ECON-2302 Inquizitive Ch. 3 - The Market at Work - Supply & Demand
Zoe buys 50 pounds of frozen peaches each month to make her famous peach cobbler that she sells in her bakery. If Zoe believes that the price of frozen peaches is going to increase by 50% next month, then her current demand for frozen peaches should increase.
~true [Zoe expects the future price to increase, which should increase current demand]
Drag the items to classify each event as movement along the demand curve or a demand curve shift. The good is fertilizer for flowering plants.
movement along demand curve (left graph) ~The fertilizer becomes more expensive ~The fertilizer becomes cheaper factors that shift demand (right graph) ~Chicken manure, a substitute for fertilizer, becomes more expensive ~Roses become cheaper [Price changes for a good will cause movement along the demand curve for that good and will cause shifts in the demand curves for related goods]
José is a typical college student and today is his birthday. His grandma sent him a birthday card with $100 inside. With this new income, he has to make various choices about what goods to spend his birthday money on. Select whether José's options are best described as a normal or inferior good now that his income has increased by $100.
normal good ~Starbucks coffee [Fresh brewed is typically considered a better-quality option] ~fresh delivery pizza [Most students would prefer fresh-made pizza] ~iPad/Surface tablet [Income levels will influence demand for technology] inferior good ~frozen microwave pizza [Microwaveable pizzas are edible, but they are likely not most student's first choice] ~pencil and paper [Students still take notes the "old way," but it is not the preferred choice] ~instant coffee [If you have limited funds, instant still counts as coffee. But most students would rather consume fresh-brewed coffee if they can afford it] *[Inferior goods are not necessarily bad choices, but the amount of these goods that Jose and many college students buy will be influenced by the income that is available to them]
During the COVID-19 pandemic, hand hygiene became recognized as a viable prevention method. This increased the market demand for hand sanitizers. To help meet the increased demand in the market, suppliers must also consider how other factors that are specific to their production can influence how much they produce. Identify the impact of each factor below on the original market supply curve, S1, as leading either to a decrease or an increase in the market supply of hand sanitizers.
no change ~the price of hand sanitizer increased [Many variables can shift the supply curve, but price is not one of them! When the price changes, the quantity supplied changes along the existing supply curve, but the curve does not shift rightward or leftward] factors that shift supply to the left (decrease supply) ~A China-based manufacturer of a key hand sanitizer-ingredient was ordered to close factories to slow the spread of the virus. This resulted in an increase in the cost of the input [When an input cost rises, the supply curve will shift to the left. Left is always less!] factors that shift supply to the right (increase supply) ~The FDA, which regulates goods used to protect public health, temporarily relaxed those regulations. This allowed non-medical firms to enter the hand sanitizer industry temporarily [An increase in firms entering the market will increase the total supply] ~A new bottling technology was discovered which allowed for rapid production [Efficient technology or new technology will shift the supply curve to the right] ~The government temporarily repealed the excise tax associated with producing hand sanitizer-grade alcohol [Taxes placed on suppliers are an added cost, so when the government repeals a tax, firms have an incentive to produce more due to the lower cost]
Which of the following could change the equilibrium price of gasoline?
correct answers ~a hurricane destroys an oil refinery [decreased supply will cause higher prices] ~summer weather encourages people to drive more [increased demand will lead to higher prices] incorrect answers ~a newspaper runs a story on the history of the petroleum industry [unless the news story somehow shifts the demand curve by changing consumer preferences, it is not going to affect the equilibrium point] ~a single gas station offers a one-time, weekend-long "free car wash with 10-gallon purchase" promotion [this limited-time promotion will likely only lure customers from other gas stations and will not convince consumers to demand more gasoline in general]
An approaching snowstorm prompts many consumers to want to buy snow shovels. Unfortunately, one of the local snow shovel factories recently burned down, so supplies of shovels are running low. As a result of these circumstances, both supply and demand shift. Click on the area of the graph most likely to contain the new equilibrium price (P2) and quantity (Q2).
~top triangle area [demand for shovels increased significantly because of the snowstorm; the supply of shovels decreased because of the factory fire; because of a leftward supply curve shift and a rightward demand curve shift, the price of shovels is set to increase]
Match each shifter of demand with an example.
A stylish new electric car with impressive performance changes consumer perceptions about electric vehicles ~change in tastes and preferences Jack is fired from his management job and takes a job as a part-time grocery bagger ~change in income A lower price on a smartphone drives up demand on accessories for that phone ~price of related goods Rumors circulate about upcoming price cuts on a popular electronic device ~expectations regarding future price *[Many different things can cause shifts in demand]
Which of the following are true regarding competitive markets?
Correct Answer(s) ~Individual buyers do not have significant influence on the price [There are enough buyers that each buyer's individual impact is negligible] ~Individual sellers do not have significant influence on the price [There are enough sellers that each seller's individual impact is negligible] ~Forces of supply and demand affect consumer and producer behavior [Forces of supply and demand determine price, which is the fundamental mechanism underlying markets] Incorrect Answer(s) ~Removing a buyer will significantly alter the demand [Each buyer has such a small impact that removing one buyer will not alter the demand in a noticeable way] ~A single seller offers many products to individual buyers [A given competitive market has many firms selling a similar product to many buyers] ~Removing a seller will significantly alter the supply [Each seller has such a small impact that removing one seller will not alter the supply in a noticeable way] *[In a competitive market, no individual consumer or firm is large enough to have a significant impact on the market price]
In a local beach town, there are many small shops that make surfboards out of polystyrene foam. The market for surfboards is currently at S0 and D0, but changes in the market can shift the supply to the left or right. According to the graph, which market change(s) will cause the market equilibrium to increase to $110?
Correct Answer(s) ~Polystyrene foam (input) increases in price [Rising input costs shift the market supply to the left. Higher input costs increase the final price that the makers of the surfboards will want when selling them] ~The city council imposes a yearly "summer season" tax on surf shops [A local government tax increases the cost of producing surfboards] Incorrect Answer(s) ~The price of surfboards decreases [A price change only reduces the quantity supplied moving along the original S0, not a shift in the market supply] ~Several new surfboard shops open in the beach town [New suppliers in the market shift the supply to the right] ~The city council's new advertising campaign increases beach visitors [New visitors may shift the demand for surfboards but not the market supply] *[All changes that shift the supply to the left will result in a higher market price]
In the Texas college town of "Big Cow University," hamburgers are a popular choice for the college students. Given the graph below, which of the following changes in the market would result in a shift in the demand of hamburgers for college students from D1 to D2?
Correct Answer(s) ~Students' income rises (hamburgers are normal goods) [An increase in income shifts the demand for a normal good to the right] ~The college doubles its enrollment of students [More consumers will shift the demand for a good to the right] ~The price of hot dogs (substitute) rises [An increase in the price of a substitute shifts the demand for hamburgers to the right] ~The price of french fries (complement) falls [A decrease in the price of a complement shifts the demand for hamburgers to the right] Incorrect Answer(s) ~The market price of hamburgers increases from $5 to $6 [A new equilibrium price is a result of a shift of the market supply or demand, not the demand for a good] ~Five new burger restaurants open around campus [New firms in the market will shift the supply, not the demand] *[A rise in income, a decrease in the price of a complement, and an increase in the price of a substitute all shift the demand function to the right. As you can see from the graph, this also results in an increase in the quantity supplied. As the demand shifts right, the new equilibrium ($6 and 450) is still on the original supply function]
Consider the market for iPads and the market for Android tablets. These two goods are substitutes. Suppose the price of an iPad goes up by $20 when a major online retailer changes its sales policies. Which of the following will occur?
Correct Answer(s) ~The equilibrium price of Android tablets will increase [The higher prices of iPads will cause consumers to buy Android tablets (a substitute) instead. New consumers shift demand to the right in the Android tablet market and raise equilibrium price] ~The demand for Android tablets will increase [The price of a substitute increased, increasing demand] Incorrect Answer(s) ~The equilibrium quantity of Android tablets will decrease [The higher prices of iPads will cause consumers to buy Android tablets (a substitute) instead. New consumers shift demand to the right in the Android tablet market and increase quantity] ~The supply curve for Android tablets will shift [The increase in price leads to an increase in quantity supplied, but the supply curve will not change] ~The demand curve for iPads will shift [The quantity demanded will decrease, but the demand curve will not shift] *[It is important to separate supply-side effects from demand-side effects. Changes in the price of a substitute only affect the demand side]
Which phrases would an economist use to describe the panic that created shortages during spring 2020 in the toilet paper aisles across most of America? Which ones are not correct?
Correct Answer(s) ~There was a shortage of toilet paper [This occurred because the quantity supplied was less than the quantity demanded] ~There was excess demand for toilet paper [Excess demand occurs when the markets have not had time to adjust to a change. In this example, the pandemic caused panic, which shifted the demand curve to the right] ~The quantity supplied of toilet paper did not meet the quantity demanded of toilet paper [This happens when the price has not yet adjusted to market conditions] Incorrect Answer(s) ~Demand for toilet paper was greater than the supply of toilet paper [Almost, but remember that when you say "demand," you are referring to the entire line, and not one specific quantity on the horizontal axis. To make this statement valid, you would want to add the word "quantity." A shortage exists when the quantity demanded is greater than the quantity supplied] ~Toilet paper was scarce [A shortage exists when the number of units consumers are willing and able to purchase is greater than the number of units suppliers are willing and able to produce] *[Be careful with this one. Remember, chapter 1 described scarcity as being due to a naturally occurring phenomenon where we are unable to meet our unlimited wants with our limited resources, such as time. A shortage is due to a market condition where the price is either above or below the equilibrium price]
Which of the following could be expected to cause a shift in the demand curve for men's jeans?
Correct Answer(s) ~celebrities in ads for men's jeans [Celebrity endorsements can increase popularity, which increases demand] ~rising incomes [Assuming jeans are a normal good, rising incomes would shift the demand curve for jeans to the right] ~an increase in the number of jean buyers [More jeans buyers means an increase in the number of jeans buyers want to buy] ~an increase in the price of khakis [When the price of a substitute good increases, demand increases] Incorrect Answer ~a decrease in the price of jeans [When the price of a good changes, the quantity demanded changes on the demand curve, but the demand curve does not shift]
When a change in the supply and demand occur within a market, the effect on the new equilibrium market price or quantity can be determined. However, without information on the relative size of these shifts, both price and quantity cannot be determined. Match the supply and demand changes to the outcome that is known about the new equilibrium in the market for pizza, where pizza is a normal good and cheese and dough are inputs.
price decreases; output uncertain ~consumer income falls; pizza dough decreases in price [Demand shifts to the left for a normal good when income decreases. Supply shifts to the right when inputs decrease in price. Both decrease price, but they have opposite impacts on quantity] output decreases; price uncertain ~consumer income falls; cheese increases in price [Demand shifts to the left for a normal good when income decreases. Supply shifts to the left when inputs increase in price. Both decrease quantity, but they have opposite impacts on price] price increases; output uncertain ~consumer income rises; cheese increases in price [Demand shifts to the right for a normal good when income increases. Supply shifts to the left when inputs increase in price. Both increase price, but they have opposite impacts on quantity] output increases; price uncertain ~consumer income rises; pizza dough decreases in price [Demand shifts to the right for a normal good when income increases. Supply shifts to the right when inputs decrease in price. Both increase quantity, but they have opposite impacts on price] *[When supply and demand shift at the same time, only price or quantity can be determined, leaving a set of many possible equilibria related to the other unknown factor]
Fill in the blanks to complete the statement describing market equilibrium. The market-clearing price for cantaloupes is the price at which the quantity supplied equals the -. If the market price is too high, then there is a -. If the market price is too low, then there is a -.
~quantity demanded ~surplus ~shortage *[In equilibrium, quantity supplied equals quantity demanded. This occurs at the market-clearing price]
Apply the correct label to each situation.
gasoline: a new housing development goes up. several new gas stations are built nearby ~demand and supply both increase [The price of gas in the area could increase, decrease, or stay the same, depending on the relative strengths of changes in supply and demand, but equilibrium quantity increases] corn: news media run stories about people with corn allergies. the corn crop is unusually large ~demand decreases and supply increases [most likely the price of corn would decline, due to consumers worried about allergies and a glut of corn on the market, but equilibrium quantity could increase, decrease, or stay the same] taxis: public transit workers at a popular tourist attraction go on strike as a holiday weekend approaches ~demand increases and supply decreases [most likely this would increase the price of private transportation for hire, but equilibrium quantity could increase, decrease, or stay the same] pumpkins: an early frost destroyed much of the pumpkin crop. a newspaper reports zucchini is better for pie than pumpkin ~demand and supply both decrease [the price of pumpkins could increase, decrease, or stay the same, depending on how many people decide to make zucchini pies instead of pumpkin pies, but equilibrium quantity decreases] *[when supply and demand both go up or both go down, it is impossible to predict how the price will be affected]
Fill in the blanks to complete the following description of the graph below. Tacos are a popular food choice of college students. The demand for tacos in a local college town was at D1 originally with an equilibrium market price of -. The market demand shifted to D2 when - increased in price. At the new market equilibrium price, the - increased by -.
~$3 [the original D1 and S market equilibrium price is $3] ~hamburgers (a substitute) [demand for a good shifts to the right when the price of a substitute increases] ~quantity supplied [as the demand shifts to the right, movement along the supply function results in an increase in quantity supplied] ~125 [the equilibrium quantity moved from 600 to 725, a difference of 125] *[an increase (shift to the right) in demand will increase the market equilibrium price and quantity; an increase in demand will also result in a movement along the original supply function, which will change the quantity supplied]
Suppose that the supply of automobiles is given by the equation P = -5,000 + 2,000Q where P is the price in dollars and Q is the quantity of cars. At a price of $23,000 each, how many cars will be supplied?
~14 cars [14 cars implies a price of -5,000 + 2,000(14) = $23,000]
Which of the following statements is true or false about firms in imperfect markets and firms in highly competitive markets?
true ~a monopoly firm is an example of an imperfect market [a monopoly is a market with a single firm, so it has complete control over the price in the market] ~in imperfect markets, firms have varying levels of market power [market power allows firms to influence the market price of a good or service in an imperfect market] ~in competitive markets, individual firms have little impact on the market price [a single firm is considered to have no market power in a competitive market] false ~in imperfect markets, firms have a negligible impact on the output [the less impact a firm has on price and output, the more competitive a market is considered to be] ~a market is competitive if a single firm leaving noticeably changes the market price [if a single firm leaving influences the market price, then it is more likely an example of an imperfect market] *[a single firm's ability to influence the price and output is an important characteristic in determining whether a firm is in a highly competitive market or one generally considered imperfect]
For a Honda Accord, some factors shift demand left and others shift it right, as shown. Classify each factor by how it shifts the current demand curve to a new position.
2% rebate on a Toyota Camry, a substitute good ~shifts left [The price of a substitute good has decreased] Consumers' income increases by 10% ~shifts right [Increasing income increases demand in normal goods] big sale coming in three months ~shifts left [Consumers expect the price to fall in the future, decreasing demand] free brake inspections ~shifts right [Automotive service is a complementary good to the car itself. As the price of the complementary good decreases, the demand for the good of interest increases] *[Mastery of this relationship indicates a thorough understanding of the factors that shift demand]
Suppose there are seven coffee shops located on the same busy street. If two of the coffee shops close, which of the following will occur, holding all else fixed?
Correct Answer(s) ~the price of coffee will increase [There is less competition so, all else being the same, the price should increase] ~the supply of coffee will decrease [Fewer sources, and each of the remaining sources continuing at the same production level, means less coffee supplied] Incorrect Answer(s) ~the demand for coffee will decrease [A change in the number of producers has no effect on demand] ~the supply of coffee will increase, since the remaining shops will sell more than before [The remaining shops are unlikely to sell enough additional coffee to outweigh the lost output of the two closed shops] *[The supply curve shifts leftward, which leads to an increase in price for any given quantity]
Consider the market for caramel and butterscotch ice cream toppings. For each price change, identify the likely effect on the demand curve for caramel topping.
The price of butterscotch topping increases ~the demand for caramel topping will increase [The two toppings are substitute goods] The price of caramel topping decreases ~the demand curve for caramel topping will remain the same [The quantity demanded will increase, but the curve will not shift] The price of ice cream increases ~the demand for caramel topping will decrease [Ice cream and caramel topping are complementary goods] *[Understanding the shifters of demand is crucial to understanding how markets work]
Fill in the blanks to complete the statement about the demand for eggs. Suppose the price of eggs decreases from $5 per dozen to $4 per dozen. According to the law of -, we should expect the - to increase.
~demand ~quantity demanded *[the law of demand states that as the price of a normal good decreases, the quantity demanded increases]
Sellers set the demand for a product, while the buyers set the supply.
~false [In fact the reverse is true. Buyers create the demand; the sellers generate the supply]
In a scenario where we expect a shift in both supply and demand, if the demand for a product increases, the price will always increase.
~false [The price could decrease if an increase in supply outweighed the increase in demand]
The law of supply applies to normal goods, but not inferior goods.
~false [With any good, whether inferior or normal, if the price increases, suppliers are willing to supply more]
Fill in the blanks to complete the following statement regarding the relationship between price and supply. Suppose there is a 10% rise in the price of gasoline. Then, according to the law of -, we expect the quantity of gasoline supplied to -. Conversely, if the price goes -, quantity supplied will -, as well.
~supply ~increase ~down ~drop *[keep in mind that changes in price do not shift the supply curve]
Consider the supply curve for bottles of soda. Identify each event as causing either a shift in supply or a movement along the supply curve.
The price of soda increases by $0.50 ~movement along curve [Changes in price imply movements along the supply curve rather than shifts in the supply] The government taxes sugar to decrease soda consumption ~shift in supply [Greater input costs cause the supply of soda to decrease]
Which items represent examples of Adam Smith's "invisible hand" at work?
Correct Answer(s) ~An auto manufacturer switches from using fabric for its seats to imported leather as "quality" becomes more desirable by those purchasing new cars [The automaker's choice of a foreign source for some materials is based on changes to consumers' preferences] ~A store starts selling candy and ice cream when a new school opens across the street [The store owner hopes to increase sales by offering items that would be demanded by the new future customers (school children)] ~A tailor who makes expensive, high-quality suits for clients by hand buys his own suits from a discount store [The tailor has decided that his time is better spent on earning money by making suits for others than on making suits for himself] Incorrect Answer(s) ~A gas station owner closes on certain days of the year, for religious reasons [The invisible hand is a metaphor for economic self-interest, not for moral or religious considerations] ~A cafe owner discards expired food, to avoid a fine from the health department ["Invisible hand" refers to market forces, not the effects of government regulation]
Suppose that a factory's supply curve is shown by the yellow line labeled S1. The workers threaten to go on strike, and the factory owner agrees to increase their wages. Show the impact on supply after the wages go up by clicking on the appropriate curve. If there is no shift, select S1.
~S3 (left slope) [The higher wages lead to an increase in input costs, which in turn causes a decrease in supply]
Fill in the blanks to complete the following statement. Suppose that Seattle's city government decides to increase the minimum wage for coffee shop baristas. This would - the supply of coffee by altering the -.
~decrease ~cost of inputs [Raising the minimum wage will increase input costs, which decreases supply]
Fill in the blanks to complete the statement comparing taking public transportation, which is typically cheaper but crowded, and using a rideshare for transportation to and from work. In this question, suppose that using your own vehicle is not an option. Since getting to work on a crowded bus or train is an - good compared with using a rideshare such as Uber or Lyft, we should expect that as income increases, the demand for taking public transportation should -. On the other hand, an Uber/Lyft ride is a - good. We should expect an increase in income to - the demand for Uber/Lyft rides.
~inferior ~decrease ~normal ~increase *[As income increases, we should expect individuals to use rideshares (normal good) more often and to take public transportation when it is crowded (inferior good) less often]
Fill in the blanks to complete the statement about market power. In the United States, - companies can apply for patents, which allow them to be the sole provider of certain vaccines. This is an example of - market, because in this case the company holds the rights to be the only supplier for the entire market. Therefore, it can charge as high a price -.
~pharmaceutical ~an imperfect ~as customers would be willing to pay [In a competitive market there are many buyers and sellers who have very little control over setting prices. The goods they sell are almost identical so they cannot differentiate themselves from each other, which makes it harder for them to set prices] *[When a firm does have market power, it can manipulate the prices. Another example of this would be Internet-provider companies, who position themselves to be the only provider in certain areas, which increases their market power. Would you describe their prices as competitive? Probably not!]
Fill in the blanks to complete the statement about Adam Smith's description of a market economy. According to Adam Smith, people are motivated by their own - to be as productive as possible when providing goods and services. In a market economy, the interaction between - results in - that influence the choices of consumers and firms. Goods and services are then exchanged, and resources are allocated to their highest-valued use as if guided by -.
~self-interest ~supply and demand ~prices ~an invisible hand *[In a market economy, prices adjust so that quantity supplied equals quantity demanded]
Consider the market for gasoline. Suppose that a new oil-pump technology is developed, making gasoline production less costly. At the same time, war breaks out and several oil fields are destroyed. What will be the effect on supply?
~supply will increase due to the new technology, but decrease due to war; the overall effect is unknown [The new production process increases profits and thereby increases supply, but the war damage decreases it. It cannot be determined which effect is larger, without more information]
Suppose that both the number of buyers and the number of sellers increase. Which of the following will occur?
~the equilibrium quantity will increase and the effect on the equilibrium price is undetermined [Both cause an increase in quantity, but increases in demand cause an increase in price, while increases in supply cause a decrease in price. Without more information, it is unknown which dominates]
Suppose there are five buyers in a market. Which of the following represents the market demand?
~the sum of the individual quantities demanded [Market demand is the total quantity demanded]
Suppose the government believes that there are too many cigarettes in the market. Which of the following policies could the government implement to decrease the supply of cigarettes?
Correct Answer(s) ~Tax the tobacco crop [Since tobacco is an input, increasing the price will lead to a decrease in supply] ~Tax the manufacturing of cigarettes [This increases the cost of manufacturing at all quantities, thus decreasing the supply] Incorrect Answer(s) ~Tax consumers on the purchase of cigarettes [This would have demand-side effects but would not impact the supply] ~Subsidize tobacco farmers, thus lowering the price of tobacco [This would decrease an input cost, thus causing an increase in supply] *[The government's options for influencing the supply of a legal good or service are typically limited to taxes and subsidies]
Which of the following goods or services can be allocated by markets in a market economy?
correct answers ~automotive insurance [in a market economy, private insurers compete for customers based on price and on quality of coverage and service] ~preventive health care [in the United States, the government plays a significant role in the healthcare market; still, preventive health care is the kind of service that can be market allocated, and providers and customers in fact have a significant amount of choice] incorrect answers ~equal treatment before law [by its nature, "equal treatment" cannot be equal if it is subject to market forces] ~happiness [goods and services that tend to promote happiness can be allocated by the market, but happiness itself is a state of mind, which, famously, money cannot buy]
Consider the following demand and supply schedules for coffee. Price per cup $9 $7 $5 $3 $1 Quantity demanded(cups) 2 4 6 8 10 Quantity supplied(cups) 10 8 6 4 2 What is the price when the market is in equilibrium?
~$5 [at a price of $5, the quantity supplied equals the quantity demanded; thus $5 is the price associated with the equilibrium quantity]
Fill in the blanks to complete the statement contrasting competitive and imperfect markets. Rural Internet access, with one dominant provider that faces very little competition, is a good example of - market. It functions as -. By contrast, a flea market or swap meet, where - buyers and sellers get together to conduct transactions, is an example of - market. No single - exerts - control over prices.
~an imperfect ~a monopoly ~many ~a competitive ~buyer or seller ~significant *[In a competitive market, any one buyer or seller has only negligible control over prices. In an imperfect market, either the buyer or the seller exerts significant control]
