Chapters 3 & 4 -- Supply, Demand, Equilibrium

Which of the following is caused by a shift in the supply curve?

a movement along the demand curve Supply side shifts cause changes in quantity demanded.

Suppose that when good Y is free, buyers will demand 200 units of it, but the quantity demanded falls by 5 units for every $2 increase in the price. If the price is $40 and the quantity supplied is 125 units:

the price will eventually fall below $40. The quantity demanded is 200 − (5 × ($40 ÷ $2)) = 100. The difference in quantity supplied and quantity demanded is 125 − 100 = 25. The surplus should lead to price decreases until the surplus is eliminated.

When the free market maximizes the total gains from trade, there may be:

unsatisfied wants. In fact, there almost always will be unsatisfied wants—among buyers who are not willing to pay the market price.

When the free market maximizes the total gains from trade, the supply of goods is sold by the sellers:

with the lowest costs. The market price keeps the sellers with the highest costs out of the market.

Which illustrates an increase in quantity supplied?

a movement up along a fixed supply curve

A(n) ______ occurs when the quantity demanded is greater than the quantity supplied.

shortage A shortage occurs when sellers have less of a good to sell than buyers want to buy. Therefore, a shortage cannot occur when quantity supplied is greater than or equal to quantity demanded.

A change in _____ does not shift the demand curve

the number of producers

If the highest price on the demand curve is $10, how much more consumer surplus is there at $2 per paperback than at $3 per paperback?

$37.50 The highest price on the demand curve would be $10. Consumer surplus at $3 is ½ × ($10 − $3) × 35 = $122.50 while at $2 it is ½ × ($10 − $2) × 40 = $160.00, with a difference of $160.00 − $122.50 = $37.50.

The financial crisis of 2008-2009 had a huge impact on the U.S. housing market, causing the number of uninhabited houses to be far greater than the number of people able and willing to buy a house. What probably happened in the housing market during this time?

Housing prices fell. Housing prices dropped over 25% between 2006 and 2010.

What might make Supply 1 be steeper than Supply 2?

Suppliers on Supply 1 face costs that rise faster than those on Supply 2. As quantity supplied increases, producers face higher opportunity costs of production and thus require a higher price to offer more for sale. Since Supply 1 is steeper, it must be that their costs rise faster.

What happened to oil prices from the early twentieth century to the 1970s?

There were modest declines in oil price.

Imagine that a major car company is producing large, fuel-inefficient SUVs during a period of rising gas prices. As a result, dealerships are overstocked with inventory that is not selling. How can we BEST describe this phenomenon?

This is a surplus, because the quantity supplied is greater than the quantity demanded.

What happened in Vernon Smith's test of the market model?

Total surplus was maximized. Total surplus was maximized in the market model experiments.

Which economist began testing the supply and demand model by running experiments with his undergraduate students in 1956?

Vernon Smith

When the market price rises, we can expect consumer surplus to:

fall. Since consumer surplus is equal to the maximum price a consumer is willing to pay minus the price actually paid, when the market price rises we can expect consumer surplus to fall.

If the price of oil is low:

only oil that can be extracted at low cost will be brought to the market for sale. If the price of oil rises, producers will extract oil from higher-cost sites.

The _____ is the producer's gain from exchange.

producer surplus

A decrease in supply along a fixed demand curve will result in:

a higher equilibrium price. A decrease in supply is represented by a leftward shift of the supply curve.

A decrease in demand along a fixed supply curve results in:

a lower equilibrium price. An increase in demand is represented by a rightward shift of the demand curve.

Total producer surplus is measured by the area _____ and below the price.

above the supply curve The height of the supply curve is the minimum price that a seller would be willing to accept. When the market price is higher than that, producers earn surplus.

Which factor decreases demand for a normal good?

an increase in the price of complements If the price of peanut butter increases, your demand for jelly will fall, assuming these goods are complements.

If the price of a good's complement rises, _____ for the good whose price did not change will decrease.

demand And if the price of a substitute rises, demand increases.

In what year was OPEC, the Organization of the Petroleum Exporting Countries, formed?

1960

Which will cause a decrease in demand?

an increase in the price of complements If the price of peanut butter rises, your demand for jelly will fall, for example.

Which statement about a free market maximizing the gains from trade is false?

All of the buyers and sellers in the market fully intended to maximize total gains from trade. Maximizing total gains from trade in a free market is the product of human action but not of human design.

A new farming technology decreases the cost of producing peanuts, which causes the price of peanut butter to decrease. What happens to the equilibrium price and equilibrium quantity of jelly?

Both equilibrium price and equilibrium quantity increased. The new farming technology will lead to a decrease in the price of peanut butter. The decrease in the price of peanut butter, a complement to jelly, leads to an increase in the demand for jelly.

Which statement accurately describes the competition that determines the price of a good?

Buyers compete with buyers, driving the price of a good up to the equilibrium price. If the price you want to buy at is high, you should not blame the seller; blame other buyers for outbidding you.

What happens to the equilibrium price and equilibrium quantity of Florida orange juice if an unexpected freeze destroys a large portion of the state's orange harvest?

Equilibrium price increases and equilibrium quantity decreases. A decrease in supply means the supply curve shifted left along a fixed demand curve, increasing the equilibrium price and decreasing the equilibrium quantity.

Which describes a vertical reading of one of the points on the demand curve?

The highest value that anyone in the market places on the fiftieth Blu-Ray disc is $20. And the horizontal reading is that at a price of $20, buyers will be willing to purchase 50 Blu-Ray discs.

Which will cause a decrease in demand for iPhones?

The prices of comparable smartphones decrease. Some sales will be lost to price competition.

"Government subsidies of an industry will not affect the total gains from trade achieved by the free market." This statement is:

false, because subsidized industries are likely to be characterized by wasted resources. At quantities higher than the equilibrium quantity, the value to buyers is lower than the cost to sellers.

A change in _____ does not shift the demand curve.

input prices Input prices are a supply factor.

Carla participates in a supply and demand experiment in her economics course. What can she expect the laboratory experiment to reveal about the supply and demand model?

it demonstrates real-life behavior

Who is represented by the portion of the curve labeled D?

potential buyers of chocolate who decide not to buy chocolate These are the buyers who are only willing to pay prices that are less than the market equilibrium price.

The demand curve is a function that shows the _____ at a range of prices.

quantity demanded The demand curve is the overall relationship between these two variables, price and quantity demanded.

A change in _____ does not shift the demand curve. Please choose the correct answer from the following choices, and then select the submit answer button.

taxes and subsidies Taxes and subsidies are a supply factor

Suppose that when good Z is free, buyers will demand 200 units of it, but the quantity demanded falls by 5 units for every $2 increase in the price. If the price is $24 and the quantity supplied is 125 units:

the price will eventually rise above $24. The quantity demanded is 200 − (5 × ($24 ÷ $2)) = 140. The difference in quantity demanded and quantity supplied is 140 − 125 = 15. The shortage should lead to price increases until the shortage is eliminated.

What is the consumer surplus if the quantity demanded is 15?

$56.25 If the quantity demand is 15, then the price is $17.5. Consumer surplus is then ½ × ($25 − $17.50) × 15 = $56.25.