Chapter 4 ECON - Equilibrium

If demand is represented by curve D1, supply is represented by curve S1, and the price is P3:

there will be a surplus in the market - a surplus will cause the price to fall over time to the equilibrium price of P2 since @ P3 quantity demanded is less than quantity supplied

When the free market maximizes the total gains from trade, there are no:

unexploited gains from trade or wasted resources - maximization of total gains from trade implies that all opportunities to produce gains from trade have been exploited, and no transactions that reduce gains from trade have taken place

A nationwide strike by workers in the widget in the widget industry has decreased the supply of widgets. Because of the decrease in supply, the equilibrium price of widgets:

INCREASE, and the quantity of widgets demanded decreased.

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

SHORTAGE

Unexploited gains from trade exists at:

quantities below the equilibrium

A supply occurs when the quantity:

supplied is greater than the quantity demanded

Suppose that when good J is free, buyers will demand 100 units of it, but the quantity demanded falls by 5 units for every $2 increase in the price. If the quantity supplied is fixed at 60 units, the equilibrium price will be:

100 - (5 x ($16/$2)) = 60

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

200 - (5 x ($24/$2)) = 140

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

the buyers with the highest willingness to pay.

Who competes with whom to determine the price of goods?

Sellers compete with sellers, and buyers compete with buyers

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 quantity demanded.

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

Unsatisfied wants

Lower Production costs results in:

a lower equilibrium price

Lower production costs results in:

a lower equilibrium price

Jan is a buyer in Vernon Smith's classroom experiment of the market model. Which does she know?

her own willingness to buy

An increase in quantity demanded is a:

movement up along a fixed demand curve caused by a rightward shift in the supply curve

An increase in quantity supplied is a:

movement up along a fixed supply curve by a rightward shift in the demand curve.

How does a shortage affect prices?

A shortage will push prices up.

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

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.

If popcorn and potato chips are substitute goods, then what happens to the equilibrium price and equilibrium quantity of potato chips if popcorn becomes more expensive?

Both the equilibrium price and equilibrium quantity increase.

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

Buyers compete with buyers, driving the price of good up to the equilibrium price.

"According to the supply and demand model, all else equal, if the price of one of its complements increase, the price of a good will increase." This statement is:

FALSE, because if the price of one of its complements increases, the price of a good will decrease.

A __________ maximizes the total of producer surplus and consumer surplus

FREE MARKET - does this by having low-cost sellers produce output for high-value buyers, by encouraging all mutually beneficial trades, and not by not wasting resources

"According to the supply and demand model, all else equal, if the price of one of its substitutes increases, the price of a good will increase." This statement is:

TRUE - an increase in the price of a substitute will increase the demand for the good in question.