Chapter 3 : Supply and Demand

What does a Demand Curve show?

Consumer Behavior

Inferior Good

when the increase in income decreases the demand for a good

Olive oil and corn oil are very often considered to be substitute products. When the price of olive oil increases, what probably happens to the demand for corn oil? a. It decreases, because olive oil and corn oil are complements. b. It decreases, because olive oil and corn oil are substitutes. c. It increases, because olive oil and corn oil are complements. d. It increases, because olive oil and corn oil are substitutes.

d. It increases, because olive oil and corn oil are substitutes.

When oil companies expect the price of oil to be higher next year, what happens to the volume of oil produced today? a. Quantity supplied increases. b. Quantity supplied decreases. c. Supply increases. d. Supply decreases.

d. Supply decreases.

Substitutes

two goods for which a decrease in the price of one leads to a decrease in demand for the others

Complements

two goods for which a decrease in the price of one leads to an increase in the demand for the other

What are some factors that shift the supply curve?

-Technological innovation/changes in price of inputs -Taxes and subsidies -Expectations -Entry or exit of producers -Changes in opportunity costs

What does a Supply Curve show?

Producer Behavior

Once you graduate from college, get a good job, and experience a rise in income, you will choose to buy fewer ______ goods, such as______. a. normal; Ramen noodles b. normal; restaurant meals c. inferior; restaurant meals d. inferior; Ramen noodles

d. inferior; Ramen noodles

What are some examples of Inferior Goods?

Ramen

The economist Bryan Caplan recently found a pair of $10 arch supports that saved him from the pain of major foot surgery. As he stated on his blog (http://econlog.econlib.org), he would have been willing to pay $100,000 to fix his foot problem, but instead he only paid a few dollars. If the sales tax was 5 percent on this product, how much revenue did the government raise when Bryan bought his arch supports? If the government could have taxed Bryan based on his willingness to pay instead of on how much he actually paid, how much sales tax would Bryan have had to pay? a. $0.50; $5,000 b. $0.50; $4,999.50 c. $5,000; $0.50 d. $4,999.50; $0.50

a. $0.50; $5,000

Michael is an economist. He loves being an economist so much that he would do it for a living even if he only earned $30,000 per year. Instead, he earns $80,000 per year. (Note: This is the average salary of new economists with a PhD degree.) How much producer surplus does Michael enjoy? a. $80,000 b. $50,000 c. $30,000 d. $0

b. $50,000

Total consumer surplus is measured by the area _____ and _____ the price. a. above the supply curve; below b. below the supply curve; above c. below the quantity demanded curve; above d. below the demand curve; above

d. below the demand curve; above

Supply Curve

a function showing the quantity of a good that suppliers would be willing and able to sell at different prices

Demand Curve

a function that shows the quantity demanded at different prices

If the price of a good's complement rises, _____ for the good whose price did not change will decrease. a. profit b. supply c. advertising d. demand

d. demand

What should happen to the demand for speed (measured by the average speed on highways) once airbags are included on cars? a. Demand for speed will fall as the airbag light on your dashboard warns you of the potential for accidents. b. Demand for speed will rise because people feel they would be safer if an accident occurs. c. Demand for speed will remain unchanged, because people's desire to drive fast is unrelated to airbags. d. All of the answer choices are correct.

a. Demand for speed will fall as the airbag light on your dashboard warns you of the potential for accidents.

Cars and gasoline are complements. What will happen to the demand curve for gasoline if the price of cars decreases? a. The demand curve for gasoline will shift upward and to the right. b. The demand curve for gasoline will shift downward and to the left. c. There will be an upward movement along the original demand curve. d. There will be a downward movement along the original demand curve.

a. The demand curve for gasoline will shift upward and to the right.

Consider farmers who have land that is suitable for growing both wheat and soybeans. Suppose all farmers are currently farming wheat, but the price of soybeans rises dramatically. How does this affect the opportunity cost of producing wheat? a. The opportunity cost of wheat production increases. b. The opportunity cost of wheat production decreases. c. The opportunity cost of wheat production remains the same. d. All of the answer choices are correct.

a. The opportunity cost of wheat production increases.

Consider farmers who have land that is suitable for growing both wheat and soybeans. Suppose all farmers are currently farming wheat, but the price of soybeans rises dramatically. How does this affect the supply curve for wheat? a. The supply curve shifts up and to the right. b. The supply curve shifts down and to the left. c. The supply curve remains the same. d. All of these are correct.

a. The supply curve shifts up and to the right.

The industrial areas in northeast Washington, D.C., were relatively dangerous in the 1980s. Over the last two decades, the area has become a safer place to work (although there are still seven times more violent crimes per person in these areas than in a nearby neighborhood called Georgetown). When an area becomes a safer place to work, what likely happens to the supply of labor in that area? a. The supply of labor increases. b. The supply of labor decreases. c. The supply of labor remains unchanged. d. All of these are correct.

a. The supply of labor increases.

Evaluate the accuracy of the following statement: People search harder for substitutes for oil when the price of oil is high. a. True; when oil prices are high, there are greater potential savings from oil substitutes. b. False; people will demand the same amount of oil regardless of the price. c. False; when oil prices are high, oil substitutes are relatively less valuable. Thus, people will demand more oil and less oil substitutes. d. The answer cannot be determined, because not all consumers place the same value on oil.

a. True; when oil prices are high, there are greater potential savings from oil substitutes.

Butter and margarine are substitutes. When the price of margarine increases, what will happen to the demand for butter? Why? a. When the price of margarine rises, some people will switch from margarine to butter. Because of this, demand will increase, making butter's demand curve shift up and to the right. b. When the price of margarine rises, some people will switch from margarine to butter. Because of this, demand will increase, making butter's demand curve shift down and to the left. c. When the price of margarine rises, some people will switch from margarine to butter. Because of this, the quantity demanded increases, resulting in a downward movement along the original demand curve for butter. d. When the price of margarine rises, some people will switch from margarine to butter. Because of this, the quantity demanded increases, resulting in an upward movement along the original demand curve.

a. When the price of margarine rises, some people will switch from margarine to butter. Because of this, demand will increase, making butter's demand curve shift up and to the right.

Glass is an input for producing both windows and bottles. However, glass bottles are a less valuable product than glass windows. If the price of glass increases dramatically, what are we likely to see a lot less of: glass windows or glass bottles? Why? a. bottles b. windows c. both d. neither

a. bottles

According to the supply curve, if the price of cars ______ carmakers will produce ______ cars. a. falls; fewer b. falls; more c. rises; fewer d. We need more information about the situation to determine what will happen

a. falls; fewer

Petroleum, natural gas, coal, and solar power are all sources used to produce energy, and, therefore, can be considered to be substitutes. When the price of petroleum increases, the demand for natural gas ______, the demand for coal ______, and the demand for solar power ______. a. increases; increases; increases b. increases; increases; decreases c. decreases; decreases; increases d. decreases; decreases; decreases

a. increases; increases; increases

A pharmaceutical business is ______ likely to hire highly educated workers and use new, experimental research methods when it expects the price of its new drug to be ______. a. more; high b. less; high c. more; low d. A, B, and C are all possible.

a. more; high

Total Consumer Surplus

adding up consumer surplus for each consumer and for each unit (area on a graph beneath the demand curve and above the price)

Quantity Demanded

amount of a good that consumers are willing and able to buy at any given price

Quantity Supplied

amount of a good that sellers will produce and bring to market at any given price

Your roommate just bought an iPod for $200. She would have been willing to pay $500 for a machine that could store and replay that much music. How much consumer surplus does your roommate enjoy from the iPod? a. $500 b. $300 c. $200 d. $0

b. $300

Consumer surplus is the difference between the _____ the consumer is willing to pay for a good and the market price. a. minimum price b. supplier's cost c. supplier's profit d. maximum price

d. maximum price

If everyone thinks that the price of gasoline will increase next week, what is likely to happen to the demand for gasoline today? a. Demand will increase, mostly because consumers will buy more gas in anticipation of the price rise. b. Demand will increase, mostly because owners of gas stations will want to fill up their storage tanks before the price increases. c. Demand will increase, mostly because gasoline refineries will refuse to sell as much gas today, holding back their stock until the price increases. d. Demand will decrease because consumers will buy less gas today in an attempt to prepare themselves for higher prices in the future.

b. Demand will increase, mostly because owners of gas stations will want to fill up their storage tanks before the price increases.

When the price of Apple computers declines, what probably happens to the demand for Windows-based computers? a. It increases, because Apple computers and Windows-based computers are complements. b. It decreases, because Apple computers and Windows-based computers are substitutes. c. It increases, because Apple computers and Windows-based computers are substitutes. d. It decreases, because Apple computers and Windows-based computers are complements.

b. It decreases, because Apple computers and Windows-based computers are substitutes.

If the price of oil falls, what will happen to the quantity of oil supplied? a. It increases, because consumers want more oil. b. It decreases, because some oil deposits are no longer worth tapping. c. It remains unchanged, because the world's total oil supply is fixed. d. The quantity changes in a way that cannot be predicted without further information.

b. It decreases, because some oil deposits are no longer worth tapping.

Imagine that a technological innovation reduces the costs of producing high-quality steel. What happens to the supply curve for steel? a. Supply increases and the supply curve shifts up and to the left. b. Supply increases and the supply curve shifts down and to the right. c. Supply decreases and the supply curve shifts up and to the left. d. Supply decreases and the supply curve shifts down and to the right.

b. Supply increases and the supply curve shifts down and to the right.

The demand curve is a function that shows the _____ at a range of prices. a. goods supplied b. quantity demanded c. goods demanded d. buyers' demand

b. quantity demanded

The imposition of an excise tax (production tax) on each unit produced will cause: a. supply to increase. b. supply to decrease. c. supply to remain unchanged. d. All of these are correct, depending on the nature of the tax.

b. supply to decrease.

The economist Bryan Caplan recently found a pair of $10 arch supports that saved him from the pain of major foot surgery. As he stated on his blog (http://econlog.econlib.org), he would have been willing to pay $100,000 to fix his foot problem, but instead he only paid a few dollars. How much consumer surplus did Bryan enjoy from this purchase? a. $0 b. $10 c. $99,990 d. $100,000

c. $99,990

If the price for a 50-inch plasma TV is $2,010 and Newhart is willing to pay $3,000, what is Newhart's consumer surplus? a. $3,000 b. $2,010 c. $990 d. $0

c. $990

If everyone believes that the price of tomatoes will increase next week, what is likely to happen to demand for tomatoes today? a. Demand will decrease because people will buy fewer tomatoes now, in anticipation of the price rise. b. Demand will increase because sellers will hold back tomatoes, hoping to get a higher price for them next week. c. Demand will increase as people buy more tomatoes now, hoping to beat the price rise. d. Both B and C are correct.

c. Demand will increase as people buy more tomatoes now, hoping to beat the price rise.

The government decides that it wants to increase the quantity of solar panels in use, so it offers a $20 subsidy per panel to producers. What happens to the supply curve of solar panels? a. The supply curve does not change. b. The supply curve shifts inward. c. For each quantity along the supply curve, the price will shift down by $20. d. Supply decreases.

c. For each quantity along the supply curve, the price will shift down by $20.

Which factor decreases demand? a. an increase in income b. a decrease in natural resources c. an increase in the price of complements d. a decrease in input prices

c. an increase in the price of complements

When the price of a good increases, the quantity demanded ______. When the price of a good decreases, the quantity demanded ______. a. rises; rises b. rises; falls c. falls; rises d. falls; falls

c. falls; rises

For most young people, working full-time and going to school are substitutes; you tend to do one or the other. Thus, when it's tough to find a job, this ______ the opportunity cost of going to college and the demand for college ______. a. raises; rises b. raises; falls c. lowers; rises d. lowers; falls

c. lowers; rises

Producer surplus is the difference between the _____ price and the minimum price at which a producer would be willing to sell a particular quantity. a. import b. minimum c. market d. maximum

c. market

What are some examples of Normal Goods?

cars, electronics, and restaurant meals

Consumer Surplus

the consumer's gain from exchange, or the difference between the maximum price a consumer is willing to pay for a certain quantity and the market price

Producer Surplus

the producer's gain from exchange, of the difference between the market price and the minimum price at which a producer would be willing to sell a particular quantity

Normal Good

when the increase in income increases the demand for a good