Chapter 4 (exam 1)

Suppose that the following table shows the supply and demand schedules for Arabian high crude oil on the free market Price: 26 27 28 29 30 quantity demanded: 14 13 12 11 10 quantity supplied: 10 11 12 13 14 - Given the information in the table, the only price at which there is neither shortage nor surplus is

$28 per barrel

In Operation Desert Storm, oil facilities in Iraq were attacked amid strong demand for oil. In response, political pressure motivated OPEC to increase the daily quota by 2 million barrels a day. Assuming demand did not change, which of the following series of princes most likely matches how the price of a barrel of oil changed from. 1) before the attack 2) just after the attack 3) after OPEC increased the quota

$40, 42, 38

Consider the following demand table and the graph Price: $5 4 3 2 Quantity demanded per week: 100 150 200 250 Which of the demand curves best reflects the demand table?

$6 and 350

Limitations of Supply/Demand Analysis

- Sometimes supply and demand are interconnected -The other things held constant assumption is not likely to hold when the goods represent a large percentage of the entire economy -The fallacy of composition is the false assumption that what is true for a part will also be true for the whole

Summery

- The law of demand states that the quantity demanded rises as price falls, other things constant. -The law of supply states that the quantity supplied rises as price rises, other things constant. -A change in quantity demanded (supplied), caused by only a change in the good's own price, is a movement along the demand (supply) curve -A change in demand (supply) is a shift of the entire demand (supply) curve. -Factors that affect supply and demand other than price are called shift factors. -Important supply shift factors include price of inputs, technology, expectations, and taxes and subsidies to producers -Important demand shift factors include society's income, the price of other goods, tastes, expectations, and taxes and subsidies to consumers -A market demand (supply) curve is the horizontal sum of all individual demand (supply) curves -When quantity demanded equals quantity supplied at equilibrium, prices have no tendency to change -When quantity demanded is greater than quantity supplied, prices tend to rise; when quantity supplied is greater than quantity demanded, prices tend to fall

An increase in demand or a decrease in supply

-Creates excess demand at the original equilibrium price -Excess demand increases price until a new higher equilibrium prince is reached -generates excess demand. Price will increase until a new, higher, equilibrium price is reached

A decrease in demand or an increase in supply

-Creates excess supply at the original equilibrium price -Excess supply decreases price until a new lower equilibrium price is reached -generates excess supply. Price will decrease until a new, lower, equilibrium price is reached

The Interaction of Supply and Demand

-Excess supply causes downward pressure on price -Excess demand causes upward pressure on price

Refer to the graph shown. if the quantity demanded by consumers is the same for every price, then the demand curve would look like

2 (straight up and down)

Refer to the graphs shown. If the supplied is a fixed amount that does not vary with price, then the supply curve looks like

2 (the line facing straight up and down like an arrow)

Refer to the graph. The curve that best demonstrates the law of demand is

4 ( downward sloping)

Refer to the graph showing the demand for books. If the price is changed from $12 to $4, the quantity demanded increased by

4 books

Shift in demand

A change in a shift factor. The graphical representation of the effect of anything other than price on demand - Society's income -The prices of other goods -Tastes -Expectations -Taxes and subsidies

Shift in Supply

A change in a shift factor. The graphical representation of the effect of change in a factor other than prince on supply -Price of inputs -Technology -Expectations -Taxes and subsidies

Movement along a supply curve

A change in price causes a movement. A graphical representation of the effect of a change in price on the quantity supplied.

Which of the following would best explain a decrease in the supply of squash?

An increase in the price of other vegetables

Refer to the graph shown. Suppose that at a price of $5.00, firm A is willing and able to supply 4 units and firm B is willing and able to supply 4 units. Which of the following statements is then true?

Curve S1 shows the quantity supplied of firm A and firm B combined

Assume the graph shown reflects demand in the automobile market. Which arrow best captures the impact of increased consumer income on the automobile market?

D (the one that has the arrow pushing outwards, to the right, on the graph)

Using the supply and demand model, what is the best way to show the effects on the plywood marker of households preparing for a hurricane?

Demand curve shifted to the right, supply curve did not shift

What happens to demand for CDs if you won $1 million in the lottery?

Demand would shift out to the right because your income increased

The demand curve is downward sloping because as the price of a good falls, demanders will substitute some other good for that good whose price has fallen

False

The law of supply states that more of a good will be supplied the lower its price, other things constant

False

Which of the following situations best demonstrates the law of demand?

Movie goers react to an increase in the price of theater tickets by seeing fewer movies per year

Suppose that the table shown shows the demand and supply schedules for pork bellies. Which of the following statements is true? price: 0.10 0.20 0.50 0.75 0.95 quantity demanded: 30,000 25,000 20,000 15,000 5,000 quantity supplied: 5,000 10,000 20,000 30,000 40,000

There would be a shortage of pork bellies if the pie were $0.25 per pound

A change in the price of carrots will cause a movement along the demand curve for carrots and a shift in the demand for substitute vegetables. True or false?

True

An increase in demand causes equilibrium prince and quantity to rise, other things constant

True

If cigar prices tripled while sales of cigars rose 30 percent, this would likely be due to a shift in demand. True or false?

True

Movements down the rows (A to E) in the demand table are represented by movements up along a demand curve. True or false?

True

Which of the following would cause quantity demanded to change without changing the demand curve?

a change in the price of the good

Equilibrium

a concept in which opposing dynamic forces cancel each other out

Which of the following would be expected to cause an increase in the supply of desktops?

a decrease in the cost of manufacturing desktops

The growing popularity of a commercial weight-loss diet that includes reducing the amount of carbs consumed will cause

a decrease in the demand for bread

The model of supply and demand leads to the prediction that low interest rates cause:

an increase in housing prices, especially in cities with limited land

Prices adjust

and tend to rise when there is excess demand and fall when there is excess supply to reach an equilibrium

Refer to the graphs shown. Higher costs of production combined with an expectation on the part of consumers of higher prices in the future would result in the shift depicted in

c (arrows on Botton right posting different directions)

Refer to the graphs shown. the effect of increased consumer income and higher production costs on a normal good is most likely shown in

c (arrows on Botton right posting different directions)

The explanation for the law of demand involves

consumers' ability to substitute different goods.

People have become more concerned about the negative health effects of eating carbohydrates and fat. Considering these effects only, which of the following best describes the likely effect of this trend on the market for high-carb, high-fat snacks?

demand shifted to the left heading to a decline in equilibrium price and quantity

Suppose that college tuition is higher this year than last year and that more students are enrolled in college this year than last year. Based on this information, we can best conclude the that

despite the increase in price, quantity demanded rose due to some other factor changing

The point at which the supply curve and the demand curve intersect is called:

equilibrium, because quantity demanded equals quantity supplied so there is no tendency for price to change

An improvement in the technology for producing a good will shoot the supply curve for that good to the left. True or false?

false

An increase in the number of firms raises the price firms are able to change to fall, which results in a movement along the market supply curve. True or false?

false

The law of supply states that more of a good will be supplied the lower its pice, other things constant. True or false?

false

a demand curve is downward showing because as the price of a good falls, demanders will substitute some other good for that good who's price has fallen. True or false?

false

according to the law of demand, only the price of a good influences the amount people will choose to purchase. True or false?

false

when quantity demanded is greater than quantity supplied, the resulting shortage cause the price to fall. True or false?

false

refer to the graphs shown. The market is caviar. Which graph best represents the impact of an increase in consumer incomes on the market for caviar?

graph A (arrow top left corner pointing right)

When airlines were deregulated, airfares declined by 30 percent. Deregulation is an example of political forces:

letting the market move toward equilibrium, reducing excess supply

According to the law of demand, an increase in the price of baseball trading cards cause

people to buy fewer trading cards

Political and Social Forces and Equilibrium

provide a counter-pressure to the dynamic forces of supply and demand -Social pressures often offset economic pressures and prevent unemployed individuals from accepting work at lower wages than currently employed workers receive -Existing firms conspire to limit new competition by lobbying Congress to pass restrictive regulations and by devising pricing strategies to scare off new entrants -Renters often organize to pressure local government to set caps on the rental price of apartments.

The law of demand states that consumers buy more of a good when its price declines

provided all else remains constant

excess demand (a shortage)

quantity demanded is greater than quantity supplied

Given the following supply table, an increase in the price of pants from $30 to $50 per pair will increase the price: $20 30 40 50 A supplied schedule for pants quantity supplied: 400 500 600 700

quantity of pants supplied by 200 pairs

excess supply (a surplus)

quantity supplied is greater than quantity demanded

Supply

refers to a schedule of quantities of a good a seller is willing to sell per unit of time at various prices, other things constant -Refers to the entire supply curve -Supply tells us how much will be sold at various prices -A change in anything other than price that affects the supply curve changes the entire supply curve -A change in the entire supply curve is a shift in supply

Demand

refers to a schedule of quantities of a good that will be bought per unit of time at various prices, other things constant - Refers to the entire demand curve Demand tells us how much will be bought at various prices A change in anything other than price that affects the demand curve changes the entire demand curve A change in the entire demand curve is a shift in demand

Quantity demanded

refers to a specific amount that will be demanded per unit of time at a specific price, other things constant - Refers to a specific point on the demand curve -A change in price causes a change in quantity demanded -A change in price causes a movement along the demand curve

Quantity supplied

refers to a specific amount that will be supplied per unit of time at a specific price, other things constant -Refers to a specific point on the supply curve -A change in price changes quantity supplied -A change in price causes a change in quantity supplied -A change in price causes a movement along the supply curve

If supply and demand both shift to the right, equilibrium quantity:

rises, but the equilibrium price may rise, fall, or stay the same

law of demand

states that the quantity of a good demanded is inversely related to the good's price -In other words, other things equal, Quantity demanded rises as price falls Quantity demanded falls as price rises -As prices change, people change how much they're willing to buy -based on the fact that when prices for a good rise, people substitute away from that good to other goods

law of supply

states that the quantity of a good supplied is directly related to the good's price -In other words, other things equal: Quantity supplied rises as price rises, Quantity supplied falls as price falls -The law of supply occurs because: When prices rise, firms substitute production of one good for another and Assuming firm's costs are constant, a higher price means higher profit

Equilibrium quantity

the amount bought and sold at equilibrium price

fallacy of composition

the false assumption that what is true for a part will also be true for the whole

demand curve

the graphic representation of the relationship between price and quantity demanded - is downward sloping - As price increases, quantity demanded decreases

supply curve

the graphic representation of the relationship between price and quantity supplied -upward sloping -As price increases, quantity supplied increases

Movement along a demand curve

the graphical representation of the effect of a change in prince on the quantity demanded. A change in price

Market demand curve

the horizontal summation of all individual demand curves

Market supply curve

the horizontal summation of all individual supply curves. Horizontal sum of all the firm's marginal cost curve, taking account of any changes in input prices that may occur

Equilibrium price

the price toward which the invisible hand drives the market

An increase in demand causes equilibrium price and quantity to rise, other things constant. True or false?

true

Suppliers will supply more of a good when the price of that good rises because the opportunity cost of not producing that good has risen. True or false?

true

The law of demand states that the quantity demanded of a good is inversely related to the price of that good. Therefore, as the price of a good goes

up, the quantity demanded goes down