LC4: LearningCurve - Ch. 4: Equilibrium: How Supply and Demand Determine Prices

Consider the nearby diagram. If 90 units of this good are produced and consumed, what is the total value of wasted resources?

$0 Explanation: At quantities less than the equilibrium quantity, there are unexploited gains from trade, not wasted resources.

An increase in the demand for Swedish watches will result in a(n):

increase in the equilibrium price and quantity of Swedish watches supplied.

An increase in quantity demanded is a:

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

If the supply of oil decreased:

quantity demanded would decrease. Explanation: A decrease (shift to the left) in supply along a fixed demand curve leads to a rise in price and a decrease in quantity demanded.

An increase in supply will _____ the equilibrium price and _____ the equilibrium quantity.

reduce; increase Explanation: An increase in supply will shift the supply curve to the right along a fixed demand curve, causing the price to decrease. This will, in turn, cause the quantity demanded to increase.

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. Explanation: 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.

When there is a shortage of a product:

the price will rise.

Refer to the nearby diagram, which shows the market for milk, along with two demand curves and two supply curves. Which BEST describes the movement from an equilibrium at point K to a new equilibrium at point J?

a decrease in supply followed by a decrease in quantity demanded Explanation: The supply curve shifts to the left, but the demand curve does not.

Refer to the nearby diagram, which shows the market for milk, along with two demand curves and two supply curves. Which BEST describes the movement from an equilibrium at point L to a new equilibrium at point M?

a decrease in supply followed by a decrease in quantity demanded Explanation: The supply curve shifts to the left, but the demand curve does not.

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

a higher equilibrium price.

Lower production costs result in:

a lower equilibrium price.

If the supply of oil decreased in the United States, then:

quantity demanded would decrease in the United States. Explanation: A leftward shift is a decrease, so supply would shift to the left along a fixed demand curve, raising price and decreasing quantity demanded.

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

surplus

From the early twentieth century to the 1970s, the supply of oil outpaced demand, and:

there were modest declines in oil prices.

Which illustrates an increase in quantity supplied?

a movement up along a fixed supply curve

Assume that the market for chocolate pictured nearby is in equilibrium. What portion of a curve represents the consumers who value chocolate the least?

D Explanation: These are the consumers who will not be in the market.

Assume the associated figure represents the market for coffee shop coffee in your town, with the initial equilibrium at point a.

Explanation: If coffee drinkers move into town, the demand curve shifts to the right, raising the equilibrium price and quantity supplied.

Assume the associated figure represents the market for coffee shop coffee in your town, with the initial equilibrium at point a. Which of the following figures represents a decrease in quantity demanded brought about by higher-priced coffee beans?

Explanation: If the price of coffee beans rises, the supply curve shifts to the left, raising the equilibrium price and decreasing quantity demanded.

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 successfully predicts real-life behavior.

What did Vernon Smith's laboratory experiments reveal about the supply and demand model?

It successfully predicts real-life behavior.

Consider the nearby diagram, which shows the market for chocolate. According to demand curve D1 and supply curve S2, what is the equilibrium price?

P3 Explanation: Supply curve S2 and demand curve D1 intersect at price P3, which means that quantity demanded equals quantity supplied.

Imagine that a major car company is producing fuel-efficient hybrid cars during a period of rising gas prices. As a result, dealerships are depleted of inventory, and customers remain on a waiting list. How can we best describe this phenomenon?

This is a shortage, because the quantity supplied is less than the quantity demanded.

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

true. Explanation: This is because an increase in the price of a substitute will increase the demand for the good in question.

A(n) _____ occurs when the quantity demanded is equal to the quantity supplied.

equilibrium

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

her own willingness to buy Answer: The buyer does know her own willingness to buy.

A movement along a fixed demand curve caused by a rightward shift in the supply curve is best described as a(n):

increase in quantity demanded.

What would happen if the supply of oil decreased?

The market price would rise.