Download Chapter 6 SUPPLY AND EQUILIBRIUM

1
How to Study for Chapter 6
Supply and Equilibrium
Chapter 6 introduces the factors that will affect the supply of a product, the price elasticity of
supply, and the concept of equilibrium price and equilibrium quantity.
1. Begin by looking over the Objectives listed below. This will tell you the main points you
should be looking for as you read the chapter.
2. New words or definitions are highlighted in italics in the text. Other key points are
highlighted in bold type. Answer the questions in the text as they are asked. Then, check
your answer by reading further in the text.
3. You have more work with the demand-supply graph in this chapter. In particular, you need
to differentiate a movement along the supply curve and a shift in the supply curve. Be
sure to go over every point so that you can see how they are derived.
4. Do the three cases involving a change in equilibrium very carefully. Go over the explanations
step-by-step. Then, try the three cases at the end of the chapter. In each case, draw the graph.
5. You will be given an In Class Assignment and a Homework assignment to illustrate the
main concepts of this chapter. When you have finished the text and the assignments, go back
to the Objectives. See if you can answer the questions without looking back at the text. If
not, go back and re-read that part of the text. Then, try the Practice Quiz for Chapter 6.
Objectives for Chapter 6
Supply and Equilibrium
At the end of chapter 6, you will be able to:
1. Define the Law of Supply
2. Differentiate Between the Causes of a Movement Along the Supply Curve and
a Shift in Supply
3. Define the Price Elasticity of Supply
4. Draw the Supply Curve (as Relatively Elastic; as Relatively Inelastic; as Perfectly Elastic;
and as Perfectly Inelastic)
5. Define the “Short-run” and the “Long-run”.
6. Name the Factors that Determine Whether the Supply of a Product is Relatively Elastic
or Relatively Inelastic.
7. Define “General Factor of Production” and “Specific Factor of Production”.
8. Name and Explain the Four Factors that will cause the Supply of a Given Product to Shift
to the Left (or to the Right).
9. Explain "equilibrium"? How are the equilibrium price and quantity determined?
10. If the price is above (or below) equilibrium, explain what will result?
11. Explain what will happen to the price and the quantity in each of the following cases (as well
as why this will happen):
a. there is an increase in demand or a decrease in demand
b. there is an increase in supply or a decrease in supply
12. Explain what will happen to the price and the quantity in each of the following cases, as well
as why it will happen:
a. both demand and supply rise c. demand rises and supply falls
b. both demand and supply fall d. demand falls and supply rises
2
Chapter 6
Supply And Equilibrium
(Most recent revision June 2006)
Part 1: Supply
Thus far, we have been focusing exclusively on buyers. But buyers are one side of the
market. We must also consider the behaviors of sellers. Discussing sellers is somewhat easier
because we can assume that sellers have only one motivation: to maximize their profits.
Although sellers have many different goals, we assume that they will be motivated to do more of
anything that increases profits and less of anything that decreases profits. The profits are
calculated as the difference between the total revenues and the total costs.
Let us begin with the total revenues, the money taken in from selling our product. In
Chapter 4 on elasticity, we calculated this as the price of the product times the quantity sold. If
we sell 100 units at $10 each, our total revenues equal $1,000. If we sell 100 units at $20, our
revenues equal $2,000. We gain more revenues if the price is $20 than if it is $10. So we would
likely want to sell more units of the product if the price is $20. We can conclude that as the price
of the product rises (falls), the quantity supplied will rise (fall). We call this statement the law
of supply. (Go back and compare this statement with the law of demand.) To illustrate the law
of supply, you would expect that more and more homes would be built after 1995 when the
prices of homes began rising greatly. This is indeed what has occurred. And you would expect
that more and more people would want to become engineers and scientists when the prices paid
for these people (called the wages) rose. Again, indeed, this is what has occurred. (Does it make
any sense that when the ticket prices charged for baseball and football games rose, Major League
Baseball changed from 154 games to 162 games per year and the National Football League
changed from 12 games to 16 games per year?)
We can illustrate the law of supply with a supply schedule for homes.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
Price of Homes
$ 80,000
$100,000
$120,000
$140,000
$160,000
$180,000
$200,000
$220,000
$240,000
$260,000
$280,000
$300,000
$320,000
$340,000
Quantity Supplied
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
11000
12000
13000
14000
The supply schedule shows that, as the price charged for homes rises, sellers wish to sell
more homes. We can also plot this in the graph on the next page. The graph depicts the law of
supply as an upward-sloping line. Notice that the line does not begin at the origin. There is
some price --- above zero --- at which no seller will produce at all. The factors that determine
3
THE SUPPLY CURVE
$400,000
$350,000
13
12
$300,000
11
10
9
$250,000
8
PRICE
7
$200,000
6
5
4
$150,000
3
2
$100,000
1
$50,000
$0
1
2
3
4
5
6
7
8
QUANTITY SUPPLIED (000)
9
10
11
12
13
4
this price will be a topic to be discussed in Chapter 16. As with the demand graph, we move
along the line if the price of the product changes. (So we move along the line from point 12 to
point 13 if the price rises from $320,000 to $340,000 per home. This gives us the quantity
supplied, which rises from 13,000 homes to 14,000 homes.) We shift the line if anything else
changes. We will consider the factors causing shifts in supply below.
Test Your Understanding
Form into groups of three to four people. Assume that you are asked to be a tutor for a class at Palomar
College. First, individually, consider how many hours you would be willing to work at each of the
following rates of pay. Add up the total number of hours for all group members.
Individual
Group
$ 5 per hour
_______
_______
$10 per hour
_______
_______
$20 per hour
_______
_______
$50 per hour
_______
_______
$100 per hour
_______
_______
$500 per hour
_______
_______
Construct a market supply curve for your group:
Wage
$100
$ 50
$ 25
$15
$10
$5
0_______________________________________
5
The Price Elasticity of Supply
As with demand, it is not enough information just to know that, if the price of the product
rises, sellers will wish to sell more of it. We want to know "how much more?". More
technically, we want to know the price elasticity of supply. This tells us what percent the
quantity supplied will increase if there is a given percentage increase in the price of the
product.
Percentage Change in the Quantity Supplied
Percentage Change in the Price
The terms we use are the same as they were in the case of demand. If the number is between
zero and one, we say that the supply is relatively inelastic (quantity supplied rises very little as
the price rises). If the number is more than one, we say that the supply is relatively elastic
(quantity supplied rises greatly when the price rises). If the number equals one, we say that the
supply is unit elastic. If the number equals zero, we say that the supply is perfectly inelastic (the
quantity supplied does not change at all if the price rises). For example, the quantity supplied of
beachfront property may be the same as the price of it rises. And the number of seats in the
stadium is unchanged when used for college football ($25 per ticket) or for professional football
($75 or more per ticket). If the number is infinitely large, we say that the supply is perfectly
elastic. This means that a seller can sell as much as can possibly be desired at the going price.
The graphs also operate in the same manner as for the price elasticity of demand (except that
the supply curve is upward sloping). The steeper is the line, the more inelastic is the supply.
The flatter is the line, the more elastic is the supply.
Price
Price
Supply
Supply
.
.
________________________
0
Quantity
INELASTIC SUPPLY
_____________________________
0
Quantity
ELASTIC SUPPLY
As with demand, perfectly inelastic supply is shown as a vertical line (no change in the quantity
supplied) while perfectly elastic supply is shown as a horizontal line.
6
Price
Price
Supply
Supply
_________________________
0
Quantity
PERFECTLY INELASTIC
______________________________
0
Quantity
PERFECTLY ELASTIC
As with the price elasticity of demand, it is difficult (and expensive) to make precise
calculations of the price elasticity of supply. But if we know the factors that affect it, we can
make a good estimate. One such factor is time. Assume that the price rises. The seller would
like to sell more of the product. To do this, the seller must increase the land, labor, or capital he
or she uses. We distinguish two general periods, the short-run and the long-run. In the shortrun, we assume that the seller is able to increase the amount of natural resources used and the
number of workers hired. This allows a certain increase in the quantity of the product sold. But,
in the short-run, the seller cannot increase the amount of capital goods. Perhaps he or she has
rented the building and has a lease for a fixed time. Or he or she has purchased the building and
equipment and plans to stay in business. The inability to increase the amount of capital limits the
increase in the quantity of the product sold. In the long-run, all of the factors of production
(natural resources, labor, and capital goods) can be changed. Particularly, this means that the
amount of capital can be changed. Perhaps this means building a second story on the building.
Perhaps it means building a new facility altogether. The ability to increase the amount of capital
as well as the natural resources and the labor allows a greater increase in the quantity produced.
So, we say that the supply is more inelastic in the short-run and becomes more elastic as the
time to adjust increases. (Remember that the term “long-run” only refers to a period of time in
which the amount of capital can be changed. This may or may not be a particularly long period
of time.)
Another factor affecting the price elasticity of supply is the generality of the factors of
production (natural resources, labor, and capital). Some factors are general, meaning that they
can be easily shifted among many different uses. Accountants who can prepare taxes for one
business can easily learn to prepare taxes for another business. Other factors are called specific,
meaning that they are useful only for one type of employment and cannot be transferred to
other uses. Many machines have only one use and cannot be used for other purposes. Many
workers have skills gained from experience with one employer; these skills would be lost if the
worker moved to a different employer. If the price rises and factors of production are general, it
7
will be easy for them to adjust to produce more of this product. If the factors of production are
specific, they may not be able to adjust to produce more of this product. Therefore, the more
general are the factors of production, the more elastic is the supply. The more specific are the
factors of production, the more inelastic is the supply.
In summary, the supply will be relatively elastic is there is a longer time under
consideration (time enough for the capital to vary) and if the factors of production are more
general. The supply will be relatively inelastic is there is a shorter time under consideration
(short enough that the capital is fixed) and if the factors of production are more specific.
The Determinants of Supply
As with the demand curve, we move along the supply curve, from one point to another on
the same line, if the price of the product changes. We shift the line if anything else changes.
Those factors that will cause the shifts in supply are called the determinants of supply. There
are four of them.
(1) The goal of a company, once again, is to maximize profits, calculated as the difference
between the total revenues and the total costs of production. So, one of the determinants of
supply must be the costs of production. As costs of production rise, profits fall, and therefore
the quantity supplied should fall (shift to the left). Conversely, as costs of production fall, the
profits rise, and the quantity supplied should rise (shift to the right). Costs include the costs of
natural resources such as wood used in building a home, the costs of labor (wages and benefits),
and the costs of the capital. We will cover them in detail in Chapters 14 and 15.
(2) When we considered demand, one of the determinants was population (the number of
buyers). The same is true for supply. One of the determinants of supply is the number of sellers
of the product. When the number of sellers increases, the supply should increase (shift to the
right). When the number of sellers falls, the supply should decrease (shift to the left). So if
there are 1,000 homebuilders, each building 7 homes, the supply of homes totals 7,000. If the
number of home builders doubles to 2,000 and each continues to build 7 homes the supply of
homes on the market doubles to 14,000.
(3) When we considered demand, one of the determinants was the price of a substitute good.
Again, the same is true for supply. In this case, the substitute is a substitute for the seller --another good also produced by the same seller. This may or may not also be a substitute for
the buyer. For example, wheat and corn can be grown on the same land; they are substitutes for
the seller. So are avocados and oranges or Coca Cola and Diet Coke (because they are produced
by the same company). If the price of the other good rises, the supply of the good in question
will fall (shift to the left). For example, if the good in question is wheat and the price of corn
rises, sellers will produce less wheat (and more corn). If the price of regular Coca-Cola rises, the
supplier will produce less Diet Coke (and more regular Coca-Cola). On the other hand, if the
price of the other good falls, the supply of this good will rise (shift to the right). Remember
that goods are substitutes for the seller only if they are produced by the same company.
8
(4) Finally, when we considered demand, one of the determinants was expectations. This is
true for supply because sellers also have expectations that affect their behavior. If sellers expect
the price to rise, they will want to sell less today (shift to the left) and wait for the price to rise
later. Home sellers will hold their homes off the market if they believe the prices will rise soon.
In 1973, oil tankers remained offshore while angry motorists waited in long lines for gasoline.
The reason was that the price of gasoline was 36 cents per gallon. The government was allowing
the price to rise only 2 cents per week; the oil companies estimated that it would rise to about 65
cents. So they reduced supply and waited until the price would reach the predicted 65 cents.
Conversely, if sellers expect the price to fall, they want to sell more now (shift to the right). If I
owned stock in Enron, and I believed the stock price was going to fall, I would sell the stock as
quickly as I could. At the beginning of 1995, holders of Mexican pesos believed that the price
would fall. They got rid of them (sold them in the foreign exchange market) as fast as they
could.
In summary, supply will shift to the left (right) if:
(1) costs of production rise (fall)
(2) the number of sellers falls (rises)
(3) the price of another good produced by the same seller rises (falls)
(4) sellers expect the price of the product to rise (fall) in the near future.
The graphs of a shift to the left and of a shift to the right are shown below. The possible reasons
for the shifts are also shown. A shift to the left means that sellers want to produce and sell
fewer homes at any price than they did before. (Note that the shift is to the left and represents a
decrease. It is NOT a shift up. The graph is read left to right, not up and down.) A shift to the
right means that sellers want to produce and sell more home at any price than they did before.
Price of Homes
Supply2
Supply1
SUPPLY SHIFTS LEFT IF
(2) costs of production rise
(3) the number of sellers
falls
(4) the price of a different
product produced by
the same seller rises
(5) sellers expect the price
to rise
0
Quantity of Homes
9
Price of Homes
Supply1
Supply2
SUPPLY SHIFTS RIGHT IF
(1) costs of production fall
(2) the number of sellers
rises
(3) the price of a different
product produced by the
same seller falls
(4) sellers expect the price to
fall
0
Quantity of Homes
Test Your Understanding
. The following supply schedule for new homes illustrates the law of supply:
Price of Homes Quantity Supplied1 Quantity Supplied 2
1
$ 80,000
1000
3000
2
$100,000
2000
4000
3
$120,000
3000
5000
4
$140,000
4000
6000
5
$160,000
5000
7000
6
$180,000
6000
8000
7
$200,000
7000
9000
8
$220,000
8000
10000
9
$240,000
9000
11000
10
$260,000
10000
12000
11
$280,000
11000
13000
12
$300,000
12000
14000
13
$320,000
13000
15000
14
$340,000
14000
16000
1. Plot the points for the Price and for Quantity Supplied1 on graph paper. Label the points 1 through 14.
Connect the points and complete a supply curve.
2. Now, plot the points for the Price and for Quantity Supplied2 on the same graph. Label the points 1
through 14. Connect the points and complete a new supply curve. Label the first supply curve Supply1
and the second supply curve Supply2.
3. The graph you drew represents a shift in the supply curve to the ____________(right or left?)
4. The shift in the supply curve that you drew could have been caused by:
a. a/an _______________(increase or decrease?) in a cost of producing new homes
b. a/an _______________(increase or decrease?) in the number of home builders in the industry
c. a/an________________(increase or decrease?) in the price that can be received by the builders for
building apartment buildings
d. an expectation by home builders that the prices of new homes will ________________(increase or
decrease?) in the near future
10
Part 2: Equilibrium
Question
Try answering this question without reading the following part of the text. Then, go over the answer as it
appears below.
In Chapter 4, you were given a demand schedule for new homes. Earlier in this chapter, you were given a
supply schedule for new homes. These are repeated here.
Price
Quantity Demanded
Quantity Supplied
1
$340,000
0
14,000
2
$320,000
1000
13,000
3
$300,000
2000
12,000
4
$280,000
3000
11,000
5
$260,000
4000
10,000
6
$240,000
5000
9,000
7
$220,000
6000
8,000
8
$200,000
7000
7,000
9
$180,000
8000
6,000
10
$160,000
9000
5,000
11
$140,000
10000
4,000
12
$120,000
11000
3,000
13
$100,000
12000
2,000
If the price of homes is $320,000, there will be a _______________(shortage or surplus?) equal to
_____________________ homes. If the price of homes is $120,000, there will be a
_______________(shortage or surplus?) equal to _____________________ homes. The equilibrium
price is equal to $_________________ and the equilibrium quantity of homes is equal to
___________________. Draw the demand curve and the supply curve on graph paper. Show the
equilibrium price and the equilibrium quantity on the graph.
Answer:
Now, we can take the two sides of the market, demand and supply, and put them together. In
the graph below, the demand curve and the supply curve have been superimposed on each other.
They reflect the demand and supply schedules that we had before.
1
2
3
4
5
6
7
8
9
10
11
12
13
Price
Quantity Demanded
$340,000
0
$320,000
1000
$300,000
2000
$280,000
3000
$260,000
4000
$240,000
5000
$220,000
6000
$200,000
7000
$180,000
8000
$160,000
9000
$140,000
10000
$120,000
11000
$100,000
12000
Quantity Supplied
14,000
13,000
12,000
11,000
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
11
EQUILIBRIUM
$350,000
1
$300,000
2
12
Supply
3
11
4
10
$250,000
5
9
6
8
E
7
PRICE
$200,000
6
8
5
9
$150,000
4
10
3
11
Demand
$100,000
2
12
$50,000
$0
1
2
3
4
5
6
7
QUANTITY (-000)
8
9
10
11
12
12
Assume that, for whatever reason, the price is $300,000 per home. The demand curve tells
us that buyers wish to buy 2,000 homes. The supply curve tells us sellers wish to sell 12,000
homes. We have a problem. There are 10,000 homes that sellers wish to sell that no one wishes
to buy (12,000 - 2,000). This is called a surplus. Graphs may seem abstract. But surpluses are
not. A seller knows there is a surplus by the fact that goods for sale are not selling. Resale
homes go on sale and sit for months and months without any buyer making an offer. New homes
have the "Grand Opening" flags out for months and even years. Eventually, sellers figure out
that they must lower the price. As the price falls, buyers will buy more (a movement along the
demand curve). Sellers may choose to sell less at the lower price, taking homes off the market (a
movement along the supply curve). The surplus becomes smaller and smaller until it disappears.
Assume instead that the price begins at $100,000 per home. The demand curve tells us that
buyers wish to buy 12,000 homes. The supply curve tells us that sellers wish to sell 2,000
homes. We have a problem. All 2,000 homes for sale will sell quickly and many more buyers
will come seeking to buy. We call this a shortage. A shortage is also easy to recognize. Homes
go on sale for a minimum price. Before orders are taken, people are lining up. It was easy for
sellers to realize that there was a shortage. As a result, sellers raise the price. The higher price
will cause buyers to buy fewer homes (move along the demand curve). It may also induce sellers
to sell more homes (move along the supply curve). The shortage becomes smaller and smaller.
At the price of $200,000, there is no surplus or shortage. Sellers want to sell 7,000 homes.
This is exactly what buyers want to buy. There is no reason to either lower to raise the price.
We call $200,000 the equilibrium price. We call 7,000 homes the equilibrium quantity. The
demand and the supply are equal. All forces affecting the price or quantity are in balance.
Case 1: Assume that we begin with a market for homes in equilibrium. Then, something changes. Let
us assume that income rises. How do we analyze this case?
Case 2: Again, assume that there is a market for homes that begins in equilibrium. In this case, the
change that occurs is an increase in the price of wood. How do we analyze this case?
Case 3: Again, assume that the market for homes begins in equilibrium. In this case, the change that
occurs is that buyers and sellers both expect the price to rise soon. How do we analyze this case?
Case 1: Does income affect demand or supply? The answer, as we saw in the last chapter, is
demand. Will there be a shift or movement along demand? The answer is shift, because the
change is caused by something other than the price. Is the shift right or left? Assuming that
homes are a normal good, demand will increase, which is a shift to the right. The data below are
repeated from the last chapter.
If the price is:
The quantity demanded is:
The quantity supplied is
Income = $50,000 Income = $100,000
1
2
3
4
5
6
7
8
9
10
11
12
$340,000
$320,000
$300,000
$280,000
$260,000
$240,000
$220,000
$200,000
$180,000
$160,000
$140,000
$120,000
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
11000
2000
3000
4000
5000
6000
7000
8000
9000
10000
11000
12000
13000
14000
13000
12000
11000
10000
9000
8000
7000
6000
5000
4000
3000
13
Just looking at the data and at the graph below tells us that there will be a new equilibrium price
and quantity. The equilibrium price will rise to $220,000 and the equilibrium quantity will
rise to 8,000 homes. With the aid of the numbers and the graph, we can explain what occurs.
Buyers wish to buy more homes (9000) at the price of $200,000 per home because they have
more income. But there are no more homes to buy (7000). This causes a shortage to result (a
shortage of 2000 homes). Recognizing the shortage, sellers will raise the price (from $200,000
to $220,000). As the price rises, sellers will desire to sell more homes (from 7000 homes to
8000 homes). And the quantity demanded will fall from 9000 homes back to 8000 homes. The
shortage will be eliminated.
DEMAND SHIFTS TO THE RIGHT
$400,000
$350,000
Supply
14
2
1
3
$300,000
13
2
4
12
3
5
11
4
6
10
$250,000
5
7
9
PRICE
6
8
$200,000
7
9
6
8
10
5
9
11
$150,000
4
10
12
Demand2
Demand
1
11
3
13
$100,000
$50,000
$0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
14
Case 2: Since wood is used to build homes, this is an increase in a cost of production. Do
costs of production affect the demand or the supply? The answer, as shown earlier in this
chapter, is supply. Will there be a shift in or movement along the supply? The answer is a shift,
since the cause is something other than the price of the product. Will the shift be right or left?
Since costs are increasing, supply will decrease --- a shift to the left.
If the price is: quantity demanded is:
1
2
3
4
5
6
7
8
$340,000
$320,000
$300,000
$280,000
$260,000
$240,000
$220,000
$200,000
9 $180,000
10 $160,000
11 $140,000
12 $120,000
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
11000
quantity supplied is:
14000
13000
12000
11000
10000
9000
8000
7000
6000
5000
4000
3000
new quantity supplied is:
12000
11000
10000
9000
8000
7000
6000
5000
4000
3000
2000
1000
From looking at the numbers and the graph, you can see that the price of homes will rise to
$220,000 while the quantity of home will fall to 6,000. With the aid of the numbers and the
graph, we can explain what occurs. As costs rise, selling homes becomes less profitable. Sellers
wish to sell less (shift from Supply1 to Supply2 --- from 7000 homes to 5000 homes). But,
buyers still want the same number of homes (7000 homes). The result is the creation of a
shortage (of 2000 homes). Recognizing the shortage, sellers will raise the price (from $200,000
to $220,000). As the price rises, buyers will buy fewer homes (from 7,000 to 6,000) while the
quantity supplied will rise from 5000 homes to 6000 homes. The shortage is eliminated.
15
Case 2: Supply Shifts Left
400,000
New Supply
350,000
Old Supply
300,000
$
250,000
200,000
150,000
100,000
Demand
50,000
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
Quantity of Homes
Case 3: In this case, both buyers and sellers are affected. Since the case involves
expectations, both the demand curve and the supply curve will shift. The demand curve shifts to
the right because buyers will want to buy more homes now before the price rises. The supply
curve shifts to the left because sellers will want to wait to sell their homes until the price they
will receive will rise. As shown in the graph, if the demand curve shifts to the right and the
supply curve shifts to the left, we know without doubt that the price of homes will rise. But
we cannot say definitively what will happen to the quantity of homes. By itself, an increase
in the demand for homes will make the quantity of homes rise. By itself, a decrease in the
supply of homes will make the quantity of homes fall. If both happen simultaneously, we cannot
know what will happen to the quantity of homes unless we know which of the two shifts is
greater. (That the quantity appears to remain the same in the graph on the next page is purely a
coincidence of the way the graph is drawn. There is no reason to expect this outcome.)
16
SHIFTS IN BOTH DEMAND AND SUPPLY
$400,000
Supply2Supply
1
$350,000
2
12
1
3
$300,000
14
11
2
4
13
10
3
5
12
9
4
6
11
8
10
$250,000
E27
5
9
PRICE
6
$200,000
8
E1
7
5
4
9
6
3
8
10
5
9
11
$150,000
2
4
1
10
12
3
11
Demand2
13
Demand1
$100,000
$50,000
$0
1
2
3
4
5
6
7
8
QUANTITY (-000)
9
10
11
12
13
14
17
Test Your Understanding
1. Assume there is a shift in the supply of new homes to the right. The data are given below:
1
2
3
4
5
6
7
8
9
10
11
12
Price
quantity demanded
$340,000
0
$320,000
1000
$300,000
2000
$280,000
3000
$260,000
4000
$240,000
5000
$220,000
6000
$200,000
7000
$180,000
8000
$160,000
9000
$140,000
10000
$120,000
11000
quantity supplied
14000
13000
12000
11000
10000
9000
8000
7000
6000
5000
4000
3000
new quantity supplied
16000
15000
14000
13000
12000
11000
10000
9000
8000
7000
6000
5000
What is the new equilibrium price? $_______________
What is the new equilibrium quantity of new homes? ________________
On a graph, redraw the original demand and supply curves. Then, show the shift in supply. Show the
new equilibrium price and quantity of new homes.
Because of the shift in the supply, there is now a _________(shortage or surplus?) equal to _________
new homes. This will cause the price of new homes to ________(rise or fall?). The change in the price
will __________(increase or decrease?) the quantity demanded for new homes and
___________(increase or decrease?) the quantity supplied of new homes.
2. Assume that the market for automobiles begins in equilibrium. Draw the demand and supply curves
for automobiles in the graph below. Label all axes and curves. Show the equilibrium price and quantity.
Then, buyers’ incomes fall due to a recession. Make the appropriate change on the graph. Show the
new equilibrium.
When the new equilibrium is reached, the price of automobiles will have ___________(risen or
fallen?) and the quantity of automobiles sold will have ___________________(risen or fallen?)
Price of Automobiles
____________________________________
0
Quantity of Automobiles
18
Practice Quiz for Chapter 6
1.
The law of supply states that, other things being unchanged,
a. as the price rises, the quantity supplied rises
b. as the price rises, the quantity supplied falls
c. as the supply rises, the price falls
d. as the demand rises, the supply falls
2.
Which of the following would cause the supply curve of wheat to shift to the right?
a. an increase in wages paid to agricultural workers
b. technological changes which lower the costs of production
c. a decrease in the number of wheat growers
d. an increase in the price of corn
3.
We move along the supply curve if what changes?
a. the price of the product b. the cost of production c. the number of sellers d. all of the above
4. The price elasticity of supply is the:
a. percentage change in quantity supplied divided by the percentage change in price
b. percentage change in price divided by the percentage change in quantity supplied
c. dollar change in quantity supplied divided by the dollar change in price
d. percentage change in quantity supplied divided by the percentage change in quantity demanded
5.
If the supply is more inelastic, you should draw the supply curve
a. flatter b. steeper
6.
Over a longer time period, the supply of the product becomes
a. more elastic b. more inelastic c. perfectly inelastic
7.
Factors of production that can be easily shifted into many different uses are called:
a. general b. specific c. shiftable d. usable
8.
If the price is above equilibrium,
a. quantity demanded equals quantity supplied c. there are surpluses
b. there are shortages
d. demand must shift to the right
9.
Assume that a market begins in equilibrium. Then, there is a decrease in buyers’
incomes. When the new equilibrium is reached:
a. the price and the quantity will both have risen
b. the price and the quantity will both have fallen
c. the price will have risen and the quantity will have fallen
d. the price will have fallen and the quantity will have risen
10. Assume that a market begins in equilibrium. Then, there is a decrease in a cost of
production. When the new equilibrium is reached:
a. the price and the quantity will both have risen
b. the price and the quantity will both have fallen
c. the price will have risen and the quantity will have fallen
d. the price will have fallen and the quantity will have risen
Answers:
1. A 2. B 3. A 4. A 5. B 6. A 7. A 8. C 9. B 10. D