Econ Quiz #3

Real GDP per capita

Real GDP per person; real GDP divided by population.

barrier to entry

Some factor that prevents firms from entering an industry when economic profits are being earned.

Consumption

Spending by households, including durable goods (washing machine, stereos, and cars), non-durable goods (food, clothing, and gasoline), and services (haircuts, medical care, education).

Total revenue

The amount a firm receives for its product at each level of output.

marginal cost

The change in total costs that results from increasing total product by one unit (ΔTC/ΔQ).

Marginal product of capital

The change in total output that results from the firm hiring one more unit of capital.

Marginal product of labor

The change in total output that results from the firm hiring one more unit of labor.

Marginal revenue

The change in total revenue resulting from the sale of one more unit.

Marginal utility

The change in total utility or satisfaction resulting from consuming one more unit of a good or service.

Principle fo increasing marginal costs

The cost of each additional unit of output increases because the opportunity cost of what could have been made with a unit of input increases.

Variable costs

The costs (prices multiplied by amounts of inputs) of the inputs that can be changed. In the long-run, all inputs are variable. These costs vary as output changes.

Total fixed costs

The costs (prices multiplied by the amounts of inputs) of the inputs that are fixed. This is also the amount of cost when total product is zero. Total fixed costs are costs that do not vary as output changes.

Consumer surplus

The difference between the total value to the consumer of consuming a specific amount of a good and the amount the consumer must pay for that amount of the good.

Capital

The factories, machines, tools, and inventories in an economy. (Education is sometimes referred to as human capital; factories, machines, etc., as physical capital.) Capital is used in producing other goods and services.

Marginal benefit

The increase in benefits resulting from an action, or the increase in benefits resulting from producing one more unit of output.

Marginal cost

The increase in costs resulting from an action, or the increase in costs resulting from producing one more unit of output.

Marginal product

The increase in output from using one more unit of an input while all other inputs are constant (ΔTP/ΔL).

Price ceiling

The legal maximum price for which a good or service can be sold. Examples include laws limiting apartment rents in some cities.

Price floor

The legal minimum price at which a good or service can be sold. An example is the federal minimum wage, currently $7.25 per hour.

Law of diminishing marginal returns

The marginal product of an input will eventually decrease as more of that input is used. The law of diminishing marginal returns assumes that all other inputs remain constant.

Law of supply and demand

The market price and the quantity exchanged in a perfectly competitive market will move toward the price and quantity where quantity supplied is equal to quantity demanded.

GDP

The market value of all of the final goods and services produced annually within a nation

Labor force

The number of individuals who have jobs plus the number who are actively looking for work.

Income elasticity of demand

The percentage change in quantity demanded of a good or service divided by the percentage change in income.

Price elasticity of demand

The percentage change in quantity demanded of a good or service divided by the percentage change in price.

Price elasticity of supply

The percentage change in quantity supplied of a good or service divided by the percentage change in price.

Unemployment rate

The percentage of the labor force that is unemployed.

Equilibrium price

The price at which quantity supplied is equal to quantity demanded. The market is in equilibrium, that is, equilibrium price will not change until something else changes.

law of demand

The principle that price and quantity demanded are inversely related. A decrease in price, assuming nothing else changes, will cause an increase in the quantity demanded and an increase in price will cause a decrease in the quantity demanded. The law of demand implies a negatively sloped demand curve.

Rational decision-making

The process of comparing the marginal benefits and marginal costs of an action. If the marginal benefits are greater than the marginal costs, a rational decision is to undertake the action.

Equilibrium quantity

The quantity of a good bought and sold when quantity supplied equals quantity demanded. The equilibrium quantity will not change until something else changes.

Quantity demanded

The quantity of a good or service that consumers intend to purchase throughout a given time period at a certain price.

Quantity supplied

The quantity of a good or service that producers intend to sell throughout a given time period at a certain price.

Long-run market supply

The quantity supplied at each price, after firms are given time to vary all inputs and to enter and exit the industry.

Real GDP

The real value of all final goods and services produced in an economy in a year. Real GDP is measured in dollars adjusted for changes in the overall price level.

Factors of production

The resources used to produce goods and services, often divided into three categories: labor, all the physical and mental inputs of people; capital, the machines, tools, buildings, and inventories; and land, the actual land used, including raw materials from land.

Utility

The satisfaction gained from consuming a good or service.

Microeconomics

The study of individual consumers, workers, producers, businesses, and industries.

Macroeconomics

The study of the economy as a whole. Growth of economy-wide production, changes in unemployment, and rates of inflation are the most common concerns.

Market supply

The sum of all of the individual firms' quantities supplied at each price.

Government spending

The sum of federal government, state, and local government purchases of goods and services counted in GDP. It includes public investments.

Total cost

The sum of total fixed cost and total variable cost.

Total product

The total amount of output produced.

Total utility

The total amount of satisfaction enjoyed from consuming a specific amount of a good or service.

Average product

The total product divided by the number of units of a particular input used.

Opportunity cost

The value of the best forgone alternative. What one really gives up when making a choice.

Average cost

Total cost divided by the total product.

Average revenue

Total revenue divided by the quantity sold.

Accounting profit

Total revenue minus explicit costs. Accounting profit that could be earned elsewhere is not counted as a cost.

Average variable cost

Total variable costs divided by total output. Same as average total cost or average cost in the long-run, when all costs are variable.

Economic efficiency

Using all of our resources in a technically and allocatively efficient manner.

Technical efficiency

Using methods to produce goods and services that minimize costs of producing or maximize output given our inputs.

Investment

When used in reference to GDP or the entire economy, it is any spending intended to increase future output. For example, goods purchased by individuals and firms that consist of fixed investment (new factories, new machines, and new houses) and inventory investment (change in inventories at business firms).

Movements along a demand curve

A change in quantity demanded caused by a change in a good's price.

Movements along a supply curve

A change in quantity supplied caused by a change in a good's price.

Shift in the demand curve

A change in the quantities consumers are willing and able to purchase at each price. The shift is caused by changes other than a change in price. For instance, changes in income, tastes, expectations, the number of potential buyers, and prices of substitute and complementary goods may lead to shifts in demand.

Shift in the supply curve

A change in the quantities producers are willing and able to sell at each price. The shift is caused by changes other than a change in price. For instance, rising labor costs (a price of an input) cause a shift to the left of the supply curve (a decrease in supply). Changes in prices of other inputs or changes in technology will also shift the supply curve.

Marginal analysis

A consumer will maximize his or her total well-being if the last dollar spent on each good provide the same marginal (additional) utility.

Deflation

A continual decrease in the average price level.

Sunk cost

A cost that has already been paid and cannot be recovered.

Price-taker

A firm "takes" the price that is given it by the market supply and demand conditions. The firm can do nothing to change that price.

Natural monopoly

A firm that can produce at a lower average cost per unit of output than a number of smaller firms producing a similar amount of total output.

Firm supply

A firm's quantity supplied at each price level.

Concentration ratio

A four-firm concentration ratio is the percentage of industry sales sold by the four largest firms in the industry. Other similar measures, that indicate the degree of market power and competitiveness, are often used.

Production function

A function showing the maximum output for each specific combination of inputs, given technology.

Inferior goods

A good is inferior if in response to an increase in income, individuals decrease their consumption of the good.

Normal goods

A good is normal if in response to an increase in income, individuals increase their consumption of the good.

Necessity

A good or service that is viewed by consumers as a high priority. Consumers tend to be less sensitive to price changes of goods that are assumed to be necessities.

Cartel

A group of producers agreeing to act in concert with one another.

Minimum wage

A legal minimum for wages (the price of one hour of labor) for most categories of workers.

Equilibrium

A market is in equilibrium, with an equilibrium price and an equilibrium quantity, when the quantity demanded equals the quantity supplied.

Perfectly competitive markets

A market with many buyers and sellers, with each seller offering the same good or service. Consumers and producers are aware of quality of inputs and goods and prices. Firms can easily enter and exit the industry.

Payoff matrix

A payoff matrix is usually a two-by-two table with two actors or players. Each player will have a set of actions that will result in different payoffs. Each player's payoff is dependent on both players' course of action.

Short-run

A period in which at least one input or factor of production is fixed.

Rent control

A policy which sets a legal maximum rent that can be charged for some apartments in some major cities.

Consumer price index

A price index that measures changes in average prices of goods and services purchased by a typical consumer.

Average cost pricing

A price, set by a regulator of a natural monopoly, equal to average cost at the corresponding quantity demanded.

Marginal cost pricing

A price, set by a regulator of a natural monopoly, equal to marginal cost at the corresponding quantity demanded.

Price discrimination

A producer charges different prices for different units of output of the same product for reasons other than differences in costs.

Technological change

A shift in the production function, usually in the direction of a greater quantity of output at each level of input. Technological change may be the result of creation of new products, redesign of old products, or the creation of new methods of manufacturing.

Economic model

A simplified explanation of a part of the economy. Economic models often focus on specific relationships and make assumptions about other possible influences remaining constant.

Monopoly

A single firm in an industry with barriers to entry and no close substitute goods.

Supply

A table (schedule) or graph (curve) showing the quantity of a good that producers are willing to supply at each price, assuming that all possible influencing factors other than price remain constant.

Demand

A table or graph showing the quantity of a good demanded at each price, assuming that all possible influencing factors other than price remain constant.

Short run

A time period in which at least one input cannot be changed.

Long-run

A time period long enough for a business to change all of its inputs (factors of production).

Long run

A time period long enough that all inputs can be changed.

Economic profits

Accounting profits minus normal profits.

Inputs

All Items Unanswered0 CH 3: The U.S. and the World Economy Review CH 3: End of Chapter Questions Review The U.S. and the World Economy: Question Bank Review Chapter 4: Demand, Supply, and Markets 4 items CH 4: Demand, Supply, and Markets Review CH 4: End of Chapter Questions Review Demand, Supply, and Markets: Question Bank Review CH 4: Math Supplement Review Discussion Assignments 1 item Is selfish free choice good or bad for society? Review Chapter 5: Using Supply and Demand 5 items CH 5: Using Supply and Demand Review CH 5: End of Chapter Questions Review CH 5: Solutions to End of Chapter Discussions Review Using Supply and Demand: Question Bank Review CH 5: Math Supplement Review Chapter 6: Behind Demand 5 items CH 6: Behind Demand Review CH 6: End of Chapter Questions Review CH 6: Solutions to End of Chapter Discussions Review Behind Demand: Question Bank Review CH 6: Math Supplement Review Chapter 7: Behind Supply 5 items CH 7: Behind Supply Review CH 7: End of Chapter Questions Review CH 7: Solutions to End of Chapter Discussions Review INDEX NOTEBOOK Chapter 4: Demand, Supply, and Markets 4.1 Chapter Objectives 4.2 Demand: An Analysis of Buyers Question 4.01 4.2.1 What Factors Determine Buyer Behavior? 4.2.2 Price Question 4.02 Question 4.03 4.2.3 Preferences Question 4.04 4.2.4 Income Question 4.05 Question 4.06 4.2.5 Prices of Related Goods 4.2.6 Expectations Question 4.09 4.3 How do you Construct Demand Schedules and Curves? 4.3.1 Examine Changes in Quantities Demanded Graphing Question 4.01 Graphing Question 4.02 4.3.2 Remember How the Changes Work Graphing Question 4.03 4.4 Section Review Questions Graphing Question 4.04 4.5 Supply: An Analysis of Sellers and Producers Question 4.16 4.5.1 What Determines Production? Question 4.17 Question 4.19 Question 4.20 4.6 How do You Construct Supply Schedules and Curves? Question 4.21 4.6.1 Understand Supply Graphing Question 4.05 Graphing Question 4.06 4.6.2 Notice Shifts in Supply Curves ​Graphing Question 4.07 Question 4.23 4.7 Section Review Questions Graphing Question 4.08 4.8 Supply and Demand Together in a Market 4.8.1 Changes in Market Prices Question 4.36 Question 4.37 4.8.2 What Is an Equilibrium in a Market? Question 4.38 Question 4.39 4.9 How Can You Remember the Distinction Between Demand and Quantity Demanded? Question 4.40 Graphing Question 4.09 4.9.1 Summarize the Results Question 4.41 Graphing Question 4.10 Question 4.42 Question 4.43 Question 4.44 Question 4.45 Question 4.46 4.9.2 What Conclusions Can We Make About Demand, Supply, and Markets? 4.10 Summary 4.11 Key Concepts 4.12 Key Term Glossary Answer Keys: Answer to Question 4.01 Answer to Question 4.02 Answer to Question 4.03 Answer to Question 4.04 Answer to Question 4.05 Answer to Question 4.06 Answer to Question 4.09 Answer to Question 4.16 Answer to Question 4.17 Answer to Question 4.19 Answer to Question 4.20 Answer to Question 4.21 Answer to Question 4.23 Answer to Question 4.36 Answer to Question 4.37 Answer to Question 4.38 Answer to Question 4.39 Answer to Question 4.40 Answer to Question 4.41 Answer to Question 4.42 Answer to Question 4.43 Answer to Question 4.44 Answer to Question 4.45 Answer to Question 4.46 Image Credits Close CH 4: Demand, Supply, and Markets REVIEW This content is available for you to study, but isn't worth marks About this material max attempts icon Unlimited attempts per question calendar icon Due: No due date feedback icon Answer feedback is ON Chapter 4: Demand, Supply, and Markets Figure 4.1​: A Croatian fresh food market. [1] An effort to decrease pollution associated with cars in the U.S. led to more expensive bacon. Why would changing the formula of gasoline to include up to 10% ethanol make the cost of bacon increase? By the end of this chapter, you should be able to explain why two seemingly unrelated goods could have an impact on each other's prices. This is just one example of how we will use supply and demand to understand how markets and the interactions of millions of buyers and sellers establish prices and determine the amount of goods and services produced. 4.1 Chapter Objectives After working through this chapter, you will be able to: Explain the role of markets in determining prices. Explain how prices determine what and how much we produce. Use the concepts of supply and demand to predict the consequences of a number of possible events for market prices and quantities. Detail the process of moving from one market equilibrium to another. Many of the fruits, vegetables, and grain we eat in the U.S. come from Florida, California, and the Midwest. Other produce comes from the Caribbean and Mexico. Clothing we wear comes to shelves in our local clothing stores from all over the world. Automobiles are produced in Michigan, California, South Carolina, Tennessee, Germany, Japan and many other places before being sent to dealers in your hometown. Who decides how many bananas to produce? Who decides where to ship the automobiles? Who decides how much to charge? The food you eat, the clothing you wear, the cars you drive, the buses and subways you ride, and the movies you watch are all produced by this marvelous economy that somehow convinces millions of businesses to produce what we want the most. Every day in our economy, businesses, large and small, make decisions about what to produce and what resources to use in the process. Markets then help determine who gets the resulting goods and services. Almost all of those decisions result from buyers and sellers coming together in markets. A gathering of produce vendors selling vegetables to locals in an empty parking lot on a downtown street corner is a market. Specifically, it is a farmers' market. The New York Stock Exchange is located in a classic, early 20th century building on Wall Street, which serves as the physical location for an international market for stocks and bonds. A market also may be non-geographical - a web site such as eBay, for example, brings together potential buyers and sellers from all over the world. Markets can be local, such as the neighborhood gym, or worldwide, such as the market for automobiles. In essence, a market is a collection of places, institutions, and means that allow individuals and businesses to buy and sell goods and services, labor, financial assets, and anything else that people want to exchange. We have labor markets and money markets, as well as markets for fish, vegetables, housing, automobiles, stocks, virtual currencies, criminal and medical services. In this chapter, we will build an economic model of markets. We will begin by examining the behavior of buyers. We will then explore what influences businesses to produce goods and services. And finally, we will put the buyers and sellers together. The resulting economic model will help us see how prices and the quantities bought and sold are determined as well as how and why they change. 4.2 Demand: An Analysis of Buyers Question 4.01 Assigned as Review Question 4.01 When you buy songs online, many factors influence your decision. Make a list of the characteristics that might affect how many songs you, as a consumer, purchase in a typical month. If you do not purchase music, list the characteristics that determine how many books or magazines you buy or movies you attend. Responses ReplyShowingAll Responses ordered byNewest Responses Will Hoadley-Brill2 months ago . How much money I have to spend on books/magazines that month 2. How much time I have to read that month 3. The topic of the books/magazines 4. The authors of the books/magazines 5. The price of the individual books/magazines Comments01 Hover here to see the hint for Question 4.01. Click here to see the answer to Question 4.01. 4.2.1 What Factors Determine Buyer Behavior? You might have suggested a number of influences. The price of a song, your income, and how much you enjoy music are all possibilities. There can be a long list of factors that determine how many songs buyers will want to purchase over a specific period of time. In putting together a model that describes how buyers make decisions, we will look at each of those possible determinants. To make the model as easy as possible to understand and use, we will discuss one determinant at a time and make the simplifying assumption that all other possible determinants do not change. The formal term for this type of assumption is ceteris-paribus. Later in the chapter, we will examine markets in which several events occur simultaneously. 4.2.2 Price Question 4.02 Assigned as Review Question 4.02 If the price of individual songs online were to increase, how would your decision about how many songs to buy change? Do you buy more music? Do you buy less? Why? Responses ReplyShowingAll Responses ordered byNewest Responses Will Hoadley-Brill2 months ago If the price of the songs were to increase, I would buy fewer songs because their importance to me would stay the same while the cost of the songs would increase. This would lead to more cost than benefit in purchasing these songs. Comments01 Hover here to see the hint for Question 4.02. Click here to see the answer to Question 4.02. If the price changes and everything else stays the same, many consumers react to a price increase by reducing the quantity they buy. There are a number of potential reasons, but we will focus on one primary reason. As the price of a good increases, some of us look around for a similar good that will come close to serving the same purpose. Perhaps we look for a monthly streaming service such as Spotify. If we can find that substitute good, we may switch from the more expensive good to the now relatively less expensive good. Or we may simply decide to switch to seemingly unrelated goods. For example, instead of buying more music, we might decide to spend more on movies. In this situation, as the price of a good increases and all other influencing factors stay the same, the quantities that buyers are willing and able to buy decreases. This is the law of demand. It also works in reverse. As the price of a good falls, some of us are likely to buy more of it. What is the highest surge price you have experienced when looking for an Uber or Lyft ride? Most people have seen a surge price and decided to not purchase the ride. The price may be high enough that an individual decides to call a friend and wait half an hour for them to arrive. If the price of rides stays high enough for several weekends in a row, people may start to use the bus instead. The primary reason for the behavior of consumers in response to price changes is that substitutes exist for many goods and services. When the price of a good increases, individuals substitute relatively less expensive goods. When the price of a good decreases, consumers substitute purchases of that good for purchases of the now relatively more expensive goods. This was shown in the analysis above. A second reason that we react so consistently to price changes is due to our incomes. When the price of a good increases and our income does not change, we have to do less of something - either less consumption of the higher-priced good, less buying of another good, or less saving. That "doing less of something" often includes buying less of the good with the increased price. If a price decreases instead, we can afford to buy more of the good (and other goods). Substitution of goods and services in response to price changes is reinforced by changes in our abilities to afford those goods and services. The law of demand is called a law because it works almost all of the time. If you can think of an exception, then you are probably wrong. The most likely error you are making is that you are not holding everything else constant. What about exceptions? Suggest some, but be careful. Question 4.03 Assigned as Review Question 4.03 Can you think of exceptions to the law of demand? Responses ReplyShowingAll Responses ordered byNewest Responses Will Hoadley-Brill2 months ago One major exception is if the need or desire of customers changes and yet the price of that good/service still changes, the consumer will likely not buy it. If, for example, someone bought their dog a leash for $10 and the price drops to $8, they may not buy more leashes if they no longer have a dog. Comments01 Hover here to see the hint for Question 4.03. Click here to see the answer to Question 4.03. For a mathematical supplement to this section, please click here: Supplement to 4.2.2 Price. A good that is an absolute necessity may be an exception. Prescribed medicine, particularly when paid for by insurance, may be an example. Drugs that help save the lives of people suffering from diabetes or cancer are unlikely to be curtailed as prices increase. Similarly, patients will be unlikely to use more of the drugs if prices fall. As prices increase or decrease, the amount people buy of these necessities does not change. In essence, there are no viable substitutes. For a mathematical supplement to this section, please click here: Supplement to 4.2.2 Price. Luxury goods may seem to be an apparent exception. The high price of a luxury good is sometimes interpreted as indicative of the high quality of the good. An example might be higher-priced cars. An expensive car may be thought to be better than a cheaper car. Given this assumption, a price increase may actually make a car more attractive to buyers. Similarly, you might buy a $300 stereo system as opposed to a $250 one sitting right next to it, because you think the sound system must be superior. However, these examples are not actual violations of the law of demand. Something else is changing along with the prices, so everything else is not truly held constant. The higher-priced car and the higher-priced stereo system are perceived as being of higher quality. The higher quality, not the higher price, is causing buyers to want to buy more. 4.2.3 Preferences Tastes and preferences change over time, and those changes affect the kinds and quantities of goods that consumers want to buy. For example, as more people began to like hip-hop music, more people purchased hip-hop music. If many consumers like a specific good or service, there will be many buyers. If tastes change so that buyers like a particular good less and everything else related to buying that good stays the same, there will be fewer buyers. A decade ago, a popular band may have sold millions of copies of a single - but if tastes have changed, hardly anyone may want to purchase their new songs. Question 4.04 Assigned as Review Question 4.04 Can you think of a recent example of how changing tastes affected demand? Responses ReplyShowingAll Responses ordered byNewest Responses Will Hoadley-Brill2 months ago In my lifetime, there has been a great shift from music accessed through CDs, purchasing in a digital format, to now streaming services. Very few people purchase CDs anymore because their preference for convenience, accessibility, and price reduction have made more people choose to stream music instead of purchasing it. Comments01 Hover here to see the hint for Question 4.04. Click here to see the answer to Question 4.04. There are countless examples that you might see every day and not even think about. Look at the automobiles on the street today and you will see many more sports utility vehicles than could be seen even a few years ago. This may seem like a strange trend, because they are expensive to maintain and do not have the best gas mileage. However, sports utility vehicles are very fashionable. Tastes have changed. Consumers want to buy more of them. 4.2.4 Income As consumers' incomes increase and all other influencing factors do not change, many will buy more of most goods. Individuals with greater incomes tend to take more vacations, buy more and better cars, and rent larger apartments than consumers with lower incomes. However, an increase in income might reduce how much individuals want to buy of some other goods. Can you think of a good that someone might buy less of if his or her income increases? Question 4.05 Assigned as Review Question 4.05 Can you think of a good that someone might buy less of if his or her income increases? Responses ReplyShowingAll Responses ordered byNewest Responses Will Hoadley-Brill2 months ago Typically, wealthy individuals choose to own their homes or apartments, therefore, making how much they pay for rent per month essentially zero. Though they still have to pay for their living spaces in the form of mortgage payments to a bank or a one time payment to the seller, their monthly rent payments would become negligible. Comments01 Hover here to see the hint for Question 4.05. Click here to see the answer to Question 4.05. Some consumers whose incomes are increasing might start eating fewer hamburgers and more lobster. Others whose incomes are rising may buy fewer used cars and be more likely to buy new cars. The vast majority of goods and services are such that more are purchased as consumers' income rise. Those goods, the lobsters and new cars of the world, are called normal goods (if lobsters can be described as normal). In the examples above, hamburgers and used cars are known as inferior goods. Other types of inferior goods include ramen noodles, bus rides, and SPAM. Inferior goods are characterized by this process: as income increases, demand for the good decreases because consumers would rather consume other goods. These goods are perceived by some consumers as inferior to other possible choices and if incomes increase, consumers will turn to those alternatives. This categorization is relative, however. A person who has been eating only macaroni and cheese may switch to hamburgers as a result of an increase in income. For that person, hamburgers are normal goods. Question 4.06 loading content Steeping some tea... Hover here to see the hint for Question 4.06. Click here to see the answer to Question 4.06. Consumption of necessities that add up to a small percentage of most people's incomes is not normally influenced by income changes. Salt and toilet paper are inexpensive for most of us, and we will not buy more (or less) as income increases. The reasoning behind this logic is that a good that a consumer really needs before a change of income will still be a necessity after a change in income. Therefore, an increase in income will not necessarily change the amount of the good the consumer wants to purchase. Another more serious example is a patient who needs a heart transplant. He will need it regardless of his income. If the transplant is paid for by insurance, the level of income will not affect whether or not a patient demands a heart transplant. Without insurance, demand may be affected by large changes in income. Most goods and services are normal; fewer are inferior goods, and fewer still are relatively independent of income. 4.2.5 Prices of Related Goods In some cases, changes in the prices of related goods can affect how much consumers want to buy. Think about the market for sweaters. An increase in the prices of wool sweaters may make people more likely to buy cotton sweaters. An increase in the price of wool sweaters causes an increase in the demand for cotton sweaters. If this relationship between the price of one good and the purchases of another good exists, the goods are substitute goods. It works in the opposite direction as well. In our example, if the prices of wool sweaters were to fall, some people would switch their consumption away from cotton sweaters. Can you think of other examples of substitute goods? If the price of oranges remains the same, but the price of nectarines decreases, one person may buy fewer oranges. As the price of nectarines decreases, you may substitute nectarines for oranges. If the price of a Toyota Camry increases, you can be sure that some consumers will shift over to similar cars made by Ford, Honda, or other manufacturers. Purchases of substitute automobiles rise. But if the price of a Jaguar convertible increases, very few consumers would switch to Chevy trucks. Perhaps Jaguars and Chevy trucks are not substitute goods for most people. Complementary goods are goods that are often used together. Coffee and cream, tennis rackets and tennis balls, bicycles and bicycle helmets, smart phones and ear buds, and gasoline and automobiles are examples. Now try to think of how a change in price of one of the goods, such as tennis balls, might affect purchases for its complement, tennis rackets. Why does that relationship exist? Assigned as Review Question 4.07 How will an increase in the price of DVDs affect the demand for DVD players? Why? A Quantity demanded of DVD players increases B Demand for DVD players increases C Quantity demanded of DVD players decreases D Demand for DVD players decreases Show Submitted Answer Show Correct Answer Check My Answer As the price of DVDs increases, the cost of enjoying DVDs increases. Consumers might consider alternatives, such as using personal computers or downloading music. Thus, the purchases of DVD players will decrease. If the price of bicycles falls, consumers will buy more bicycles. Because many people consider bicycles and bicycle helmets as necessary to use together, purchases of bicycle helmets should rise. 4.2.6 Expectations Expectations of future changes also affect the quantities of goods and services consumers will want to buy today. If consumers expect prices to be higher in the future and all other influencing factors are the same, demand for a good will increase. Assigned as Review Question 4.08 What will happen to current purchases if people expect lower prices in the future? What will happen with expectations of higher incomes? A Demand increases; demand increases B Demand decreases; demand increases C Demand increases; demand decreases D Demand decreases; demand decreases Show Submitted Answer Show Correct Answer Check My Answer If you expect higher prices in the future, current buying will increase, as people who plan on buying the good at some time in the future will buy now to avoid paying higher prices later. In some markets, people may buy now in order to make a profit by selling the good at a higher price later on. If you expect to receive a higher income in the near future, then your current spending may increase. For example, if you expect to receive a job offer in the fall, you may rent a larger apartment in the summer than if you did not expect to have a job in the fall. 4.2.6.1 Potential Number of Buyers An increase in the number of potential buyers, holding all other influencing factors the same, means there are more consumers wanting to buy products. An increase in the number of potential buyers can be viewed in much the same manner as an increase in income for normal goods. On the other hand, a smaller number of potential buyers will consume fewer goods. Thus, demand increases as the number of potential buyers grows and decreases as the number of potential buyers shrinks. Question 4.09 loading content Steeping some tea... Hover here to see the hint for Question 4.09. Click here to see the answer to Question 4.09. 4.3 How do you Construct Demand Schedules and Curves? An economic model of demand simplifies the buyers' side of an actual market by making the assumption that only one determinant of buyers' behavior will change at a time. We have discussed a number of possible influences on consumer decisions. Now we will focus on the relationship between the price of a good and how much consumers want to purchase, with all other determinants remaining unchanged. That relationship between prices and the amounts consumers want to purchase can be shown in tables and on two-dimensional graphs. This process will let us summarize a great deal of data and better understand markets. 4.3.1 Examine Changes in Quantities Demanded Assume that tastes, income, prices of related goods, expectations, and the number of potential buyers do not change. The law of demand tells us that if all of these potential influences remain the same, an increase in price will cause a decrease in the quantity demanded (and vice-versa). That relationship is often described as an inverse relation between price and the quantity demanded. Our model highlights the prices of goods and services because they are so central to the functioning of markets. One of the challenges of understanding and using this economic model is in learning the very specific language that economists use in describing what is happening in a market. The quantity demanded is the quantity of a good or service that consumers are willing and able to purchase during a given time period at a certain price. Table 4.1: An individual's demand schedule for oranges.​ Consider a market for oranges. An example set of data appears in Table 4.1. If you really like oranges and the price is 50 cents, you might buy about five per week. If prices were a lot lower, you would probably buy more oranges - that is, substitute oranges for other kinds of fruit. At a price of 10¢ per orange, you might buy as many as eight per week. At a price of $1 each, you would reconsider. Now, you may switch to other fruit and perhaps buy as few as four oranges each week. If prices were to increase to even higher amounts, the law of demand tells us that you would be likely to reduce your consumption even further. We will refer to this table, showing prices and the corresponding quantities demanded, as demand. It is the listing of quantities demanded that will exist in the market at each price. Demand is the quantity of a good that buyers will buy at each price, assuming that everything else remains constant. Demand is the entire table, the entire schedule - in other words, it includes all of the quantities demanded at each price. These same data are shown in a graphical form in Figure 4.2. (If using graphs in this manner is new to you or you need a review, make sure you have read the appendix to Chapter 2: An Economic Model) We can draw the relationship between prices and quantities demanded and create a demand curve. We will refer to the demand curve as demand. It is the same as a demand schedule in that it shows the quantities demanded at each price. It simply shows this information on a graph instead of in a table. With prices plotted along the vertical axis and the quantities demanded at each price along the horizontal axis, the demand curve will look like the line drawn in Figure 4.2. Points A, B, C, D, and E correspond to the prices and quantities demanded in the demand schedule shown in Table 4.1. Lines are drawn between each of the points on the assumption that if the price of oranges were between two of the listed prices, the quantity demanded would be between the two quantities demanded. Figure 4.2: A demand curve for oranges.​ The demand curve and the demand schedule both represent demand. The demand curve and the data in the schedule also both reflect the law of demand. As price falls, the quantity demanded increases. For example, as price falls from $3.00 to $2.00 (point A to point B on Figure 4.2), the quantity demanded increases from one orange per week to two oranges per week. We describe that change as a movement along the demand curve or a change in the quantity demanded. This particular example also means that the graphical interpretation of the law of demand is a demand curve that is downward sloping, as we go from left to right. Table 4.2: An individual's demand schedule for oranges - after an announcement about the health benefits of oranges.​ Consider that demand may actually shift. A change in one of the determinants (other than price) of how much consumers want to buy will change the entire demand relationship. If your preferences for oranges change due to medical studies reminding you about the health benefits of Vitamin C, you might buy more at each price. This is an increase in demand, or a shift in the demand curve. The medical study that described the benefits of oranges reflects a change in tastes and preferences. At each price level, you will choose to consume more oranges. When price alone changed, the result was described as a change in the quantity demanded and a movement along a demand curve. Your demand for oranges, given your refreshed knowledge about the health benefits of oranges, might now look something like the data shown in the third column of Table 4.2. The quantities demanded at each price are now greater than the original quantities demanded at the same prices. Graphing Question 4.01 Draw these new data on the graph below, which shows the initial demand curve. Activate Click here to activate this content. You should have a new demand curve that has shifted to the right and looks like Figure 4.3. An increase in demand is represented on a graph as a shift of the demand curve to the right. The quantities demanded at each price are now greater than before the increase in demand. Figure 4.3: An increase in demand following a favorable health announcement.​ Table 4.3: An individual's demand schedule for oranges - after the fall in tangerine prices.​ Demand could shift in the opposite direction. Think back to the discussion of prices of substitute goods. For instance, if the price of tangerines were to fall dramatically, the demand for oranges would decrease. This means that at each price level for oranges, the quantity demanded of oranges would decrease, as suggested. For a mathematical supplement to this section, please click here: Supplement to 4.3.1 Examine Changes in Quantities Demanded. Graphing Question 4.02 Draw these points and the new curve on the graph below. Activate Click here to activate this content. Your new demand curve should look like Figure 4.4; it shifts to the left to show a decrease in demand. Figure 4.4: A decrease in demand for oranges.​ 4.3.2 Remember How the Changes Work A change in any of the factors influencing how much consumers want to buy, other than the price of the good itself, will cause a change in the quantities consumers are willing and able to purchase at each price. The shifts are caused by changes in income, tastes (in the previous example, this is represented by perceived health benefits), the number of potential buyers, expectations, and prices of substitute and complementary goods. A change in price alone is shown by movement along a specific demand curve, and in that case, demand itself does not change. Do not be casual about the use of the terms "quantity demanded" and "demand". The most common difficulty for those new to market models is confusion between quantity demanded and demand. Demand is not the same as quantity demanded. The quantity demanded is how much buyers are willing and able to buy at each specific price. Demand is the whole table, the whole schedule, and the whole curve. It is a list of prices and the quantities demanded at each individual price. A change in price does not change demand. It changes the quantity demanded. It is represented as a movement along a single demand curve. Do not use the two concepts interchangeably. When we first considered demand, we discussed one person's demand for oranges (Table 4.1). Assigned as Review Question 4.10 What would the demand in the entire market be if there were 1000 individuals, each with demand schedules identical to that depicted in Table 4.1? Fill in the schedule for the market. answerable question reference Premise ResponseDrag and drop to match 1 A 2 B 3 C 4 D 5 E Show Submitted Answer Show Correct Answer Check My Answer Graphing Question 4.03 Activate Click here to activate this content. The new market demand schedule should be like the one shown in Table 4.4 below and drawn as a curve in Figure 4.5. The new schedule and the curve are derived by adding all of the individual quantities demanded at each price. In this case, because all the individuals' demands are identical, the quantities demanded at each price are multiplied by 1,000. Table 4.4: A demand schedule for a market with 1000 buyers.​​ Figure 4.5: A market demand curve for oranges.​ 4.4 Section Review Questions Graphing Question 4.04 Activate Click here to activate this content. Assigned as Review Question 4.11 "Some people predict, however, that the prices of chocolate will increase drastically in about three years because of some unhealthy crops." Given this expectation for the future, what will happen to the demand for chocolate now? What will the demand do? A Decrease as people switch to substitute goods B Increase as consumers buy more now to avoid higher prices later C Decrease; when prices increase, demand decreases D Stay the same as consumers plan to adjust to the prices in the future Show Submitted Answer Show Correct Answer Check My Answer Assigned as Review Question 4.12 Consider the markets for ball-point pens and the market for "rollerball" pens. Suppose that, due to an increased cost of the metal that is used in "rollerball" pens, the prices of "rollerball" pens and ball-point pens increase. There are no other changes. This is true because the two products have a unique relationship. What is the likely relationship between "rollerball" pens and ball-point pens? What are they? A Complementary goods B Substitute goods C Normal goods D Inferior goods Show Submitted Answer Show Correct Answer Check My Answer Assigned as Review Question 4.13 Consider the markets for ball-point pens and "rollerball" pens. Suppose that, due to an increased cost of the metal that is used in "rollerball" pens, the prices of "rollerball" pens increase. There are no other changes. What would happen to the demand schedules of both products? The demand curve for ball-point pens would ______________ ; the demand curve for "rollerball" pens would ______________. A Increase; not change B Increase; increase C Decrease; not change D Decrease; increase E Not change; decrease Show Submitted Answer Show Correct Answer Check My Answer Assigned as Review Question 4.14 A decrease in income will cause which of the following to happen to the demand for used cars? Assume used cars are inferior goods. A The demand for used cars will increase. B The demand for used cars will decrease. C The quantity demanded for used cars will increase. D The quantity demanded for used cars will decrease. Show Submitted Answer Show Correct Answer Check My Answer Assigned as Review Question 4.15 An increase in the number of potential buyers will most likely cause which of the following? A An increase in demand B A decrease in demand C An increase in the quantity demanded D A decrease in the quantity demanded Show Submitted Answer Show Correct Answer Check My Answer 4.5 Supply: An Analysis of Sellers and Producers Buyers are only one half of a market. The other, equally important part of any market is made up of the producers and sellers of goods and services - the supply side of the market. To begin our thinking about supply, let's envision a scenario. What do you think people in your class or dorm or a group of your friends would do if you offered to buy every used smartphone they would bring to you? Say at a price of $20 each? At $50 each? At $100? At $200? Question 4.16 loading content Steeping some tea... Hover here to see the hint for Question 4.16. Click here to see the answer to Question 4.16. The suppliers of used smartphones (your classmates, dorm residents, or friends) would likely bring a few smartphones at a price of $20, more at $50, even more at $100, and the most at $200. That relationship between price and the amount suppliers (in this case, your friends) bring to the market is the fundamental characteristic of the supply side of the market. Let's look at why. Most businesses are started and continue to grow due to owners' and managers' efforts to earn profits - the difference between revenues from selling goods and the costs of producing those goods. Anything that changes revenues or costs will affect incentives and thereby be likely to influence how much a business produces. A change that increases revenues (a higher price, perhaps) or decreases costs (less costly raw materials) will result in increased production. If revenues decline or costs increase, production will decrease. In our analysis of producers, we will focus on prices a business can receive for its products, the prices of resources used in producing its goods along with other costs, and the available technology or the methods a business uses to produce goods. For a mathematical supplement to this section, please click here: Supplement to 4.5 Supply: An Analysis of Sellers and Producers. 4.5.1 What Determines Production? In thinking about business decision-making, we will proceed in a manner much like we did in the discussion of buyers and demand. We will explore how changes in each determinant will change output and when we assume that all of the other factors remain the same. Then we will put all of the factors together into a model of supply - one that parallels our model of demand. 4.5.1.1 Price If the price of a good or service being produced increases, businesses will normally respond by increasing output of that good or service. Production will decrease if the price of the good decreases. Remember, we are assuming that no other possible influences change at the same time. Higher prices provide incentives for producers to switch from production of one good to another. A car manufacturer, for example, may have the capability to produce convertibles or trucks, among other possibilities. An increase in the price of trucks will increase the incentive to produce trucks and reduce the incentive to produce convertibles and other automobiles. A decrease in prices will work in exactly the opposite fashion. A decrease in truck prices will decrease the incentives to produce trucks and result in a reduction in the output of trucks. The same concept works with the supply of labor and most other resources. Why are some recent college graduates convinced that they should enter software development, business, or law instead of teaching at elementary and secondary schools? The higher salaries, that is, the higher prices for labor, in those professions attract more college graduates. In essence, more software designers, business students, and pre-law majors are produced and fewer teachers are produced. A second reason that prices and production change in the same direction is based on the concept of increasing costs that we discussed in Chapter 1: Introduction to Economic Analysis. As production increases, eventually the cost of producing additional output will increase. Most resources are best suited to specific uses. Dry, hot land can produce a lot of wheat. Wetter, richer soil is more effective when used to grow corn. Rice grows best in extremely wet conditions. Wheat farmers will use the dry land first. As wheat production is expanded, wetter soil will eventually have to be used. And that soil will not produce as much wheat. The cost of the additional production will eventually begin to increase. In order to pay the higher costs associated with the increased production and thereby convince farmers to grow more wheat, prices will have to increase. The same is true when we think of work decisions made by individuals. Individuals who enjoy using their quantitative skills make good engineers and computer programmers. Others with superior writing and speaking skills often make good lawyers. An accountant is better at manipulating and analyzing numbers than the typical carpenter. The average carpenter is better at building houses than the accountant. If we try to expand the production of accounting services and we do so by hiring carpenters as accountants, they will not be as productive as people who have the skills necessary to be accountants. Or to make the carpenters productive, they may have to be trained. In either case, costs of producing accounting services will likely increase as more individuals are hired. Therefore, in order to get more accounting services and pay the higher costs, prices may have to rise. Again, we find that higher prices are necessary to attract more output. Question 4.17 loading content Steeping some tea... Hover here to see the hint for Question 4.17. Click here to see the answer to Question 4.17. The key to understanding supply is to think about why businesses are producing goods. The most common reason is to earn a profit. If prices increase, a business can earn more profit by switching from other lines of business to producing more of the good with the now higher price. Thus, the amount of the good produced increases. On the other hand, if the price falls, the typical firm will have less of an incentive to produce the good, and will likely cut back production. 4.5.1.2 Prices of Inputs All goods and services sold in the marketplace are produced in processes that use labor, land, and capital resources (buildings, machines, computers, and other tools). The prices of these inputs include wages, prices of raw materials and supplies, rent, and utilities. Even taxes and tariffs are a part of the cost of producing goods and services. An increase in the prices of any of the inputs will lead to a decrease in profits. Thus, there is a decrease in the incentives to produce and as a result a decrease in production. On the other hand, a decrease in the price of any of the inputs will increase profits, increase the incentives to produce, and result in more of the good being brought to the market, ceteris-paribus (holding any changes to other variables constant). It should be noted that sellers (retailers) do not physically produce goods; rather, they bring to market goods that are produced by other firms. If there is an increase in the price of inputs that makes it more expensive to produce goods, it becomes more expensive for sellers to buy those goods and bring them to market. Falling prices of microprocessors, for example, have meant increased profits and incentives to produce many new products that use microprocessors. The result is an increase in production of those goods. 4.5.1.3 Technology If new ways of producing goods are created so that fewer resources are used to produce the same output, the effect is similar to a decrease in the price of an input. Profits will increase and businesses will be willing to expand production. Creation of new software has enabled many manufacturers to reduce the number of workers needed to manage supplies and to respond to orders. This in turn has reduced the resources necessary to produce goods and resulted in increased profits and increased incentives to expand production. Assigned as Review Question 4.18 How does an decrease in input costs affect suppliers? A Demand increases B Demand decreases C Supply increases D Supply decreases Show Submitted Answer Show Correct Answer Check My Answer 4.5.1.4 Other Possible Factors What about expectations? If producers expect prices to increase in the future, the amount of the good produced or brought to market in the present may decrease. For example, an oil company may withhold production from the market now in anticipation of higher prices next month. The reverse is true as well. The owner of bonds or stocks may offer more for sale now if she expects prices to fall in the near future. Expectations of future prices and incomes are another determinant. Current prices of related goods can also affect supply of a good. In our discussion of the relationship between the amount produced and prices of the good, we looked at the prices of trucks. We said that as truck prices increase, automobile manufacturers would shift from producing convertibles to producing trucks. So, an increase in truck prices may cause a decrease in the production of convertibles. An increase in price of one good that a manufacturer can produce may reduce the production of other goods that the manufacturer could produce. In the case of a decrease in the price of one good, the manufacturer may increase the production of the alternative good. The number of firms or sellers in the market is another determinant. If the number of firms or sellers in an industry increases, the amount of production or goods provided to a market will increase. If some firms leave the industry, the amount produced or brought to market will decrease. The effect is really a simple one. Think of the existing firms as continuing to produce or bring to market the same number of goods. New firms will add to total production in the market and fewer firms will mean less production in the market. Every time a new coffee shop opens in town, total production of coffee increases. If coffee shops close, fewer total cups of coffee are produced. A number of other events can change abilities or willingness to produce. Extraordinarily good or bad weather affects the production of agricultural products. Legislation can affect costs - for example, consider requirements that businesses change production techniques to reduce pollution in a manner that increases costs. Costs will rise, incentives to produce or bring goods to market will fall, and production or the number of goods sellers bring to market will be reduced. Similarly, an increase in the price of corn will increase incentives to produce corn and some farmers will switch land use from soybeans to corn. This will mean a greater production of corn and indirectly cause a decrease in the production of soybeans. The expectation of higher future prices may cause a farmer to withhold production from the current market (if that can be done) in order to increase the sale of goods in the future. Thus the future supply to the market will increase, but the current amount of the product available on the market will decrease. Question 4.19 loading content Steeping some tea... Hover here to see the hint for Question 4.19. Click here to see the answer to Question 4.19. Question 4.20 loading content Steeping some tea... Hover here to see the hint for Question 4.20. Click here to see the answer to Question 4.20. 4.6 How do You Construct Supply Schedules and Curves? In our discussion of demand, we created an economic model of buyers' behavior by assuming that a single influencing factor (price) would change and that all other potential influences (preferences, incomes, prices of related goods, expectations, and the number of potential buyers) would stay the same. We will do the same with producers' decisions. Account for changes in quantities supplied. We begin by considering how changes in the price of a good affect the quantity supplied of a good, when all other possible determinants do not change. The quantity supplied is the quantity of a good or service that a producer will produce or bring to market at a specific price during a given period of time. It is a parallel concept to quantity demanded. This table shows a hypothetical example of the number of oranges a producer might bring to a market at each price level. The table shows that as prices of oranges increase, the quantities supplied increase. It also shows the reverse. As prices decline, a producer will reduce the quantity supplied. Can you explain why?​ Table 4.5: Supply schedule for oranges.​ Question 4.21 loading content Steeping some tea... Hover here to see the hint for Question 4.21. Click here to see the answer to Question 4.21. 4.6.1 Understand Supply As we did with demand, we will use the term supply to mean the entire list of quantities that will be supplied at each price. That list is often called a supply schedule. It is simply a table listing a variety of prices and the quantities that will be supplied at each of those prices. A single supply schedule or table, such as the one shown in Table 4.5, shows the relationship between the market price and how much a producer is willing to produce or bring to market at each price assuming that everything else stays the same. Prices of resources, other costs, and the technology of producing do not change for a given supply. The table summarizing the prices and how much businesses will produce or bring to market is also labeled simply as supply. When we put the same data on a graph, we describe the line as a supply curve, or again, simply supply. Assume that each potential supplier of oranges has the supply schedule shown in Table 4.5. Graphing Question 4.05 Activate Click here to activate this content. The supply curve you draw should look like the one shown in Figure 4.6. The combinations of prices and quantities supplied are plotted first. Then the points are connected under the assumption that prices between those shown in the table will be associated with quantities supplied that are also between those shown in the table. The supply curve shows that as price increases, the quantities supplied by the producer increase. A change in price causes a movement along the supply curve. For example, in Figure 4.6, a movement from point A to point B is a result of a change in price. Figure 4.6: Market demand curve for oranges.​ Assigned as Review Question 4.22 What if another business the same size as the first entered the market? Construct the new supply schedule for the market for oranges by matching the price to the quantity supplied per week. Premise ResponseDrag and drop to match 1 10¢ 2 50¢ 3 $1.00 4 $2.00 5 $3.00 Show Submitted Answer Show Correct Answer Check My Answer The first supply schedule shows the following quantities supplied at each of the prices: 10 cents, 200 oranges; 50 cents, 500 oranges; $1.00, 800 oranges; $2.00, 1,200 oranges; and $3.00, 1,500 oranges. The market supply schedule with two firms is found by adding the quantities supplied by each of the two firms. Thus, the market quantities supplied should be 400, 1,000, 1,600, 2,400 and 3,000 oranges, respectively. Graphing Question 4.06 Activate Click here to activate this content. 4.6.2 Notice Shifts in Supply Curves Changes in prices alone, with every other possible influencing factor staying the same, cause a movement along the supply curve, that is, a change in the quantity supplied. If any one of those other determinants changes, the entire relationship changes. There is a change in supply and there will be a shift of the supply curve. For example, if an innovation in the orange industry made it possible to grow oranges in colder climates, the market for oranges would change. At each price, more oranges would be offered for sale in the market. Figure 4.7 shows the supply curve shifting to the right, representing an increase in supply.​ ​ ​Graphing Question 4.07 Activate Click here to activate this content. This change would cause a shift to the left of the supply curve - a decrease in supply - and would look like the new supply curve in Figure 4.8. Figure 4.8: The effect of a hurricane on the supply of oranges.​ Question 4.23 loading content Steeping some tea... Hover here to see the hint for Question 4.23. Click here to see the answer to Question 4.23. What can you conclude about changing demand and supply? Assigned as Review Question 4.24 Which of the following does not cause a change in demand? A Tastes and preferences B Income C Prices of related goods - substitutes and complements D Price of the good E The number of potential buyers Show Submitted Answer Show Correct Answer Check My Answer Assigned as Review Question 4.25 Match the economic change to its associated effect on demand, supply, quantity demanded, or quantity supplied. Premise ResponseDrag and drop to match 1 Change in technology 2 Price of the good sold by a firm 3 Number of sellers 4 Tastes and preferences 5 Price of related goods Show Submitted Answer Show Correct Answer Check My Answer 4.7 Section Review Questions Graphing Question 4.08 Activate Click here to activate this content. Assigned as Review Question 4.26 Indicate which of the following will cause a movement along a supply curve. Which will shift the supply curve to the left? Which will shift the supply curve to the right? Will supply increase or decrease? Premise ResponseDrag and drop to match 1 A decrease in the price of an input¸ such as wages for labor 2 A decrease in the price of another good firms in the industry could produce 3 A decrease in the price of the good itself 4 A tax on the land used by the producer 5 Expectations of rising prices of the good in the near future Show Submitted Answer Show Correct Answer Check My Answer Assigned as Review Question 4.27 An increase in the cost of an input will cause which of the following? A An increase in supply and a shift to the right of the supply curve B An increase in supply and a shift to the left of the supply curve C A decrease in supply and a shift to the right of the supply curve D A decrease in supply and a shift to the left of the supply curve Show Submitted Answer Show Correct Answer Check My Answer Assigned as Review Question 4.28 Expectations of lower prices in the near future may cause some producers to do what? A Increase the quantity supplied of the good now B Increase the supply of the good now C Decrease the supply of the good now D Decrease the quantity supplied of the good now Show Submitted Answer Show Correct Answer Check My Answer Assigned as Review Question 4.29 Six months ago, the cost of an important input in an industry increased. Then, three months later another change occurred. Production engineers invented a new method that uses fewer raw materials for the same level of production. If these were the only two events that influenced production in the last six months, what has been the influence on the supply? A Six months ago the supply curve shifted to the left, and then three months ago the quantity supplied at each price fell. B The first event caused production to decrease and supply to drop, but the second event increased supply above what it had been originally. C The influences of both events had equal effects on the supply, only one was negative and the other positive so that they perfectly balanced out. D The event of six months ago caused added costs to production and then lowered supply. The event of three months ago allowed more to be produced at each price, so the supply increased. Show Submitted Answer Show Correct Answer Check My Answer Assigned as Review Question 4.30 Consider the market for peaches. Suppose that the conditions for growing peaches in the southeast become unfavorable, and many of the southeastern peach farmers decide to leave the industry and look for other jobs. With this migration of farmers, what will happen to the supply of peaches from the southeast? A Increase B Decrease C Not change Show Submitted Answer Show Correct Answer Check My Answer Assigned as Review Question 4.31 Using the information provided in the previous question, in which direction will the demand curve for peaches shift? The information is repeated for you below: Consider the market for peaches. Suppose that the conditions for growing peaches in the southeast become unfavorable, and many of the southeastern peach farmers decide to leave the industry and look for other jobs. A Left B Right C Not change Show Submitted Answer Show Correct Answer Check My Answer Assigned as Review Question 4.32 Consider an increase in the number of potential buyers. Select whether this change will affect either the supply or demand of apples and whether this change will cause it to increase, decrease or not change. Multiple answers: You can select more than one option A Supply B Demand C Increase D Decrease E Neither F Cannot tell Show Submitted Answer Show Correct Answer Check My Answer Assigned as Review Question 4.33 Consider a decrease in the cost of land used in apple orchards. Select whether this change will affect either supply and demand of apples and whether this change will cause it to increase, decrease or not change. Multiple answers: You can select more than one option A Supply B Demand C Increase D Decrease E Neither F Cannot tell Show Submitted Answer Show Correct Answer Check My Answer For a mathematical supplement to this section, please click here: Supplement to 4.7 Section Review Questions. 4.8 Supply and Demand Together in a Market ​A famous economist, Alfred Marshall, once described supply and demand as the two halves of a pair of scissors. By themselves, the halves are not very useful and one could never really determine which half does the cutting. But when they are combined, we have a powerful tool to cut paper. And when we combine the concepts of supply and demand, we have a powerful tool to analyze markets. Just as the combination of two scissor blades cuts a piece of paper, supply and demand together determine market outcomes. 4.8.1 Changes in Market Prices The final step in building our model of markets is to put supply and demand together into an economic model of a market. We should then be able to understand just how prices and the amounts of goods and services exchanged in markets are determined and be able to use the model to explain the effects of a series of changes in a market. Our demand schedule and our supply schedule for oranges are shown in Table 4.6. Table 4.6: The market supply and demand schedules for oranges.​ If the price in the market were 10 cents per orange, what would be the quantity supplied and the quantity demanded? Again, compare the two numbers and predict what might happen. Assigned as Review Question 4.34 What is the quantity supplied? Numeric Answer: Show Submitted Answer Show Correct Answer Check My Answer Assigned as Review Question 4.35 What is the quantity demanded? Numeric Answer: Show Submitted Answer Show Correct Answer Check My Answer Question 4.36 loading content Steeping some tea... Hover here to see the hint for Question 4.36. Click here to see the answer to Question 4.36. 4.8.1.1 How Does a Shortage Cause Prices to Increase? There will be a shortage of 6,000 oranges at a price of $0.10. A shortage means simply that buyers want to buy more (8,000) than sellers want to sell (2,000). Some buyers who cannot get oranges at a price of 10 cents may offer to pay more. The demand schedule tells us that at a price of $0.50 apiece, buyers wish to purchase 5,000 oranges. Some sellers, seeing an opportunity to increase profits, will raise their prices. Thus, because of the shortage, there will be upward pressure on prices. Think of a sold-out concert or a world-championship sporting event. If there is a shortage of tickets, scalpers may raise the price and some buyers may even advertise that they are willing to pay a higher price. When auto parts maker Takata announced a recall on 28 million airbags, individuals were asked to not use their cars. This caused a large shortage of rental cars available in the market and led to dealerships paying more for rental cars to provide to their customers. As the market price increases, two things happen simultaneously. The quantity demanded will begin to decrease as some buyers turn to substitute goods or find they can no longer afford to buy as much of a product as they did before. The quantity supplied will begin to increase as suppliers see the increased incentives and realize they can pay the higher costs of producing. But if there is still a shortage, the price of a good will continue to increase (and as a result quantity demanded decreases and quantity supplied increases) until the quantity supplied is equal to the quantity demanded. At that point, there will no longer be any reason for prices to rise. In the example in Table 4.6, the price goes from 10 cents to 50 cents per orange. The quantity supplied increases from 2,000 to 5,000 oranges and the quantity demanded decreases from 8,000 to 5,000. The process stops when the quantity supplied equals the quantity demanded at a quantity of 5,000 oranges. At a price of $3.00, compare the quantity demanded with the quantity supplied. What is the difference? What do you think might happen in a market if this were the case? Go ahead. See if you can explain the process of adjustment. Question 4.37 loading content Steeping some tea... Hover here to see the hint for Question 4.37. Click here to see the answer to Question 4.37. 4.8.1.2 How Does a Surplus Cause Prices to Decrease? At a price of $3.00 per orange, the quantity supplied is 15,000 and the quantity demanded is 1,000 oranges. We define this difference as a surplus. A surplus means that sellers are producing more than buyers are willing to buy at the going market price. Since sellers cannot sell all they would like at the market price, some will likely offer to lower the price (perhaps run a sale) to get rid of the excess production. Some aggressive buyers might offer less, seeing that sellers are producing too much. As the price begins to come down, say to $2.00, two things happen simultaneously. First, the quantity demanded increases (from 1,000 to 2,000, for example) as buyers switch from substitute goods and can more easily afford the now less expensive oranges. Second, businesses begin to cut back production (from 15,000 to 12,000, for example) because at the lower price there is less of an incentive to grow oranges or to ship them to this market. Even if the price fell to $1.00, however, there would still be a surplus. This process of the surplus shrinking, prices being lowered by sellers and buyers, and the surplus shrinking further continues until the quantity demanded equals the quantity supplied. In this example, the quantity demanded would equal the quantity supplied at a price of $ .50 per orange. 4.8.2 What Is an Equilibrium in a Market? The adjustment processes in the case of a shortage and in the case of a surplus end with the shortage and surplus eliminated. At that point, there are no longer pressures for prices to change or for the quantities demanded and supplied to change. The market will then be in equilibrium, meaning that given the current supply and demand conditions in the market, price and quantity will not change. The market pressures of supply and demand are balanced. This market price, where the quantity supplied equals the quantity demanded, is described as the equilibrium price, and the quantities demanded and supplied in the market are equal to the equilibrium quantity. The equilibrium price and quantity will not change, unless something else changes. Changes in any of the factors that influence demand, or any of the factors that determine supply, will cause a new shortage or a surplus. Those changes will create a new equilibrium, and the forces of supply and demand will cause market prices and quantities to move toward that new equilibrium. The adjustment process of moving from one equilibrium to another is often described as the law of supply and demand. The law means that given a change in supply or demand conditions, prices and quantities will tend to move toward equilibrium levels, where the quantities supplied and demanded are equal. Figure 4.9: An equilibrium of supply and demand.​ For a mathematical supplement to this section, please click here: Supplement to 4.8.1.2 How Does a Surplus Cause Prices to Decrease? What would happen in the market if income increases? We will assume that oranges are normal goods and that nothing other than income changes. Figure 4.10 shows a new demand curve that has shifted to the right, an increase in demand. Individuals now with higher incomes can afford to buy more of many goods, including oranges. At the current price of 50 cents, the new quantity demanded is 12,000 oranges and there is now a shortage of oranges in the market. Given that the price has not changed, the quantity supplied is still 5,000. The resulting shortage is equal to 7,000 oranges (12,000 - 5,000). Some buyers may offer more in order to get oranges and surely grocery stores will begin to raise their prices. Grocers will see the opportunity to increase profits as they can sell all they have and more at the current prices. As prices increase, the quantity supplied will begin to increase. Remember that a higher price increases incentives to grow and ship oranges to this market. The quantity demanded will begin to decrease from the new higher amount as some consumers will switch to substitutes as the price of oranges rises. The shortage will get smaller. Figure 4.10 shows that if the price increases to $1.00, the shortage will still be about 2,000 oranges (10,000 - 8,000). But the process continues as long as there is a shortage. Figure 4.10: How market forces shrink a shortage.​ Both the new equilibrium price (about $1.25) and the new equilibrium quantity (about 9,000 oranges) will be higher than before the increase in income. See Figure 4.11. Figure 4.11: New equilibrium after a change in demand.​ A second application focuses on supply. Suppose a new fertilizer enables producers to grow more oranges in cooler climates. The enhanced technology allows producers to increase supply. The result is shown in Figure 4.12. Figure 4.12: The effect of an increase in supply in the market for oranges.​ The increase in supply causes the new quantity supplied (13,000 oranges) to be greater than the quantity demanded (9,000 oranges) at the current market pr

total costs

All costs of producing a specific amount of output.

Allocative efficiency

Allocating our resources to produce the kinds of goods and services we want the most.

Economic model

An abstract description of a part of an economy. Simplifying assumptions are made, with a goal of understanding and explaining economic events.

Production possibilities frontier

An economic model showing possible combinations of outputs, given resources and technology.

Inflation

An increase in the overall level of prices of goods and services in the economy. Often expressed as an annual rate of increase.

Unemployed

An individual is counted as unemployed if he or she does not have a job and is actively looking for work.

Oligopoly

An industry with few producers, high entry barriers, and each one has market power. They compete on either price or quantity and may charge the same or different prices.

Monopolistic competition

An industry with many competitors, all producing slightly different products.

Entry barriers

Any impediment that makes entry into a market difficult or impossible for new firms.

Law of diminishing marginal utility

As a consumer purchases more of a good in a specific time period, the additional satisfaction enjoyed from the additional unit of the good will diminish.

Shortage

At a single price, the quantity demanded is greater than the quantity supplied.

Surplus

At a single price, the quantity supplied is greater than the quantity demanded.

Fixed costs

Costs that do not change as a result of a decision.

Elastic

Demand is elastic when the percentage change in the quantity demanded is greater than the percentage change in the price of the good or service. The price elasticity of demand is greater than one.

Inelastic

Demand is inelastic when the percentage change in the quantity demanded is less than the percentage change in the price of the good or service. The price elasticity of demand is less than one.

Economic growth

Economists use the term to refer to continual increases in real GDP or real GDP per capita. The term is often used in the press to mean increases in total spending.

Net exports

Exports of goods and services minus imports of goods and services.

Total variable costs

For a given level of output, the costs (prices multiplied by the amounts of inputs) of the inputs that can be changed. These costs vary as output changes.

Exports

Goods and services produced domestically and sold abroad.

Imports

Goods produced abroad and purchased domestically.

Complementary goods

Goods that are used together. When the price of one good increases, the demand for its complementary good decreases.

Substitute goods

Goods that can used in place of one another. When the price of one increases, the demand for a substitute good increases.

Decision-making rule

If the additional benefits (correctly measured) are greater than the additional costs incurred (correctly measured), go for it. If the additional costs are greater than the additional benefits, do not do it.

Real income

Income adjusted for price changes. A measure of the amount of goods and services one can purchase.

Diminishing marginal returns

Increasing one input, while holding all other inputs constant, will eventually result in smaller and smaller additions to output.

Economic resources

Labor, capital, and natural resources that can be used to produce goods and services.

Antitrust law

Legislation that restricts deliberate formation of monopolies and prevents firms from engaging in anticompetitive practices.

Economies of scale

Long-run average total cost decreases as the quantity of output increases.

Diseconomies of scale

Long-run average total cost increases as the quantity of output increases.

constant returns to scale

Long-run average total cost remains constant as the quantity of output increases.

Taxes

Mandatory payments to governments from consumers and producers.

Markets

Methods through which buyers and sellers come together and determine the prices and quantities of goods and services that will be exchanged.

Scarcity

Our wants are greater than our abilities to satisfy them. This leads to the necessity for making choices about how we use our resources.

Subsidies

Payments from governments to producers or consumers of specific goods and services.