Supply and demand shifts
How do you expect these events in the market for roses to affect the market for tulips, a substitute?
demand curve for tulips will shift to the left (since there is an increased supply of roses the price will be cheaper)
Last year, aluminum companies produced and sold 2,000 pounds of aluminum ingot, at a market price of $2/pound. This year, they produced and sold 1,800 pounds at a market price of $1.80/pound. The most likely explanation for these changes is:
demand decreased ( on a demand diagram (the only way for the equilibrium to move to a lower price and a lower quantity is for demand to fall.)
A pizza store's inputs include flour and cardboard boxes and its competitors include fried fish outlets. Then, in the national markets for boxes and fish, the store's owner is happy to see the demand for boxes _____ and the supply of fish _____.
fall, rise (inverse) If the demand for boxes falls, then the price will fall and the store will pay less for that input. If the supply of fish falls, then the price of fish will rise; then fried fish outlets will pay more for fish,
Two complementary ingredients in the manufacture of beer are barley and hops. Suppose that the supply of barley falls (while the demand for beer is unchanged). Then, in the market for hops, the price ______ and the quantity traded ______.
falls, falls (since theres a decreased supply of barley the price rises causing the supply of beer to decrease)
If production engineers discover a new procedure that reduces the labor required to produce oatmeal without increasing any other inputs, then the equilibrium price of oatmeal _____ and the equilibrium quantity of oatmeal _____.
falls, rises (since we can oatmeal faster its gonna be cheaper which will raise the quantity of oatmeal)
what happens to demand when the price of a substitute rises?
the demand increases
Suppose that wine and cheese are complements, and the supply of wine increases. What happens?
the price of wine will fall and the price of cheese will rise--people are more likely to buy cheese when wine is cheaper
what does a vertical supply line mean?
the quantity traded does not change bc the good is inelastic
In the fall, the demand for electricity usually decreases because people stop using air conditioning. Then, in the methane (i.e., natural gas) market, we expect price to ______ and the quantity traded to ______. (Background information: many electric power generators burn methane.)
when the demand for electricity decreases, electric power generators demand less methane causing the demand curve to shift left
If more suppliers enter an industry, and demand falls simultaneously, then which of the following statements must be true as the market goes to its new equilibrium?
(I) Supply increases. we dont know that just bc the supply has increased, the consumers will want more of it
What happens to the demand curve for paper if there is a change in wood pulp?
A change in the price of wood pulp has no direct effect on consumers of paper. Quantity of paper demanded declines as the market reaches the new equilibrium, but that is a movement along the demand curve as the supply curve shifts, not a shift in demand.
Earlier in the course, we defined a competitive market. We later defined free entry into a market. Which statement is true?
A market can be competitive without having free entry, and it can have free entry without being competitive.
According to the principle of sunk costs
A person deciding whether to walk out of a movie should *not* take into account how much was spent on the ticket.
if a firm earns "normal" profits, then its economic profits:
Are zero.
An astrologer earns revenue of $4,000 per month and pays office rent of $1,000 per month. If she quit her own business, she could work for a large firm of Wall Street astrologers for $3,500 per month. She has signed her lease through the end of 2018, and she cannot sublet. In this situation, and based on the information given, she should
Continue to operate her business through 2018, but switch to Wall Street in 2019
Firm A sells in the largest market Firm B has the largest share of its market. Firm C produces in the market that is growing most rapidly. Firm D has a secret process that cuts production costs, which others cannot duplicate. Which firm is most likely to earn positive economic profits in the very long run?
Firm D is protected by a cost advantage. To make economic profits in the very long run, a firm should be protected by a barrier to entry ( no one else has this advantage)
What is required for free entry?I. New firms can enter the market without significant legal obstacles.II. Every firm in the market has the same long run costs.
I. New firms can enter the market without significant legal obstacles. II. Every firm in the market has the same long run costs.
If a business activity would generate a negative economic profit, then this means that:
More money can be made by investing the same resources elsewhere.
Suppose that many steelmakers shut down permanently, and the demand for cars increases slightly, but the increase in the demand for cars is small relative to the very large change in the number of steelmakers. What do we expect to happen in the market for steel (which is used to make cars)? We expect the price to ______ and the quantity traded to ______.
Rise; fall.
Suppose that the price of transporting gasoline rises. Then, in the retail gasoline market, the price ______ and the quantity traded ______.
Rises, falls (when inputs become more expensive the supply curve shifts left)
The opportunity cost of a resource is:
The current value of that resource in its next best use.
The returns that an investor could earn from the best alternative investment are:
The opportunity cost of capital. (The opportunity cost is the earnings you could have made by investing your money elsewhere. This is called the opportunity cost of capital.)
Suppose that beef and chicken, which are substitutes for each other, both get cheaper during 2020. During the same period, the quantity of chicken produced and consumed increased. What event could explain this pattern? (Assume that pork is another substitute for chicken.) It may appear that there are multiple correct answers, but there is only answer that fits all of the facts provided.
The price of chicken feed fell.
Suppose that the supply of wheat is a vertical line. If the demand for wheat increases, then the price of wheat ______ while the quantity traded ______.
The quantity of wheat traded does not change because supply is perfectly inelastic. The equilibrium point moves vertically up the supply curve.
If the demand for steel increases, then the price of steel will be affected more than the quantity of steel traded if:
The supply curve for steel is fairly steep (very positive slope).
Suppose that the economy shrinks and consumers' incomes generally fall. Then, for most goods, we expect prices to ______ and the quantities traded to ______.
fall, fall (if the economy is down then prices will have to be lower which will decrease quantity traded)
Because of the changes in the market for tile, we expect, the price of grout to ______ and the quantity traded to ______.
fall, fall. The fall in the demand for tile causes the demand for its complement also to fall.
We expect the price of tile to ______ and the quantity traded to ______.
fall, fall. since there are now 3 substitutes the supply of granite goes up which lowers equilibrium and lowers the price
What happens to the supply curve for paper?
it shifts left, when the price of an input rises supply decreases (if it costs more money to make we wont make as much)
Suppose that all of the firms in an industry are incorporated and consistently earn a 2% return on stockholder's equity, but alternative investments (e.g. certificates of deposit) earn 4%. In this industry, the firms are earning ___________ economic profits, and we expect to see the industry ___________ in the long run.
negative, shrink (The firm must earn a 4% return on equity to cover the stockholders' opportunity cost of capital, but it is earning only 2%. Therefore, it is earning negative economic profits. )
Suppose that new planting techniques make it possible to grow more peaches per acre. At the same time, the price of nectarines (a substitute for peaches) falls. In this situation, we definitely expect the _____ of peaches to ______.
price, fall. though peaches are in abundance, now that nectarines are cheaper we have to lower the price of peaches.
If the demand for french fries rises, and the price of potatoes (an ingredient) falls, then we can be fairly confident that the equilibrium _____ of french fries will _____.
quantity, rises. since potatoes are cheaper, we can produce more french fries which will raise the equilibrium
Steel and CFRP (carbon fiber reinforced polymer) are substitutes in some structural applications. If the price of steel rises then, in the market for CFRP, the price ______ and the quantity traded ______.
rise and rises (the demand for CFRP increases when the price of substitute rises)
If a hurricane wipes out much of the orange crop, then we expect the price of oranges to ______ and the quantity traded to ______.
rise, fall (we'll have less orange crops so we'll have to sell at a higher price which means that people will buy less)
If more students who need apartments move into Tucson, then in the market for apartments the equilibrium rent _____ and the equilibrium number of apartments rented _____
rises, rises
Assume that horticulturists discover a new variety of roses that produces more roses per bush, with minimal change in the cost of maintaining each bush. What impact do you expect this to have in the market for roses?
supply curve for roses shifts to the right bc roses are cheaper to make (demand is not affected) because although the technology has improved it is irrelevant to consumers
In what situation does an increase in demand cause an increase in the equilibrium quantity traded, with no effect on price?
supply is horizontal. demand shifts have no effect on price (inelastic)
