questions 137-140 with the correct word.
137.
When a market experiences a shortage, price will INCREASE (increase or decrease).
138.
When a shortage occurs, supply and demand work together to influence price and move the market toward EQUILIBRIUM.
139.
When a market experiences a surplus, prices will DECREASE (increase or decrease).
140.
When a surplus occurs, supply and demand work together to influence price and move the market toward EQUILIBRIUM.