Download Chapter 3 – Practice Questions (p. 71)

Chapter 3 – Practice Questions (p. 71)
1) Identify three reasons why the supply of oranges, for example, might increase and
explain how this change will result in a new equilibrium.
An equilibrium is when the quantity supplied is equal to the quantity demanded;
on a graph, this would be the point of intersection between the supply and demand
curves. The supply of oranges might increase due to a supply shock, excess demand,
and market shocks in relation to demand.
Supply shocks refer to a sudden increase or decrease in supply (which lead to
sudden changes in the price of a good). An example of a supply shock is a
technological advance made in the production of the good. This would allow
producers to produce much more orange juice at the same price (if they choose to) –
in other words, the supply curve would shift to the right (increase). This would
increase consumers’ purchasing power as more would be willing and able to buy the
juice because it became cheaper; therefore, the equilibrium would be lower.
Excess demand is used to describe the situation in which the quantity demanded is
relatively high and the quantity supplied is relatively low, thus leading to a gap
between the two. When excess demand occurs, producers are likely to raise both the
price and supply demanded of orange juice in order to decrease the excess demand.
This wouldn’t change the equilibrium because in excess demand the quantity supplied
is at a disequilibrium level (too low).
Market shocks refer to sudden increases in supply or demand. A market shock that
could increase demand is a change in consumer tastes and preferences. If a widely
publicized research article showed that orange juice was the best juice in order to get
vitamin C (for example), the demand for orange juice would increase. In order to meet
this increased demand, producers would increase supply. The equilibrium wouldn’t
change much because both the supply and the demand curves shifted to the right
(increased).
4) Using a diagram, explain the concept of community surplus.
Community surplus is the sum of the consumer and producer surpluses.
When consumers pay less than what they are willing to pay for a good, they
receive a consumer surplus – the money they saved by paying less for a good.
Similarly, when producers receive more than what they are willing to receive for a
good, they receive a producer surplus – the money they earned by receiving more
for a good. For example, if the consumer surplus was $200 and the producer
surplus was also $200, the community surplus would be $400 dollars (the sum).