Ch 4 (generic)
The amount of a good that sellers are willing and able to supply at a given price
quantity supplied
excess supply (surplus)
quantity supplied is greater than quantity demanded
A table showing the relationship between the price of a good and the amount of it that sellers are willing and able to supply at various prices
supply schedule
Your task is to take this and construct a graphical representation of the data. In doing so, you determine that as the price of soda rises, the quantity of soda supplied increases. This confirms the . .
supply schedule & law of supply
(Figure: The Shrimp Market) Use Figure: The Shrimp Market. If the government imposes a quota limiting sales of shrimp to 250 pounds, the quota rent per pound is:
$10
A local bakery buys $3,000 worth of oatmeal from a local miller and uses it to make cookies that it sells to the public. Individual residents of the town buy $2,000 worth of oatmeal from the miller and use it to make cookies that they give to family and friends. Looking ONLY at the $5,000 worth of oatmeal sold by the miller, how much of it is counted in GDP?
$2,000. The $2,000 worth sold to individual residents is a final good. The $3,000 worth sold to bakery is an intermediate good, and so is not counted in GDP. The value of the $3,000 worth of oatmeal will be counted in the value of the cookies produced and sold by the bakery.
(Figure: The Market for Clams) Use Figure: The Market for Clams. The government imposes a quota limiting sales of clams to 1,000 pounds. According to the figure, the quota rent per pound in this case is:
$2.50
For the following event, identify which of the determinants of demand are affected. If demand is unaffected by this event because it creates a supply change, select "None" option and explain. A strike by steelworkers raises steel prices.
none (input prices)
law of supply and demand
A law which states that when supplies of goods and services become plentiful, prices tend to drop. When supplies become scarcer, prices tend to rise.
Competitive Market
A market in which there are many buyers and sellers so that each has a negligible impact on the market price.
Monopoly
A market that only has one seller (small town's local cable services)
Perfectly competitive market
A market with many sellers and buyers of a homogeneous product and no barriers to entry
Change in demand
A shift of the demand curve caused by a change in a variable other than the price of the product
Change in supply
A shift of the supply curve caused by a change in a variable other than the price of the product
in the equilibrium in the goods market, what would be the effects of a decline in the current government purchases?
A shift to the right in savings and a decrease in the real interest rate.
Shortage
A situation in which quantity demanded is greater than quantity supplied.
Surplus
A situation in which quantity supplied is greater than quantity demanded.
Market equilibrium
A situation in which, at the prevailing price, the quantity demanded exceeds the quantity supplied
Demand Schedule
A table that shows the relationship between the price of a good and the quantity demanded.
Supply schedule
A table that shows the relationship between the price of a product and quantity supplied, ceteris paribus
Demanded schedule
A table that shows the relationship between the price of a product and the quantity demanded, ceteris paribus
Supply Schedule
A table that sows the relationship between the price of a good and the quantity supplied.
Substitutes
a fall in the price of one good reduces the demand for another good (hot dog and hamburger)
Inferior Good
a good for which, other things being equal, an increase in income leads to a decrease in demand
Normal Good
a good for which, other things being equal, an increase in income leads to an increase in demand
inferior good
a good that consumers demand less of when their incomes increase
normal good
a good that consumers demand more of when their incomes increase
Normal Good
a good whose demand falls if income falls
Inferior Good
a good whose demand increase if income falls
Demand Curve
a graph of the relationship between the price of a good and the quantity demanded
Supply Curve
a graph of the relationship between the price of a good and the quantity supplied
Market
a group of buyers and sellers of a particular good or service
Competitive Market
a market in which there are many buyers and many sellers so that each has a negligible impact on the market price
A maximum price legislated by the government is called:
a price ceiling.
supply
a schedule of quantities a seller is willing to sell per unit of time at various prices
demand
a schedule of quantities of a good that will be bought per unit of time at various prices, other things constant
shortage
a situation in which a good or service is unavailable
Shortage
a situation in which quantity demanded is greater than quantity supplied
Equilibrium
a situation in which the market price has reached the level at which quantity supplied equals quantity demanded
quantity demanded
a specific amount that will be demanded per unit of time at a specific price, other things constant
Demand Schedule
a table that shows the relationship between the price of a good and its quantity demanded
Demand Schedule
a table that shows the relationship between the price of a good and the quantity demanded
4 components of GDP
consumption, government, investment, net exports
Now suppose Congress passes a new tax that decreases the income of Denver residents. If donuts are a normal good, this will cause the demand for donuts to .
decrease
The following graph shows the market for roses in 2010. Between 2010 and 2011, the equilibrium quantity of roses remained constant, but the equilibrium price of roses increased. From this, you can conclude that between 2010 and 2011, the supply of roses and the demand for roses .
decreased & increased
A graphical object showing the relationship between the price of a good and the amount of the good that buyers are willing and able to purchase at various prices
demand curve
If Latasha's boss is interested in a graphical representation of the relationship between the price and quantity of televisions demanded, you would advise your coworker to construct a demand curve Correct using the data provided. However, if Latasha's boss is more interested in the detailed numbers used to construct this visual representation, you would instead advise your coworker that a demand schedule Correct would be more appropriate
demand curve and demand schedule
Your task is to take this _________ and construct a graphical representation of the data. In doing so, you determine that as the price of soup rises, the quantity of soup demanded decreases. This confirms the ________.
demand schedule; law of demand
how are the desired consumption and desired saving affected by increases in current income, expected future income, and wealth • When wealth rises,
desired consumption increases, and desired saving decreases
(Table: Quantity Supplied and Quantity Demanded) Use Table: Quantity Supplied and Quantity Demanded. A government-imposed price ceiling equal to $5 would result in:
excess demand.
surplus
extra
A binding rent-control price ceiling does NOT result in:
inefficiently high quality of the good being sold.
The persistent unwanted surplus that results from a binding price floor causes inefficiencies that do NOT include:
inefficiently low quality.
Law of Demand
inverse relationship between price and quantity demanded
A price ceiling will have NO immediate effect if:
it is set above the equilibrium price.
entitlements
largest category of US federal spending: social security, pension, medicare, medicaid
The claim that, other things being equal, the quantity supplied of a good increases when the price of that good rises
law of supply
Farmers in developing countries want the United States to reduce the subsidies that it gives to U.S. farmers because subsidized agricultural products from the United States:
lead to agricultural surpluses and lower prices for farmers in developing countries.
If minimum wages are set above the equilibrium wage in the market, then the number of workers hired will be _____ the number of people who are willing to work at the prevailing wage.
less than
Typically, the government limits the quantity of a good that can be bought and sold by:
licensing the suppliers.
Which example is a quantity control?
limits on the number of red snappers that can be caught in the Gulf of Mexico
Suppose the market for pizzas is unregulated. That is, pizza prices are free to adjust based on the forces of supply and demand. If a shortage exists in the pizza market, then the current price must be __________ than the equilibrium price. For the market to reach equilibrium, you would expect __________ to offer higher prices.
lower buyers
Suppose the market for cantaloupes is unregulated. That is, cantaloupe prices are free to adjust based on the forces of supply and demand. If a shortage exists in the cantaloupe market, then the current price must be than the equilibrium price. For the market to reach equilibrium, you would expect .
lower & buyers to offer higher prices
Suppose the market for pizzas is unregulated. That is, pizza prices are free to adjust based on the forces of supply and demand. If a shortage exists in the pizza market, then the current price must belower Correct than the equilibrium price. For the market to reach equilibrium, you would expectbuyers to offer higher prices
lower and higher prices
A group of buyers and sellers of a particular good or service
market
Surplus
market price is above equilibrium price suppliers are unable to sell all they want at the going price respond to the surplus by cutting their prices ===> (D up, S down) changes represent movements along the supply and demand curves
Shortage
market price is below equilibrium price demanders are unable to buy all they want at the going price sellers can respond to the shortage by raising their prices without losing sales ===> (D down, S up) these changes represent movements along the supply and demand curves
Competitive Market
market where there are so many buyers and so many sellers that each has a negligible impact on the market price
Indicating whether this event will cause a movement along or a shift of the demand curve for hot dogs: An increase in the price of hot dogs
movement
Indicating whether this event will cause a movement along or a shift of the supply curve for peanut butter: An increase in the price of peanut butter
movement
A decrease in the price of cereal
movement along
change in price
movement along the demand curve; NO SHIFT
what is the difference between gross investment and net investment? Can gross investment be positive when net investment is negative
net investment is the overall increase in the capital stock; Yes.
what is the difference between gross investment and net investment
net investment= gross investment minus taxes
If a quota is set above the equilibrium quantity, there will be:
no immediate effect.
Market Demand
sum of all individuals' demand for good/service
The discovery of a large new reserve of crude oil will shift the ________ curve for gasoline, leading to a ________ equilibrium price.
supply lower
equilibrium
supply and demand intersects; goods produced as much as there is demand for it
A graphical object showing the relationship between the price of a good and the amount that sellers are willing and able to supply at various prices
supply curve
gross pay
the total amount you earn before any deductions are subtracted
if buyers and sellers in a certain market are price takers then individually
they have no influence on market price.
True or False: The market for digital cable does not exhibit the two primary characteristics that define perfectly competitive markets
true
True or False: The market for lettuce does exhibit the two primary characteristics that define perfectly competitive markets
true
When both the demand and supply curves shift, the curve that shifts by the larger magnitude determines the effect on the undetermined equilibrium object
true
Complements
two goods for which an increase in the price of one leads to a decrease in the demand for the other
Substitutes
two goods for which an increase in the price of one leads to an increase in the demand for the other
substitutes
two goods for which an increase in the price of one leads to an increase in the demand for the other
complements
two goods that are bought and used together
substitution effect
when consumers react to an increase in a good's price by consuming less of that good and more of other goods
Law of Supply
when the price of a good rises, the quantity supplied of the good also rises and vice versa
Equilibrium (Price and Quantity)
where the supply and demand curves intersect (the price and quantity at this point)
In Europe, the minimum wage has led to:
widespread evasion of the minimum wage law in the black market for labor.
Market
A group of buyers and sellers of a particular good or service.
Surplus
a situation in which quantity supplied is greater than quantity demanded
Supply Schedule
a table that shows the relationship between the price of a good and the quantity supplied
Demand Curve
A graph of the relationship between the price of a good and the quantity demanded.
Equilibrium
A situation in which the market price has reached the level at which quantity supplied equals quantity demanded.
Excess supply
A situation in which the quantity supplied exceeds the quantity demanded at the prevailing price
Excess demand
A situation in which, at the prevailing price, the quantity demanded exceeds the quantity supplied
Supply Curve
A graph of the relationship between the price of a good and the quantity supplied.
What variables affect an individual customers decision when buying?
-Price of product -Consumers income -Price of substitute goods -Price of complementary goods -The consumers preferences -The consumer's expectations about future prices
Determinates of a demand curve
1) Price of the product 2) Consumer's Income 3) Price of substitute goods 4) Price of a complementary goods 5)Consumer's preferences or taste and advertising that may influence preferences 6) consumer's expectations about future prices
Determinates of a supply curve
1)Price of the product 2)wage paid to workers 3) prices of materials 4)cost of capital 5) state of production technology 6)producers' expectations about future prices 7) Taxes paid to government or subsidies
Steps to Analyzing Equilibrium Changes
1. Decide whether the event shifts the supply or demand curve (or perhaps both). 2. Decide in which direction the curve shifts. 3.Use the supply-and-demand diagram to see how the shift changes the equilibrium price and quantity.
5 shifters of demand
1. Tastes and Preferences 2. Number of Consumers 3. Price of Related Goods 4. Income 5. Expectations
With no inflation and a nominal interest rate (i) of .03, a person can trade off one unit of current consumption for _____ units of future consumption.
1.03
Your firm has capital stock of $10 million and a depreciation rate of 15%. Gross investment is $3 million. How much is net investment?
1.5 million
Supply: Basic Concepts 1. The amount of a good that sellers are willing and able to supply at a given price. 2. The claim that, other things being equal, the quantity supplied of a good increases when the price of that good rises. 3. A graphical object showing the relationship between the price of a good and the amount that sellers are willing and able to supply at various prices. 4. A table showing the relationship between the price of a good and the amount of it that sellers are willing and able to supply at various prices. Fortunately, you recognize that the line on this graph is a _____. When your friend asks you which value represents the quantity of notebooks supplied at a price of $2 per notebook, you tell him the value represented by the letter ___.
1A. Quantity Supplied 2A. Law of Supply 3A. Supply Curve 4A. Supply Schedule The quantity supplied of a good is the amount of the good that sellers are willing and able to supply at a given price. This is different from a supply curve, which shows the entire relationship between the price of a good and the quantity of the good supplied. A supply schedule is a table that shows this relationship. The law of supply states that, other things being equal, the quantity supplied of a good increases when the price of that good rises. You can see the law of supply graphically in the upward-sloping supply curve. A supply curve; X
Demand Terminology 1. A graphical object showing the relationship between the price of a good and the amount of the good that buyers are willing and able to purchase at various prices. 2. The amount of a good that buyers are willing and able to purchase at a given price. 3. A table showing the relationship between the price of a good and the amount that buyers are willing and able to purchase at various prices. 4. The claim that, with other things being equal, the quantity demanded of a good falls when the price of that good rises.
1A: Demand Curve 2A: Quantity Demanded 3A: Demand Schedule 4A: Law of Demand
a consumer has initial real wealth of 50, current real income of 100, and future real income of 110. The real interest rate is 10% • what is the consumers PVLR?
250
David consumes 200 in the current period and 330 in the future period. The real interest rate is 10% per period. David's present value of lifetime consumption is
500
The price of a unit of capital is 5,000. The rate of depreciation is 1% per year. The annual real rate of interest is 9%. • What is the user cost of capital?
500
An economy has government purchases of 2000. Desired national saving and desired investment are given by: • Sd= 200 + 5000r + 0.10Y - 0.20G • Id= 1000- 4000r o When the full-employment level of output equals 5000, then the level of investment when the goods market is in equilibrium will be
688.9
the price of a unity of capital is 1,000. The rate of depreciation is %5 per year and the annual real rate of interest is 10%. The equation for the expected future marginal product of capital is given as: MPK= 1000-10K • what is optimal quantity of capital?
85 units
(Table: Market for Butter) Use Table: Market for Butter. If the government imposes a price ceiling of $0.90 per pound of butter, the quantity of butter actually purchased will be _____ million pounds.
9.0
Consider the market supply of donuts. Complete the following table by indicating whether an event will cause a movement along the supply curve for donuts or a shift of the supply curve for donuts, holding all else constant.
A change in expectations about the future price of donuts = shift An increase in the price of donuts= movement An increase in the number of producers= shift
A change in quantity demanded
A change in the quality consumers are willing and able to buy: change of point on the same curve
Change in quantity supplied
A change in the quantity firms are willing and able to sell when the price changes; represented graphically by movement along the supply curve.
individual supply curve
A curve showing the relationship between price and quantity supplied by a single firm, ceteris paribus.
Market supply curve
A curve showing the relationship between the market price and quantity supplied by all firms, ceteris paribus
Individual demand curve
A curve that shows the relationship between the price of a good and quantity demanded by an individual customer, ceteris paribus
inferior good
A good for which an increase in income decreases demand
normal good
A good for which an increase in income increases demand
Inferior Good
A good for which, other things being equal, an increase in income leads to a decrease in demand.
Normal Good
A good for which, other things being equal, and increase in income leads to an increase in demand.
A curve that connects all the consumption combinations that yield the same level of utility is known as
An indifference curve
A change in which of the following will not shift the demand curve for hamburgers? A)The price of hot dogs B)The price of hamburgers C)The price of hamburger buns D)The income of hamburger consumers
B
An increase in ________ will cause a movement along a given demand curve, which is called a change in ________. A)supply, demand B)supply, quantity demanded C)demand, supply D)demand, quantity supplied
B
Price Takers
Buyers and sellers must accept the price that the perfectly competitive market sets
In the country of Ophir, the GDP deflator is 175. What does this tell us about prices now compared to prices in the base year? If nominal GDP in Ophir is $87,500, what is real GDP?
By definition, the GDP Deflator in the base year is 100. Consequently, prices are now 75% higher than in the base year. I.e., (175 - 100)/100 = 0.75 = 75% To convert nominal GDP into real GDP, divide nominal GDP by the GDP deflator divided by 100. In this case, Real GDP = $87,500 divided by 175/100, or $87,500/1.75 = $50,000
Which of the following might lead to an increase in the equilibrium price of jelly and a decrease in the equilibrium quantity of jelly sold? A)An increase in the price of peanut butter, a complement to jelly B)An increase in the price of Marshmallow Fluff, a substitute for jelly C)An increase in the price of grapes, an input to jelly D)An increase in consumers' incomes, as long as jelly is a normal good
C
given the following: • Output (Y)= 1,000 • Government Spending (G): 200 • Desired Savings (Sd): 0 o If the economy is closed and its goods market is in equilibrium, what is the desired level of consumption?
Cd= 800
• your current income is equal to 15,000. Your next period (future) income is known to be equal to 16,500. o If the real rate of interest is equal to 10%, how much will you spend on consumption next period (assuming that your current consumption is 12,000)
Cf= 19800
When a person receives an increase in wealth, what is likely to happen to consumption and saving?
Consumption increases and saving decreases.
When a person gets an increase in current income, what is likely to happen to consumption and saving?
Consumption increases and saving increases
What are the main components of measuring GDP with what is demanded?
Consumption, Investment, Government Purchases, and Net Exports.
suppose that you expect that your future income to increase, what is the effect on current and future consumption?
Current consumption doesn't change, but future consumption increases. Your budget line moves to the right.
Because you understand the law of demand, you can deduce that the correct graphical representation of the demand for CDs must be .Moreover, you know that at a price of $10 per CD, the is five million CDs.
D1 & quantity demanded
Movie tickets and DVDs are substitutes. If the price of DVDs increases, what happens in the market for movie tickets? The _____________ curve shifts to the __________.
DEMAND RIGHT
A table showing the relationship between the price of a good and the amount that buyers are willing and able to purchase at various prices
Demand Schedule
A graphical object showing the relationship between the price of a good and the amount of the good that buyers are willing and able to purchase at various prices
Demand curve
The following graph shows the market for donuts in Denver, where there are over 1,000 donut shops at any given moment. Suppose the Surgeon General issues a public statement saying that consuming donuts is bad for your health. Show the effect of this change on the market for donuts by shifting one or both of the curves on the following graph, holding all else constant.
Demand curve shifts to the left
The market price of calzones in a college town decreased recently, and the students in an economics class are debating the cause of the price decrease. Some students suggest that the price decreased because the price of dough, an important ingredient for making calzones, has decreased. Other students attribute the decrease in the price of calzones to a recent decrease in college student enrollment. The second group of students attributes the decrease in the price of calzones to the decrease in college student enrollment. On the following graph, adjust the supply and demand curves to illustrate the second group's explanation for the decrease in the price of calzones.
Demand curve shifts to the left
Adjust the graph to illustrate your answer by showing the positions of the supply and demand curves in 2010.
Demand curve shifts to the left Supply curve shifts to the right
The market price of pizzas in a college town increased recently, and the students in an economics class are debating the cause of the price increase. Some students suggest that the price increased because the price of dough, an important ingredient for making pizzas, has increased. Other students attribute the increase in the price of pizzas to a recent increase in college student enrollment. The second group of students attributes the increase in the price of pizzas to the increase in college student enrollment. On the following graph, adjust the supply and demand curves to illustrate the second group's explanation for the increase in the price of pizzas.
Demand curve shifts to the right
Adjust the graph to illustrate your answer by showing the positions of the supply and demand curves in 2011.
Demand curve shifts to the right Supply curve shifts to the left
how are the desired consumption and desired saving affected by increases in current income, expected future income, and wealth? • When current income rises
Desired consumption increases and desired saving increases
in the equilibrium in the goods market, what would be the effects of a decline in the productivity of capital?
Desired investment moves to the left thus, real interest rate decreases.
The Ricardian equivalence proposition suggests that a government deficit caused by a tax cut
Doesn't affect consumption
What are the main components of measuring GDP with what is produced?
Durable Goods, Nondurable Goods, Services, Structures, and Changes in Inventories.
True or False: An increase in the demand for notebooks raises the quantity of notebooks demanded but not the quantity supplied.
FALSE
True or False: When the demand curve and the supply curve shift in the direction previously indicated, the effect on the equilibrium price is clear even without knowing the magnitude of the shifts.
FALSE
Critics of the pharmaceutical industry often argue that price ceilings should be imposed on drug manufacturers. If this happened, the quality of drugs would improve.
False
In New York City there are more than 100,000 licensed taxicabs.
False
The Czech Republic has a GDP of 1,800 billion koruny. The exchange rate is 20 koruny/U.S. dollar. The Czech population is 20 million. What is the GDP per capita of the Czech Republic expressed in U.S. dollars?
First, convert Czech GDP into U.S. dollars: K1,800 billion/(K20/$1) = $90 billion. Then divide GDP per capita by population: $90 billion/20 million = $4,500
Given the limitations to GDP as a measure of the standard of living, why do economists still think that it is a "rough but useful" statistic?
For one thing, GDP per capita does reflect how much income people have. But in addition, countries with higher GDP per capita typically have higher standards of living as measured by other things such as health and life expectancy, education, environmental protection, and leisure time. So while GDP per capita per se does not capture everything that matters to people, it is highly correlated with many things that people care about.
Last year in the very small country of Shem, consumption spending was $10,000, investment spending was $2,000, government spending was $5,000 (including $3,000 in transfer payments), exports were $1,000 and imports were $2,000. In addition, residents of Shem working in other countries earned $750 and physical capital located in other countries owned by residents of Shem earned $500. Residents of other countries working in Shem earned $250 and physical capital in Shem owned by foreigners earned $250. What was GDP in Shem last year? What was GNP in Shem last year?
GDP = Consumption + Investment + Government Purchases + Net exports. Consumption was $10,000 and Investment was $2,000. Government Purchases are Government Spending minus Transfer Payments, so they are $5,000 - $3,000 = $2,000. Net Exports are Exports minus Imports, or $1,000 - $2,000 = - $1,000. So: GDP = $10,000 + $2,000 + $2,000 + (-$1,000) = $13,000. GNP = GDP + Income earned by residents of Shem from their labor and capital in other countries - Income earned by foreign residents from their labor and capital in Shem. So: GNP = $13,000 + $750 + $500 - $250 - $250 = $13,750.
List some of the limitations to GDP as a measure of the standard of living.
GDP ignores many things that matter to people. The GDP statistic does not reflect increases in leisure time, the quality of the environment, life expectancy and health, congestion, crime, quality of education, culture, and the number of options available for travel and entertainment. Things that people do at home (such as cooking) are not counted in GDP; to the extent that people purchase more of these things (such as eating out), GDP increases without there really being an increase in production.
Why doesn't the investment component of GDP include purchases of financial assets such as stocks and bonds?
GDP measures output of real goods and services. Stocks and bonds represent ownership and claims to income. Stocks and bonds may facilitate investment, but they are not goods and services.
Ethiopia has a GDP of $8 billion (measured in U.S. dollars) and a population of 55 million. Costa Rica has a GDP of $9 billion (measured in U.S. dollars) and a population of 4 million. Calculate the per capita GDP for each country and identify which one is higher.
GDP per capita in Ethiopia is $8 billion/55 million = $145.45. GDP per capita in Costa Rica is $9 billion/4 million = $2,250.00. Costa Rica has a much higher GDP per capita.
What are the two main difficulties that arise when comparing standards of living in different countries using GDP?
GDP statistics from different countries are expressed in different currencies. So the first thing that must be done is to convert the GDP statistic into a common currency. A second problem is that countries have different populations. If GDP is used to compare standards of living, it must be converted into GDP per person.
given the following: • output (Y): 2000 • Government Spending (G): 300 • Desired Consumption (cd): 1,500 o If the goods market is equilibrium for a closed economy, what is the desired level of investment?
Id= 200
Complements
a fall in the price of one good raises the demand for another good (hot dog and ketchup)
Suppose that both of the events you have just analyzed are partly responsible for the decrease in the price of calzones. Based on your analysis of the explanations offered by the two groups of students, how would you figure out which of the possible causes was the dominant cause of the decrease in the price of calzones?
If the equilibrium quantity of calzones decreases, then the demand shift in the market for calzones must have been larger than the supply shift.
Suppose that both of the events you have just analyzed are partly responsible for the decrease in the price of hamburgers. Based on your analysis of the explanations offered by the two groups of students, how would you figure out which of the possible causes was the dominant cause of the decrease in the price of hamburgers
If the equilibrium quantity of hamburgers increases, then the supply shift in the market for hamburgers must have been larger than the demand shift.
Suppose that both of the events you have just analyzed are partly responsible for the increase in the price of pizzas. Based on your analysis of the explanations offered by the two groups of students, how would you figure out which of the possible causes was the dominant cause of the increase in the price of pizzas?
If the equilibrium quantity of pizzas decreases, then the supply shift in the market for pizzas must have been larger than the demand shift.
In 1980, Denmark had a GDP of $70 billion (measured in U.S. dollars) and a population of 5.1 million. In 2000, Denmark had a GDP of $160 billion (measured in U.S. dollars) and a population of 5.3 million. By what percentage did Denmark's GDP per capita rise between 1980 and 2000?
In 1980, Denmark's GDP per capita was $70 billion/5.1 million = $13,725.49. In 2000, Denmark's GDP per capita was $160 billion/5.3 million = $30,188.68. (30,188.68 - 13,725.49)/13,725.49 = 1.19946. So Denmark's GDP per capita was 119.95% higher in 2000 than in 1980.
Demand Shifters
Increase or decrease demand at any given price: -Income -Price of related goods -Tastes -Expectations -Number of Buyers
Supply Shifters
Increase or decrease supply at any given price: -Input cost -Technology -Expectations -Number of Sellers
A technological improvement will
Increase the desired capital stock
Marginal principle
Increase the level of an activity as long as its marginal benefit exceeds its marginal cost. Choose the level at which the marginal benefit equals the marginal cost.
Investment spending is only 15 to 18 percent of GDP, but it is extremely important to the overall health of the economy. Why?
Investment is the source of new physical capital. As we will see in Chapter 5, that is essential for economic growth. New factories and businesses as well as improvements to existing factories and businesses result from investment. That allows us to expand employment and production.
A country loses much of its capital stock to a war: • What effects should the event have on the country's current employment?
It Decreases
A country loses much of its capital stock to a war: • What effects will the loss of capital have on desired investment?
It Increases
A country loses much of its capital stock to a war: • What effects should the event have on the country's current output
It decreases
A country loses much of its capital stock to a war: • What effects should the event have on the country's current real wage
It decreases
A country loses much of its capital stock to a war: • Assume that desired saving doesn't change. What effect does the loss of capital have on the country's real interest rate and the quantity of investment
It increases
if the tax rate on interest income declines, what happens to the expected after-tax real interest rate?
It increases
the equation for the marginal productivity of capital is given by: • MPKf= 1000- 10K The price of a unit of capital is 2,000. The rate of depreciation is 2% per year. The real interest rate is 11% per year. • If the existing level of Kt is equal to 60 units what is the level of gross investment?
It= 15.2
the equation for the marginal productivity of capital is given by: • MPKf= 1000- 10K The price of a unit of capital is 2,000. The rate of depreciation is 2% per year. The real interest rate is 11% per year. What is the desired capital stock?
K*=74
The claim that, with other things being equal, the quantity demanded of a good falls when the price of that good rises
Law of Demand
your current income is equal to 50,000 when your income changes by 10,000, your consumption expenditure changes by 9,000 • what is the value of the marginal propensity to consume (MPC)
MPC= 0.9
Which of the following machines has the lowest user cost? • Machine A costs $15,000 and depreciates at a rate of 25%; machine B costs $10,000 and depreciates at a rate of 20%; machine C costs $20,000 and depreciates at a rate of 10%; and machine D costs $17,000 and depreciates at a rate of 11%. The expected real interest rate is 5%.
Machine B
An increase in the price of peanut butter
Movement along
Suppose that there are three beachfront parcels of land available for sale in Asilomar and six people who would each like to purchase one parcel. Assume that the parcels are essentially identical and that the minimum selling price of each is $400,000. The following table states each person's willingness and ability to purchase a parcel. Which of these people will buy one of the three beachfront parcels? Check all that apply.
Musashi, Rina, & Sean
What is the difference between a series of economic data over time measured in nominal terms versus the same data series over time measured in real terms?
Nominal values are measured with whatever prices existed at the time. Real values have been adjusted for inflation. For example, if the price of an item doubles over a period of time, the nominal value would double. But if the overall price level had also doubled, the good's price would not have changed relative to the prices of other goods. So the real value of the good would be unchanged.
(Figure: The Market for Tortillas) Use Figure: The Market for Tortillas. With a nonbinding price floor, the price could be equal to _____, consumers would demand _____, and producers would supply _____.
P2; Q2; Q2
If the economy goes into a recession and incomes fall, what happens in the markets for inferior goods? Prices (rise/fall) Quantities (rise/fall)
Prices and quantities both rise.
Individual and market demand Market Qty Demanded = ?
Qty demanded #1 + Qty demanded #2
The amount of a good that buyers are willing and able to purchase at a given price
Quantity Demanded
Suppose your company is in equilibrium, with its capital stock at its desired level. A permanent decline in the expected real interest rate now has what effect on your desired capital stock?
Raises it, because the user cost of capital is now lower
Which statistic gives us a more accurate picture of how production changes over time, nominal GDP or real GDP? Why?
Real GDP. That is because real GDP changes only if production changes. Nominal GDP changes is either prices or production changes.
• your current income is equal to 15,000. Your next period (future) income is known to be equal to 16,500. o If your current consumption expenditure is equal to 12,000. What is your (current) level of savings?
S= 3000
for a household with a given level of income, how are consumption and saving linked?
Saving= Income - consumption
A country loses much of its capital stock to a war: • The effects of desired national saving of the wartime losses are ambiguous. What is one reason for desired saving to rise
Since future output will be lower, people desire to save more today to make up for the loss of future income.
Cross country comparisons of GDP per capita typically use purchasing power parity equivalent exchange rates, which are a measure of the long run equilibrium value of an exchange rate. In fact, we used PPP equivalent exchange rates in this module. Why could using market exchange rates, which sometimes change dramatically in a short period of time, be misleading?
Since market exchange rates can change dramatically in a short period of time, a comparison of GDP per capita between countries would give quite different results depending on the day one happened to choose. For example, suppose the GDP of Mexico is 10 trillion pesos. If the exchange rate on a particular day is 10 pesos per dollar, then Mexican GDP would be measured as $1 trillion. If on another day the exchange rate is 14 pesos per dollar, then Mexican GDP would be measured as $714 billion, which is almost 30% smaller. Hence it is best to use a long-run measure of the exchange rate
The following graph shows the market for croissants in Detroit, where there are over 1,000 bakeries at any given moment. Suppose the price of flour, a major ingredient in croissants, suddenly increases. Show the effect of this change on the market for croissants by shifting one or both of the curves on the following graph, holding all else constant.
Supply curve shifts to the left
The market price of pizzas in a college town increased recently, and the students in an economics class are debating the cause of the price increase. Some students suggest that the price increased because the price of dough, an important ingredient for making pizzas, has increased. Other students attribute the increase in the price of pizzas to a recent increase in college student enrollment. The first group of students thinks the increase in the price of pizzas is due to the fact that the price of dough, an important ingredient for making pizzas, has increased. On the following graph, adjust the supply and demand curves to illustrate the first group's explanation for the increase in the price of pizzas.
Supply curve shifts to the left
The market price of calzones in a college town decreased recently, and the students in an economics class are debating the cause of the price decrease. Some students suggest that the price decreased because the price of dough, an important ingredient for making calzones, has decreased. Other students attribute the decrease in the price of calzones to a recent decrease in college student enrollment. The first group of students thinks the decrease in the price of calzones is due to the fact that the price of dough, an important ingredient for making calzones, has decreased. On the following graph, adjust the supply and demand curves to illustrate the first group's explanation for the decrease in the price of calzones.
Supply curve shifts to the right
Law of Supply
Tendency of suppliers to offer more of a good at a higher price
U.S. macroeconomic data are thought to be among the best in the world. Given what you learned in the Clear It Up (How do statisticians measure GDP?, p. 101) "How do statisticians measure GDP?" does this surprise you? Or does this simply reflect the complexity of a modern economy?
The U.S. economy is vast and complicated. It is an enormous task to collect all the data required to calculate GDP. The U.S. Bureau of Economic Analysis works very hard to get the best data it can, but as the discussion in the book makes clear, the system is far from perfect. One should think of all such statistics as educated guesses, not absolute fact
Quantity Demanded
The amount of a good that buyers are willing and able to purchase.
Quantity Supplied
The amount of a good that sellers are willing and ab to sell.
Quantity demanded
The amount of a product that consumers are willing and able to buy
real income
The amount of goods and services that can be purchased with nominal income during some period of time; nominal income adjusted for inflation.
Law of Supply and Demand
The claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance.
Law of Demand
The claim that, other things being equal, the quantity demanded of a good falls when the price of the good rises.
Law of Supply
The claim that, other things being equal, the quantity supplied of a good rises when the price of the good rises.
Why do you suppose that U.S. GDP is so much higher today than 50 or 100 years ago?
This is a question we will answer more fully in Chapter 5. The short answer is that the U.S. now has better technology, more labor, and more capital.
The desire to have a relatively even pattern of consumption over time is known as
The consumption-smoothing motive
What is the desired capital stock?
The desired capital stock is the amount of capital that allows the firm to earn the largest possible
What are the typical patterns of GDP for a high-income economy like the United States in the long run and the short run?
The long-run trend is for GDP to rise over time. In the short run, however, GDP can fluctuate up and down.
Minimum supply price
The lowest price at which a product will be supplied
Equilibrium Price
The price that balances quantity supplied and quantity demanded.
Explanation for first 4 Questions:
The quantity demanded of any good is the amount of the good that buyers are willing and able to purchase at a given price. This is different from a demand curve, which is a graph that shows the entire relationship between the price of a good and the quantity of the good demanded. A demand schedule, on the other hand, is a table that shows this relationship. The law of demand states that, other things being equal, the quantity demanded of a good falls when the price of the good rises. You can see the law of demand graphically in the downward-sloping demand curve.
Equilibrium Quantity
The quantity supplied and the quantity demanded at the equilibrium price.
Any change in the economy that raises desired national saving for a given value of the real interest rate will shift the desired national saving curve to
The right and decrease that real interest rate
Suppose that the countries of Aquilonia and Nemedia have the same GDP as measured in dollars. Further suppose that the population of Nemedia is twice the population of Aquilonia. Roughly speaking, what can you say about the standard of living of the average person in Aquilonia compared to Nemedia?
The two countries have the same GDP but Nemedia has twice as many people. Hence, GDP per capita is twice as large in Aquilonia as in Nemedia. GDP per capita is a rough measure of standard of living, so the standard of living in Aquilonia is roughly twice that of Nemedia.
Law of supply
There is a positive relationship between price and quantity supplied
Why do you think that GDP does not grow at a steady rate, but rather speeds up and slows down?
This is a question we will answer more fully in Chapter 8. For now, realize that the business cycle is the result of a variety of short-run shocks, including financial panics, changes in government policies, and the moods of consumers.
What is the basic motivation for saving?
To provide for future consumption
A limit on the amount of a foreign currency people are allowed to buy is an example of a quota.
True
If the state of Minnesota established a price floor in the market for pumpkins that was double the current market-clearing price, this would lead to an inefficient number of pumpkins sold in Minnesota.
True
Complements
Two goods for which a decrease in the price of one good increases the demand for the other good
Substitutes
Two goods for which an increase in the price of one good increases the demand for the other good
Complements
Two goods for which an increase in the price of one leads to a decrease in the demand for the other.
Substitutes
Two goods for which an increase in the price of one leads to an increase in the demand for the other.
the equation for the marginal productivity of capital is given by: • MPKf= 1000- 10K The price of a unit of capital is 2,000. The rate of depreciation is 2% per year. The real interest rate is 11% per year. what is the User cost of capital?
Uc=260
Law of Demand
When a good's price rises, its demand falls and vice versa
Assume that the three beachfront parcels are sold to the people that you indicated in the previous section. Suppose that a few days after the last of those beachfront parcels is sold, another essentially identical beachfront parcel becomes available for sale at a minimum price of $360,000. This fourth parcel be sold, because will purchase it from the seller for at least the minimum price.
Will be & Yvette
give two equivalent ways of describing equilibrium in the goods market
Y= Cd + Id+ G and Sd=Id
define the expected after-tax real interest rate
[(1-tax rate)* nominal interest rate] - expected inflation rate
Market demand curve
a curve showing the relationship between price and quantity demanded by all consumers, ceteris paribus
which of the following, if any, is not a characteristic of a perfectly competitive market
all of the above are characteristics of a perfectly competitive market
quantity
an amount
Suppose that the average cost of a doctor visit is $100. If the government imposes a price ceiling of $50 on the cost of a doctor visit, there will be:
an excess demand for doctor visits.
Equilibrium (Market Clearing) Price
at equilibrium price, the quantity of the good that buyers are willing and able to buy exactly balances the quantity that sellers are willing and able to sell
in a market economy, supple and demand determine
both the quantity of each good produced and the price at which it is sold
Suppose the government of the oil-rich country Saudi Arabia sets gasoline prices at $0.25 per gallon when the market price is $1.50. The Saudi government's actions will:
cause gasoline shortages even in an oil-rich country.
The saving-investment diagram shows that a higher real interest rate due to a leftward shift of the saving curve
causes the total amounts of saving and investment to fall.
Ketchup is a complement (as well as a condiment) for hot dogs. If the price of hot dogs rises, the quantity of hot dogs demanded (rises/falls), which (increases/lowers) the demand for ketchup. Because of the change in the equilibrium quantity of ketchup, the demand for tomatoes by ketchup producers _______, causing the equilibrium price of tomatoes to (increase/decrease). This means producers of tomato juice face __________ input prices, and the supply of tomato juice (increases/decreases). The resulting _______ in the price of tomato juice causes ppl to sub away from ___________ juice and toward ___________ juice, so the demand for OJ _______.
falls lowers falls decrease lower increases fall orange tomato falls
True or False: When both the demand and supply curves shift, the curve that shifts by the smaller magnitude determines the effect on the undetermined equilibrium object.
false
the market for public utilities, like gas and electricity, does exhibit the two primary characteristics that define perfectly competitive markets
false
demand curve
graphic representation of the relationship between price and quantity demanded
Market
group of buyers and sellers of a particular good or service Buyers=demand Sellers=supply
explain why the investment curve slopes downward in the saving-investment diagram
higher interest rates increase in the user cost of capital thus reducing the desired capital stock
explain why the saving curve slopes upward in the saving-investment diagram
higher interest rates provide higher returns for savers and also a higher opportunity cost of current consumption
Perfectly Competitive
highest form of competition 1. The goods offered for sale are all exactly the same, and 2. The buyers and sellers are so numerous that no single buyer or seller has any influence over the market price.
in a perfectly competitive market, all producers sell ___ goods or services. Additionally, there are ___ buyers and sellers. Because of these two characteristics, both buyers and sellers in perfectly competitive markets are price ____.
identical, many, takers
For the following event, identify which of the determinants of demand are affected. If demand is unaffected by this event because it creates a supply change, select "None" option. A stock-market crash lowers people's wealth.
income
Over the past 30 years, technological advances have reduced the cost of computer chips. This has led to a(n) (increase/decrease) in the supply of computers, causing the prices of computers to _________. Because computers and computer software are ________________ this change in price causes the demand for computer software to (increase/decrease). However, computers and typewriters are ________________, so the change in the price of computers (increases/decreases) the demand for typewriters.
increase fall complements increase substitutes decreases
The following graph shows the market for laptops in 2009. Between 2009 and 2010, the equilibrium quantity of laptops remained constant, but the equilibrium price of laptops decreased. From this, you can conclude that between 2009 and 2010, the supply of laptops and the demand for laptops .
increased & decreased
The following graph shows the market for cars in 2008. Between 2008 and 2009, the equilibrium price of cars remained constant, but the equilibrium quantity of cars increased. From this, you can conclude that between 2008 and 2009, the supply of cars and the demand for cars . Adjust the graph to illustrate your answer by showing the positions of the supply and demand curves in 2009.
increased & decreased I guess answer is increased & increased Demand curve shifts to the right Supply curve shifts to the right
The following graph shows the market for laptops in 2007. Between 2007 and 2008, the equilibrium quantity of laptops remained constant, but the equilibrium price of laptops decreased. From this, you can conclude that between 2007 and 2008, the supply of laptops
increased and the demand for laptops decreased
For the following event, identify which of the determinants of demand are affected. If demand is unaffected by this event because it creates a supply change, select "None" option and explain. Engineers develop new automated machinery for the production of minivans.
none (technology is supply)
For the following event, identify which of the determinants of demand are affected. If demand is unaffected by this event because it creates a supply change, select "None" option. People decide to have more children.
number of buyers
nominal income
number of dollars received as wages, rent, interest, or profit
how are the desired consumption and desired saving affected by increases in current income, expected future income, and wealth? • When expected future income rises,
odesired consumption increases, and desired saving decreases
Equilibrium
opposing dynamic forces cancel each-other out
Identical products, as well as a large number of buyers and sellers, are characteristics of a market. In such markets, sellers of goods influence the prevailing market price, giving them the role of price in the market. True or False: The market for lettuce does exhibit the two primary characteristics that define perfectly competitive markets.
perfectly competitive, cannot, & takers False
Identical products, as well as a large number of buyers and sellers, are characteristics of a --- market. In such markets, sellers of goods ----- influence the prevailing market price, giving them the role of price ---- in the market.
perfectly competitive, cannot, takers
For the following event, identify which of the determinants of demand are affected. If demand is unaffected by this event because it creates a supply change, select "None" option. The price of sports utility vehicles rises.
price of a substitute/complement
shift factors of supply include
price of inputs, technology, expectations, taxes
excess demand (shortage)
quantity demanded is greater than quantity supplied
law of demand
quantity demanded rises as price falls, other things constant
Law of Supply
quantity supplied rises as price rises, other things constant; quantity supplied falls as price falls
if the stock market booms and people feel wealthier (in a closed economy), then the real interest rate____ and Investment_____
rises; declines
A change in expectations about the future price of cereal
shift
A change in tastes of consumers that makes them desire more peanut butter
shift
A decrease in the number of consumers
shift
A decrease in the price of labor (used in the production of cereal
shift
Indicating whether this event will cause a movement along or a shift of the demand curve for hot dogs: A change in tastes of consumers that makes them desire more hot dogs
shift
Indicating whether this event will cause a movement along or a shift of the demand curve for hot dogs: A decrease in the number of consumers
shift
Indicating whether this event will cause a movement along or a shift of the supply curve for peanut butter: A change in technology that makes it less costly to produce peanut butter
shift
Indicating whether this event will cause a movement along or a shift of the supply curve for peanut butter: A decrease in the number of producers
shift
Movements along versus shifts of demand curves Event: A change in the expectations of consumers about prices. A decrease in the number of consumers. An increase in the price of donuts. An increase in the number of consumers. A change in tastes of consumers that makes them desire more hot dogs. A decrease in the price of hot dogs. A decrease in the price of cereal a change in tastes of consumers that makes them desire more cereal an increase in the price of milk (a complement for cereal)
shift; shift; movement along shift; shift; movement along Movement along; shift, shift The demand curve for donuts shows the relationship between the price of donuts and the quantity of donuts demanded by consumers, assuming that all of the determinants of demand are held constant. The following list displays determinants of demand, which are the factors that affect the quantity of donuts consumers want to buy at a given price: price of a related good (complement or substitute), income of consumers, tastes of consumers, number of consumers, expectations of consumers.
what is the effects of an increase in the rate of depression on capital stock
shock will decrease the capital stock
(Figure: The Market for Economics Textbooks) Use Figure: The Market for Economics Textbooks. At a price ceiling of $40, the market outcome would be a _____ of _____ textbooks.
shortage; 30
shift factors of demand include
society's income, price of other goods, tastes, expectations, taxes
(Figure: Rent Controls) Use Figure: Rent Controls. If rent controls are set at Rent0:
some renters will be willing to pay a price as high as Rent4 for Q0 units.
Fortunately, you recognize that the line on this graph isa supply curve. When your friend asks you which value represents the quantity of notebooks supplied at a price of $4 per notebook, you tell her the value represented by the letter
supply curve and x
An effective price floor would result in a(n):
surplus of the good
(Figure: The Market for Butter) Use Figure: The Market for Butter. If a government price floor of $1.10 is imposed on this market, an inefficiency will result in the form of a _____ of _____ million pounds of butter.
surplus; 3
The United States and the European Union impose price floors on many agricultural products. These price floors lead to unwanted surpluses. To deal with a surplus:
the U.S. government in some cases has destroyed the surplus production.
Quantity Demanded
the amount of a good that buyers are willing and able to purchase
quantity demanded
the amount of a good that buyers are willing and able to purchase
Quantity Demanded
the amount of a good that buyers are willing t purchase
Quantity Supplied
the amount of a good that sellers are willing and able to sell
quantity supplied
the amount of a good that sellers are willing and able to sell
Quantity Supplied
the amount of a good that sellers are willing/able to sell
net pay
the amount of a paycheck after the deductions are taken out
Quantity supplied
the amount of a product that firms are willing and able to sell
income effect
the change in consumption resulting from a change in real income
Law of Supply and Demand
the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance
Law of Demand
the claim that, other things being equal, the quantity demanded of a good falls when the price of the good rises
Law of Supply
the claim that, other things being equal, the quantity supplied of a good rises when the price of the good rises
Supply Curve
the curve relating price and quantity supplied
You are trying to figure out how much capacity to add to your factory. You will increase capacity as long as
the expected marginal product of capital is greater than or equal to the user cost of capital.
fallacy of composition
the false assumption that what is true for a part will also be true for the whole
supply curve
the graphical representation of the relationship between price and quantity supplied
market demand curve
the horizontal sum of all individual demand curves
market supply curve
the horizontal sum of all individual supply curves
Demand Curve
the line that represents the relationship between the price and quantity demanded typically slants downward
The market for apples is in equilibrium at a price of $0.50 per pound. If the government imposes a price floor in the market at a price of $0.40 per pound:
the price floor will not affect the market price or output.
Law of Supply and Demand
the price of any good adjusts to bring the quantity supplied and quantity demanded for that good into balance
Equilibrium Price
the price that balances quantity supplied and quantity demanded
law of diminishing marginal utility
the principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time
Equilibrium Quantity
the quantity supplied and the quantity demanded at the equilibrium price
