Download Chapter:3 Where Prices Come From: The Interaction of Demand and

1
Economics
6th edition
Chapter 3
Where Prices Come From:
The Interaction of Demand
and Supply
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Ch. 2 Class
Quiz
Birds/Day Mice/Day
Cinder
2
4
Flounder
8
4
What is Cinder’s opportunity cost/day for producing a bird?
4 Mice/day
/ 2 Birds/day =
2 mice
What is Flounder’s opportunity cost/day for producing a mouse?
8 Birds/day
/ 4 Mice/day =
2 birds
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Chapter Outline
3.1 The Demand Side of the Market
3.2 The Supply Side of the Market
3.3 Market Equilibrium: Putting Demand and Supply
Together
3.4 The Effect of Demand and Supply Shifts on Equilibrium
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Early High-Tech Gadgets
1992
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Smart Watch
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What determines the price of a
smartwatch?
Demand for smartwatches
– How many smartwatches do consumers want to buy?
– Factors affecting demand
 price of the smartwatches
 other factors, such as prices of other goods
Supply of smartwatches
– How many smartwatches are producers willing to sell?
– Factors affecting demand
 price of the smartwatches
 other factors, such as prices of other goods
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Our model of a smartwatch market
To analyze the market for smartwatches, we need a model how
buyers and sellers behave.
Perfectly competitive market
(1) many buyers and sellers
(2) all firms selling identical products
(3) no barriers to new firms entering the market
While these assumptions are quite restrictive, the model is still
useful for analyzing many markets.
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3.1 The Demand Side of the Market
List and describe the variables that influence demand
We begin our analysis of
where prices come from by
investigating how buyers
behave.
• We refer to this as
market demand, the
demand by all the
consumers of a given
good or service.
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Figure 3.1 A demand schedule and a demand curve (1 of 3)
Demand schedule: A table that shows the relationship between
the price of a product and the quantity of the product demanded.
Demand curve: A curve that shows the relationship between the
price of a product and the quantity of the product demanded.
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Figure 3.1 A demand schedule and a demand curve (2 of 3)
When drawing the demand curve, we assume ceteris paribus.
Ceteris paribus (“all else equal”) condition: The requirement
that when analyzing the relationship between two variables—such
as price and quantity demanded—other variables must be held
constant.
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Figure 3.1 A demand schedule and a demand curve (3 of 3)
Quantity demanded: The amount of a good or service that a
consumer is willing and able to purchase at a given price.
Law of Demand: A rule that states that, holding everything else
constant, when the price of a product falls, the quantity demanded
of the product will increase, and when the price of a product rises,
the quantity demanded of the product will decrease.
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What explains the law of demand?
When the price of a good falls, two effects take place:
1. Consumers substitute toward the newly less-expensive good.
2. Consumers have more purchasing power, which is like an
increase in income.
We call these the substitution effect and the income effect:
Substitution effect: The change in the quantity demanded of a
good that results from a change in price, making the good more or
less expensive relative to other goods that are substitutes.
Income effect: The change in the quantity demanded of a good
that results from the effect of a change in the good’s price on a
consumers’ purchasing power.
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Change in Price  move along the demand curve
Change in quantity demanded!
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Figure 3.2 Shifting the demand curve (1 of 2)
A change in something
other than price that
affects demand, causes
the entire demand curve
to shift.
A shift to the right (D1 to
D2) is an increase in
demand.
A shift to the left (D1 to
D3) is a decrease in
demand.
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Figure 3.2 Shifting the demand curve (2 of 2)
As the demand curve
shifts, the quantity
demanded will change,
even if the price doesn’t
change.
The quantity demanded
changes at every
possible price.
P1
Q3
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Q1
Q2
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What factors influence market demand?
Income
– Increase in income increases demand if product is normal,
decreases demand if product is inferior.
Prices of related goods
– Increase in price of related good increases demand if products
are substitutes, decreases demand if products are
complements.
Tastes
Population and demographics
Expected future prices
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Changes in income of consumers
Normal goods: Goods for which the demand increases as income
rises and decreases as income falls.
Examples:
Clothing (new)
Restaurant meals
Vacations
Inferior goods: Goods for which the demand increases as income
falls, and decreases as income rises.
Examples:
Second-hand clothing
Ramen noodles
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Effects of changes in income
An increase in income would increase
the demand for new clothing, ceteris
paribus.
However the same increase in income
would likely decrease the demand for
second-hand clothing.
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Changes in the price of related goods
Substitutes: Goods and services that can be used for the same
purpose.
Examples:
Big Mac and Whopper
Ford F-150 and Dodge Ram
iPhone and Galaxy
Complements: Goods and services that are used together.
Examples:
Big Mac and McDonald’s fries
Hot dogs and hot dog buns
Cars and motor oil
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Effects of changes in the price of related
goods
Substitutes
An increase in the price of a Big Mac
would increase the demand for
Whoppers.
Complements
However the same increase in the price
of a Big Mac would decrease the
demand for McDonald’s fries.
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Making the Connection: Are smartwatches substitutes for smartphones?
Smartwatches like the
new Apple Watch are not
perfect substitutes for
smartphones; they do
not fulfill identical
purposes.
Many people already
own a smartphone; will
they see enough benefit
from a smartwatch to
make that purchase as
well?
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Changes in tastes
Tastes
If consumers’ tastes change,
they may buy more or less of
the product.
Example: If consumers
become more concerned
about eating healthily, they
might decrease their demand
for fast food.
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End of the “Soft Drink
Era?”
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End of the “Soft Drink
Era?”
Other than changes in Taste,
what other issues might be
affected demand for soda?
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Changes in population/demographics
Demographics: The
characteristics of a
population with respect to
age, race, and gender.
Increases in the number of
people buying something
will increase the amount
demanded.
Example: An increase in
the elderly population
increases the demand for
medical care.
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Changes in expectations about future
prices
Consumers decide which products to
buy and when to buy them.
• Future products are substitutes for
current products.
• An expected increase in the price
tomorrow increases demand today.
• An expected decrease in the price
tomorrow decreases demand today.
Example: If you found out the price of
gasoline would go up tomorrow, you
would increase your demand today.
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Making the Connection: Apple’s policy
on product speculation
Apple strongly discourages its employees from speculating about
when a new model will appear. Why?
Suppose a customer learns that a new iPad model will be
available next month.
• The new model is a potential substitute for the current model.
• The price of the current model will likely fall next month.
• Both effects decrease current demand (bad for Apple!).
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Change in demand vs. change in
quantity demanded
A change in the price of
the product being
examined causes a
movement along the
demand curve.
• This is a change in
quantity demanded.
Any other change affecting
demand causes the entire
demand curve to shift.
• This is a change in
demand.
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The dot represents a point on the individual’s yearly
demand curve for rock concerts. Which of the following
interpretations of the dot on this graph is correct?
B
a.
The dot shows that this individual spends $125 on five rock concerts
each year.
b.
When a rock concert costs $125, this individual goes to five of them per
year.
c.
When five concerts cost a total of $125, this individual goes to up to five
per year.
d.
At $125, the quantity of concerts demanded equals the quantity supplied.
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Which of the following refers to
consumers buying other goods when
the price of the good in question rises?
a. The law of demand.
b. The substitution effect.
c. The income effect.
d. The term ceteris paribus.
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B
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When analyzing the relationship between the price of
a good and quantity demanded, other variables must
be held constant. Which term best describes such an
assumption?
a. The law of demand.
b. The substitution effect.
c. The income effect.
d. The term ceteris paribus.
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D
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Each graph refers to the demand for pizza. Assuming that
a pizza is a normal good, which of the graphs best
describes the impact of an increase in income?
a. The graph on the left.
b. The graph on the right.
c. Both graphs.
d. Neither graph.
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A
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Each graph refers to the demand for pizza. Which of the
graphs best describes the impact of an increase in the
price of beer (at the pizza restaurant)?
a. The graph on the left.
b. The graph on the right.
c. Both graphs.
d. Neither graph.
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B
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Each graph refers to the demand for pizzas. Which of the
graphs best describes the impact of an decrease in the price
of a substitute good?
a. The graph on the left.
b. The graph on the right.
c. Both graphs.
d. Neither graph.
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B
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Which of the following moves best describes what happens
when a change in something other than the price of a
concert ticket affects market demand?
a. A move from A to B.
b. move from A to C.
c. Either move from A to B or A to C.
d. None of the above.
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B
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3.2 The Supply Side of the Market
List and describe the variables that influence supply
There are some similarities,
and some important
differences, between the
demand and supply sides of
the market.
In this section we examine
the market supply, i.e. the
decisions of (generally) firms
about how much of a
product to provide at various
prices.
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Figure 3.4 A supply schedule and supply curve (1 of 2)
Supply schedule: A table that shows the relationship between the
price of a product and the quantity of the product supplied.
Supply curve: A curve that shows the relationship between the
price of a product and the quantity of the product supplied.
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Figure 3.4 A supply schedule and supply curve (2 of 2)
Quantity supplied: The amount of a good or service that a firm is
willing and able to supply at a given price.
The law of supply: The rule that, holding everything else
constant, increases in price cause increases in the quantity
supplied, and decreases in price cause decreases in the quantity
supplied.
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Figure 3.5 Shifting the supply curve (1 of 2)
A change in
something other
than price that
affects supply
causes the entire
supply curve to shift.
• A shift to the right
(S1 to S3) is an
increase in
supply.
• A shift to the left
(S1 to S2) is a
decrease in
supply.
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Figure 3.5 Shifting the supply curve (2 of 2)
As the supply
curve shifts, the
quantity supplied
will change, even
if the price doesn’t
change.
P1
The quantity
supplied changes
at every possible
price.
Q2
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Q1
Q3
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What factors influence market supply?
Prices of inputs
Technological change
Prices of substitutes in production
Number of firms in the market
Expected future prices
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Change in prices of inputs
Inputs are things used in the
production of a good or service.
For a smartwatch, inputs include the
computer processor, plastic, and
labor.
An increase in the price of an input
decreases the profitability of selling
the good, causing a decrease in
supply.
A decrease in the price of an input
increases the profitability of selling the
good, causing an increase in supply.
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Technological change
A firm may experience a positive or
negative change in its ability to
produce a given level of output with a
given quantity of inputs. We call this a
technological change.
Examples:
 A new, more productive variety of
wheat would increase the supply of
wheat.
 Governmental restrictions on land
use for agriculture might decrease
the supply of wheat.
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Prices of related goods in production
Many firms can produce and sell
alternative products.
Example: An Illinois farmer can plant corn
or soybeans. If the price of soybeans
rises, he will plant (supply) less corn.
Sometimes, two products are necessarily
produced together.
Example: Cattle provide both beef and
leather. An increase in the price of beef
encourages more cattle farming, and
hence increases the supply of leather.
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Number of firms and expected future
prices
More firms in the market will result in
more product available at a given
price (greater supply).
Fewer firms → supply decreases.
If a firm anticipates the price of its
product will be higher in the future, it
might decrease its supply today in
order to increase it in the future.
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Making the Connection: Release timing
of Collateral Damage
The Arnold Schwarzenegger film Collateral Damage was originally
scheduled to be released on October 5, 2001.
• The film contained plot elements about terrorist attacks.
The production company (Warner Bros.) decided the movie would
have higher demand if it did not show immediately after 9/11, so it
was delayed until February 2002.
• i.e. current supply of the film decreased because the (relative)
expected future price increased.
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Figure 3.6 A change in supply versus a change in
quantity supplied
A change in the price of
the product being
examined causes a
movement along the
supply curve.
• This is a change in
quantity supplied.
Any other change
affecting supply causes
the entire supply curve to
shift.
• This is a change in
supply.
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Which of the following defines a supply
curve?
C
a. The quantity of a good or service that a firm is willing
to supply at a given price.
b. A table that shows the relationship between the price
of a product and the quantity of the product supplied.
c. A curve that shows the relationship between the price
of a product and the quantity of the product supplied.
d. A curve that shows combinations of price and quantity
for which quantity supplied equals quantity demanded.
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Which of the following best describes the law
of supply?
a. Supply shifts are caused not by a single variable but
most likely by a number of different variables.
b. An increase in price causes an increase in the
quantity supplied, and a decrease in price cause
decrease in the quantity supplied.
c. A change in price causes a shift of the supply curve.
d. All of the above.
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B
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The graphs depict the supply of rock concerts in the
United States. Which of the graphs best describes the
impact of an increase in the price of an input?
a. The graph on the left.
b. The graph on the right.
c. Both graphs.
A
d. Neither graph.
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The graphs depict the supply of rock concerts in the
United States. Which of the graphs best describes the
impact of an increase in the expected future price of
concert tickets?
a. The graph on the left.
b. The graph on the right.
c. Both graphs.
d. Neither graph.
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A
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Which of the following moves best describes a
change in supply?
D
a.
b.
c.
d.
A move from A to B.
A move from A to C.
Either the move from A to B or from A to C.
A move from B to C.
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Supply
Questions
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In economics for simplicity, we often assume every firm supplies
the same quantity as every other firm at a given price. Is this
always true? What factor(s) might cause the quantity of
smartphones supplied by different firms to be different at a
particular price?
Not necessarily. Firms may have different costs of
producing smartphones and, therefore, supply different
quantities at the same price.
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Name two different variables that would cause the
quantity supplied of UGG boots to change from 2014 to
2015 as indicated in the table above.
The supply of UGG boots decreased from 2014 to 2015. The supply decrease
could be caused by an increase in the price of sheepskin (UGG boots are
sheepskin boots) or an increase in the price of the machines used to assembly
the boots, an increase in the price of other types of boots that UGG could
produce.
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Explain and demonstrate graphically the difference
between a change in supply and a change in quantity
supplied.
• A change in supply is a shift in
the supply curve and is caused
by a change in at least one of
the factors of supply (i.e. price
of inputs, technological
change, prices of substitutes in
production, number of firms in
the market and expected future
prices).
• A change in quantity supplied
is a movement along the
supply curve and is caused by
a change in price of the
specific good.
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Demand
Questions
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a. What is meant by the term ceteris paribus?
The requirement that when analyzing the relationship between two variables
– such as price and quantity demanded – other variables must be held
constant.
b. Give an example of when it would be necessary to use
ceteris paribus.
Suppose we wanted to determine the effect of a price decrease for a
iPhone. We would have to hold all other variables constant to determine
the effect of the price decrease.
a. If we wanted to determine the effect on demand from a
population increase, identify some things we would
have to hold constant.
Income, tastes and preferences, substitute goods are just a few examples.
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a. In your own words, state the “law of demand.”
The rule that, holding everything else constant, when the price of a product
falls, the quantity demanded of the product will increase, and when the
price of a product rises, the quantity demanded of the product will
decrease.
a. How do the substitution effect and income effect both
explain this law?
For a normal good, as the price of a product increases both the income
and substitution effects work together to reduce the quantity of the product
demanded.
a. Give an example.
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For each of the following pairs of products, state
which are complements, which are substitutes,
and which are unrelated
a. New cars and used cars
b. French Fries and Catsup
c. Fishing pole and boat
d. Hamburger and taco
Substitutes
Complements
Complements
Substitutes
e. Golf shoes and basketballs
Not related
f. Houses and washing machines
Complements
Create your own example(s) of complements, substitutes
and unrelated products.
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Let’s do an local example of demand.
Consider the demand for off-campus
student apartments in Corvallis.
a. Identify factors that would potentially cause an
increase in demand for student apartments.
Examples might include rising student population and higher incomes. Also,
a rising population throughout the city might make other housing options
more difficult ( or expensive) to find and, consequently, increase the
population of students looking for student specific housing.
b. Identify factors that would potentially cause an increase
in the quantity demanded for student apartments.
Lower rent
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What effect will each of the following, ceteris
paribus, have on the demand for hot dogs in
Corvallis?
Demonstrate in words and graphically.
 a movement along the demand curve for hot dogs in
Corvallis or a shift of the demand curve?
a. The price of hot dogs declines.
↑ in qty Demanded
b. It’s a home game for the Beavers today.
↑ Demand
c. Taco Time is offering free tacos today with the order of
any beverage.
↓ Demand
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What effect will each of the following, ceteris
paribus, have on the demand for hot dogs in
Corvallis?
Demonstrate in words and graphically.
 a movement along the demand curve for hot dogs in
Corvallis or a shift of the demand curve?
a. You get a free drink if you order a hot dog.
↑ Demand
b. The Gazette-Times just published an article about a
Salmonella outbreak originating from hot dogs.
↓ Demand
c. The U.S. economy enters a period of rapid growth in
incomes.
↑ Demand
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A) State whether each of the following events will
result in a movement along the demand curve for
McDonald’s Big Mac hamburgers or whether it will
cause the curve to shift. B) if the demand curve shifts
indicate which direction it will shift C) Identify which
↓ Demand, price
variable caused this change.
of substitute
1. The price of a Burger King’s Whopper hamburger declines. decreased
2. McDonald’s distributes coupons for $1.00 off the purchase of a Big
↑ qty Demanded, decrease in price of good
Mac.
3. Because of a shortage of potatoes, the price of French fries
↓ Demand, price of complement increased
increases.
↓ Demand, change in
4. The USDA warns people not to eat fast food. tastes
5. The U.S. economy enters a period of rapid growth in incomes.
↑ Demand, Increase in income
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Chapter 3 Outline – DAY 2
3.1 The Demand Side of the Market
3.2 The Supply Side of the Market
3.3 Market Equilibrium: Putting Demand and Supply
Together
3.4 The Effect of Demand and Supply Shifts on Equilibrium
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Review of Supply – Supply of econ
textbooks at LBCC store
How can each of the following examples be illustrated – i.e. a movement along
the supply curve or a shift of the supply curve for economics textbooks at the
LBCC bookstore? Demonstrate graphically.
a. The price of an economics textbook rises.
supplied
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Review of Supply – Supply of econ
textbooks at LBCC store
How can each of the following be illustrated – i.e. a movement along the supply
curve or a shift of the supply curve for economics textbooks at the LBCC
bookstore? Demonstrate graphically.
a. There is an increase in minimum wage benefiting most of your employees.
Review of Supply – Supply of econ
textbooks at LBCC store
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How can each of the following be illustrated – i.e. a movement along the
supply curve or a shift of the supply curve for economics textbooks at the
LBCC bookstore? Demonstrate graphically.
a. A second bookstore opens at LBCC.
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How can each of the following be illustrated – i.e. a movement along the supply
curve or a shift of the supply curve for economics textbooks at the LBCC
bookstore? Demonstrate graphically.
a. A recent report predicts that the market price for textbooks will double
next week.
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3.3 Market Equilibrium: Putting Demand
and Supply Together
Use a graph to illustrate market equilibrium
Market equilibrium is a situation in which quantity demanded
equals quantity supplied.
Recall that markets with many buyers and sellers are perfectly
competitive markets; a market equilibrium in one of these markets
is called a competitive market equilibrium.
There are ~25 firms selling smartwatches; we will assume this is
enough to generate competitive behavior in the market for
smartwatches.
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71
Figure 3.7 Market equilibrium
At a price of $350,
• consumers want to buy
5 million smartwatches, and
• producers want to sell 5
million smartwatches.
We say the equilibrium price in
this market is $350, and the
equilibrium quantity is 5 million
smarwatches per week.
Since buyers and sellers want
to trade the same quantity at
the price of $350, we do not
expect the price to change.
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Figure 3.8 The effect of surpluses and shortages on the
market price (1 of 2)
What if the price were
$400 instead?
At a price of $400,
• consumers want to
buy 4 million
smartwatches, while
• producers want to
sell 6 million.
This gives a surplus of 2 million smartwatches: a situation in
which quantity supplied is greater than quantity demanded.
Prediction: sellers will compete amongst themselves, driving the
price down.
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Figure 3.8 The effect of surpluses and shortages on the
market price (2 of 2)
Now what if the price
were $250?
At a price of $250,
• consumers want to
buy 7 million
smartwatches, while
• producers want to
sell 3 million.
This gives a shortage of 4 million smartwatches: a situation in
which quantity demanded is greater than quantity supplied.
Prediction: sellers will realize they can increase the price and still
sell many smartphones, so the price will rise.
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74
Demand and supply both count
• Price is determined by the interaction of buyers and sellers.
• Neither group can dictate price in a competitive market (i.e. one
with many buyers and sellers).
• However changes in supply and/or demand will affect the price
and quantity traded.
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Rent Control – Effect of Ceiling on Supply & Dem.
Rental price
ceiling set at
$3.00/sq ft by
Govt
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Minimum Wage–Effect of Floor on Supply & Dem.
Wage floor set at
$3.00/hr by Govt
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3.4 The Effect of Demand and Supply
Shifts on Equilibrium
Use demand and supply graphs to predict changes in prices and quantities
• Predictions about price and quantity in models require us to
know supply and demand curves.
• Typically, we know price and quantity, but do not know the
curves that generate them.
• The power of the demand and supply model is in its ability to
predict directional changes in price and quantity traded.
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78
Figure 3.9 The effect of an increase in supply on
equilibrium (1 of 2)
The graph shows the market
for smartwatches before
Apple enters the market.
When Apple enters, more
smartphones are supplied at
any given price—an increase
in supply from S1 to S2.
• Equilibrium price falls from
P1 to P2.
• Equilibrium quantity rises
from Q1 to Q2.
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79
Figure 3.9 The effect of an increase in supply on
equilibrium (2 of 2)
By how much will price
fall? By how much will
quantity rise?
We cannot say, without
knowing more
information.
For now, we can only
predict that price will
fall and quantity traded
will rise.
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Figure 3.10 The effect of an increase in demand on
equilibrium
Suppose incomes
increase. What happens to
the equilibrium in the
smartwatch market?
Smartwatches are a normal
good, so as income rises,
demand shifts to the right
(D1 to D2).
• Equilibrium price rises
(P1 to P2).
• Equilibrium quantity
rises (Q1 to Q2).
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Practice – Try This
Suppose you are working at a local wine distributor. You noticed that the price of
for Pinot Noir wine has recently increased and the equilibrium quantity seems to
have decreased. Ceteris paribus, would this likely be caused by a shift in the
demand curve or supply curve for Pinot Noir wine? Explain and use a graph to
illustrate your conclusions.
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Practice – Try This
Last year, the Oregonian reported that “For the third consecutive year, Oregon
holds on to the No. 1 spot as the “Top Moving Destination” in United Van Lines’
39th Annual National Movers Study, which tracks customers’ state-to-state
migration patterns over the past year.” Use a supply and demand model to
predict how this will affect real estate prices in Oregon in 2016.
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83
Practice – Try This
2006
2016
Why did gas prices fall?
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84
Practice – Try This
2006
2016
Why did gas prices fall?
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85
Table 3.3 How shifts in demand and supply affect
equilibrium price (P) and quantity (Q) (1 of 2)
The table summarizes what happens when the demand curve
shifts or the supply curve shifts, with the other curve remaining
unchanged.
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Making the Connection: The falling price
of Blu-ray players (1 of 2)
From 2006 to 2013, the price of Blu-ray players fell from about
$800 to about $95, while the number of Blu-ray players traded
increased dramatically.
What best explains this change?
A. Increase in demand
B. Decrease in demand
C. Increase in supply
D. Decrease in supply
Can you show this change on a supply-and-demand diagram?
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Making the Connection: The falling price
of Blu-ray players (2 of 2)
Supply increased as additional firms started manufacturing Blu-ray
players and input costs fell.
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Figure 3.11 Shifts in demand and supply over time (1 of 3)
Over time, it is likely that
both demand and supply
will change.
For example, as new firms
enter the market for
smartwatches and
incomes increase, we
expect:
• The supply of
smartwatches will shift
to the right, and
• The demand for
smartwatches will shift
to the right.
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Figure 3.11 Shifts in demand and supply over time (2 of 3)
What does our model
predict?
S↑  ( P↓ and Q↑ )
D↑  ( P↑ and Q↑ )
So we can be sure
equilibrium quantity will
rise; but the effect on
equilibrium price is not
clear.
This panel shows demand
shifting more than supply:
equilibrium price and
quantity both rise.
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Figure 3.11 Shifts in demand and supply over time (3 of 3)
This panel shows supply
shifting more than
demand: quantity rises,
but equilibrium price falls.
Without knowing the
relative size of the
changes, the effect on
equilibrium price is
ambiguous.
It is possible, but unlikely,
that the equilibrium price
will remain unchanged.
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Table 3.3 How shifts in demand and supply affect
equilibrium price (P) and quantity (Q) (2 of 2)
We can now fill in the rest of Table 3.3.
The cell in red is the example that we just did.
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Shifts of a curve vs. movements along a
curve
Suppose an increase in supply occurs. We now know:
• Equilibrium quantity will increase, and
• Equilibrium price will decrease.
It is tempting to believe the decrease in price will cause an
increase in demand. But this is incorrect.
• The decrease in price will cause a movement along the
demand curve, but not an increase in demand.
• Why? The demand curve already describes how much of the
good consumers want to buy, at any given price.
• When the price change occurs, we just look at the demand
curve to see what happens to how much consumers want to
buy, a.k.a. the “quantity demanded”.
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If the magnitude of an increase in supply is greater than
the magnitude of an increase in demand, what happens
to equilibrium price and quantity in the market?
a.
b.
c.
d.
Equilibrium price will rise and quantity will rise.
Equilibrium price will rise and quantity will fall.
Equilibrium price will fall and quantity will rise.
Equilibrium price will fall and quantity will fall.
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If the magnitude of an increase in demand is greater than
the magnitude of an increase in supply, what happens to
equilibrium price and quantity in the market?
a.
b.
c.
d.
Equilibrium price will rise and quantity will rise.
Equilibrium price will rise and quantity will fall.
Equilibrium price will fall and quantity will rise.
Equilibrium price will fall and quantity will fall.
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a. Draw a supply and demand curve for bananas.
b. Identify the equilibrium price and quantity on your
graph.
c. Demonstrate graphically what happens if the current
price of bananas is above the equilibrium price.
Explain.
d. Assuming the banana market is unregulated, explain
what is likely to happen in the long run (i.e. if the
current price of bananas is above the equilibrium
price).
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Briefly explain whether you agree with the following
statement: “When there is a shortage of a good,
consumers eventually give up trying to buy it, so the
demand for the good declines, and the price falls until the
market is finally in equilibrium.”
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It was recently reported that the supply of milk has fallen
due to unusually dry conditions affecting the availability of
feed for dairy cows and the demand for milk has also
fallen due to consumers choosing to drink other
beverages such as soy milk and orange juice.
a. Can we use this information to be certain whether the
equilibrium quantity of milk will increase or decrease?
b. Can we use this information to be certain whether the
equilibrium price of milk will increase or decrease?
c. Use a supply and demand model to demonstrate your
conclusions to a. and b. above.
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The following are four graphs and four market
scenarios for cabbage. Match each scenario with the
appropriate graph:
a. A new fertilizer
capable of
doubling cabbage
yield.
b. A fall in the price
of lettuce.
c. A fungus outbreak
which reduces
cabbage yields.
d. An increase in the
population of
buyers.
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