Download Chapter 4: Supply and Demand

Chapter 4: Supply and Demand
Chapter 4: Supply and Demand
Questions for Thought and Review
The law of supply states that quantity supplied rises as price increases or, alternatively,
that quantity supplied falls as price decreases. Price is directly related to quantity supplied
because, as price rises, people and firms rearrange their activities to supply more of that
good in order to take advantage of the higher price.
4.
A change in the price causes a movement along the demand curve, a movement to a new
point on the same curve. A shift in the demand curve means that the quantities will be
different at all prices; the entire curve shifts.
6.
Shift factors of supply include the price of inputs, technological advances, changes in
expectations, and taxes and subsidies. As the price of inputs increase, the supply curve
shifts to the left. As technological advances are made that reduce the cost of production,
the supply curve shifts to the right. If a supplier expects the price of her good to rise, she
may decrease supply now to save and sell later. Other expectational effects are also
possible. Taxes paid by suppliers shift the supply curve to the left. Subsidies given to
producers shift the supply curve to the right.
8.
In the accompanying graph, the demand curve has shifted to the
left, causing a decrease in the market price and the market
quantity.
Price
2.
S
P0
P1
D1
Q1
D0
Q0
Quantity
Sales volume increases (equilibrium quantity rises) when the
government suspends the tax on sales by retailers because the
price to demanders falls and hence equilibrium quantity
demanded rises. This occurs because the supply curve shifts to
the right because suppliers do not have to pay taxes on their sales
(cost of production declines).
S0
Price
10.
S1
P0
P1
D
Q0
Q1
Quantity
12.
Customers will flock to stores demanding that funky “economics
professor” look, creating excess demand. This excess demand will soon catch the
attention of suppliers, and prices will be pushed upward.
14.
Because the price of gas rose significantly, we’d expect people to purchase fewer gasguzzlers and more fuel-efficient cars such as diesel cars.
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Chapter 4: Supply and Demand
16.
It suggests that the job is being rationed, which means that the wage is above the
equilibrium wage.
18.
The fallacy of composition is the false assumption that what is true for a part will also be
true for the whole. It affects the supply/demand model by drawing our attention to the
possibility that supply and demand are interdependent. Feedback effects must be taken
into account to make the analysis complete.
20.
The greatest feedback effects are likely to occur in the markets that are the largest. This is
most likely to be true for housing and manufactured-goods markets.
Chapter 4: Problems and Exercises
22. a. The market demand and market supply curves are
shown in the accompanying graph.
b. At a price of $37, quantity demanded is 32 and
quantity supplied is 18. Excess demand is 14. At a
price of $67, quantity demanded is 10 and quantity
supplied is 46. Excess supply is 36.
c. Equilibrium price is $47. Equilibrium quantity is 24.
S0
26. a. The tax shifts the supply curve to the left because it increases the
cost of supplying the natural gas abroad. Equilibrium price rises
while equilibrium quantity declines.
b. The tax will likely reduce the price of natural gas in Argentina as
more gas is diverted to the domestic market.
c. It depends; it will have a tendency to push it up, but probably
since Argentina is such a small percentage of the world market,
the effect would be difficult to distinguish.
S1
P0
P1
D0
Q0 Q1
Quantity of wheat
S1
Price
Price of wheat
24. a. I would expect wheat prices to decline since the supply of
wheat is greater than expected. Wheat commodity markets
are very competitive, so the initial 35 percent increase in
output was already reflected in the current price of wheat.
It is only the additional 9 percent increase that will push
down the price of wheat.
b. This is graphically represented by a shift to the right in the
supply of wheat, as shown in the accompanying graph.
Equilibrium price falls from P0 to P1 while equilibrium
quantity rises from Q0 to Q1.
S0
P1
P0
D
Q1 Q0
Quantity
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Chapter 4: Supply and Demand
S1
Price
28. a. It would likely raise the value significantly – it was estimated
that it would raise it to $50,000 a sheet. See the accompanying
graph. Demand shifts to the right as people realize the oddity
of the stamp. Supply shifts to the left because of the recall.
b. It would probably lower the value of the stamps – it was
estimated that it would lower the price of the sheet to $100 a
sheet. In the accompanying graph, the supply curve shifts back
to S0 and the price declines to P2. We’ve shown the demand
curve remaining high, though it might shift back to the left.
c. They would likely sue; they did and they lost.
S0
P1
P2
D1
P0
D0
Q0
Q1
Quantity
30. a. Because the market for pencils is relatively small, supply/demand analysis would be
appropriate without modification. Also, there are no significant political or social forces
that would affect the analysis.
b. Because the labor market is very large, supply/demand analysis would not be appropriate
without modification. For example, an increase in labor supply will likely lead to greater
income and greater demand for goods, which will lead to an increase in quantity of goods
produced and therefore an increase in the demand for labor. In this case there are
significant feedback effects.
c. Aggregate markets such as savings and expenditures include feedback effects, so
supply/demand analysis would not be appropriate without modification.
d. The CD market is relatively small. Supply/demand analysis would be appropriate without
modification.
Chapter 4: Web Questions
The answers to these questions will depend upon the current “Short-Term
Energy Outlook.” The answer given here should be used as a guide.
a. Continued problems with local refineries and increased global
demand for oil means that oil prices are expected to rise.
b. World oil prices are forecast to rise. The effect of the supply and
demand factors on price and quantity are shown in the
accompanying graph. Price rises by a lot. What happens to quantity
depends on the relative size of the shifts.
c. Higher crude oil, an input to the production of gasoline, and higher
seasonal demand for gas will increase its price in the near term. As
the market enters summer, demand for heating oil and natural gas
will decline, leading to lower prices.
S1
Price
2.
S0
P1
P0
D0
Q1Q
0
3
D1
Quantity