HW 3
supply curve
A curve that shows the relationship between the price of a product and the quantity of the product supplied.
supply schedule
A table showing the relationship between the price of a product and the quantity of the product supplied.
demand curve
a curve that shows the relationship between the price of a product and the quantity of the product demanded
inferior good
A good for which the demand increases as income falls and decreases as income rises.
normal good
A good for which the demand increases as income rises and decreases as income falls.
complements
Goods and services that are used together. When two goods are complements, the more consumers buy of one, the more they will buy of the other. A decrease in the price of a complement causes the demand curve for a good to shift to the right. An increase in the price of a complement causes the demand curve for a good to shift to the left.
substitues
Goods and services that can be used for the same purpose. When two goods are substitutes, the more you buy of one, the less you will buy of the other. A decrease in the price of a substitute causes the demand curve for a good to shift to the left. An increase in the price of a substitute causes the demand curve for a good to shift to the right.
quantity supplied
The amount of a good or service that a firm is willing and able to supply at a given price.
the diagram in panel is an example of
a supply schedule
demand schedule
a table showing the relationship between the price of a produce and the quantity of the product demanded
market price is determined by a. both supply and demand b. supply only c. demand only d. neither supply nor demand
a. both supply and demand the interaction of supply and demand determines equilibrium price. Without both curves, we can only speculate on the price
According to the law of supply a. there is a positive relationship between price and quantity supplied b. as the price of a product increases, firms will supply less of it to the market c. as the price of a product increases, firms will supply more of it to the market d. A and C only
d. A and C only
Which of the following would cause a shift in the demand curve from point A to point B? a. an increase in the price of a substitute good b. a decrease in income (inferior good) c. an increase in income (normal good) d. all of the above
d. all of the above When consumers increase the quantity of a product they wish to buy at all prices, the entire demand curves shifts from D1 to D2. This is called an "increase in demand." When consumers decrease the quantity of a product they wish to buy at all prices, the entire demand curves shifts from D1 to D3. This is called a "decrease in demand." Many variables other than price affect demand. The five most important are: 1. Income of consumers. If demand increases (decreases) when income increases (decreases), the good is considered "normal." If demand decreases (increases) when income increases (decreases), the good is considered "inferior." 2. Prices of substitutes (goods used for the same purpose) and complements (goods used together). 3. Consumer tastes and preferences. 4. Population (number of consumers). 5. Expected future prices
What is the distinction between substitutes and complements?
substitutes are goods used for the same purposes while complementary goods are used together
In the diagram to the right, when the price is $71 per player, the amount of the ______ is ______ million players per month
surplus, 56 When the quantity supplied is greater than the quantity demanded, there is a surplus in the market. To calulate the surplus, subtract quantity demanded from quantity supplied. When the quantity demanded is greater than the quantity supplied, there is a shortage in the market. To calulate the shortage, subtract quantity supplied from quantity demanded. quantity demanded= 22 million quantity supplied = 78 million Surplus = quantity supplied= quantity demanded : 78-22= 56 million
In the diagram to the right, when demand decreases, a ______ develops at the original price. Equilibrium price will _____ and equilibrium quantity will ______ as a new equilibrium is established.
surplus; fall; fall
quantity demanded
the amount of a good or service that a consumer is willing and able to purchase at a given price
market demand
the demand by all the consumers of a given good or service
a perfectly competitive market is a market that meets the conditions of
1. many buyers and sellers 2. all firms selling identical products 3. no barriers to new firms entering the market the model of demand and supply assumes that we are analyzing a perfectly competitive market. These assumptions are very restrictive and apply exactly to only a few markets, such as the markets for wheat and other agricultural products. Experience has shown, however, that the model of demand and supply can be very useful in analyzing markets where competition among sellers is intense, even if there are relatively few sellers and the products being sold are not identical.
Graphically show the impact on price and quantity of a large number of new clothing outlets on the apparel market. 1.) Using the line drawing tool, show the effect of a large number of new clothing outlets on the market for apparel. Properly label your curve. 2.) Using the point drawing tool, show the new equilibrium. Label your point 'E2'.
S2, E2
equilibrium- supply shifts
When new firms enter the market, the market supply curve for goods shifts to the right. The diagram above shows the supply curve shifting from S1 to S2. When the supply curve shifts to the right, there will be a surplus at the original equilibrium price, $50 per unit. The surplus is eliminated as the equilibrium price falls to $40, and the equilibrium quantity rises from 50 to 60 million units per month. If existing firms exit the market, the supply curve will shift to the left, causing the equilibrium price to rise and the equilibrium quantity to fall.
In the table below, fill in the missing blanks to complete the summary of the effects of changes in demand and supply on equilibrium price and quantity.
Whenever only demand or only supply shifts, we can easily predict the effect on equilibrium price and quantity. The table above summarizes all possible combinations of shifts in demand and supply over time and the effects of the shifts on equilibrium price (P) and quantity (Q). For example, if the demand curve shifts to the right and the supply curve also shifts to the right, then the equilibrium quantity will increase, while the equilibrium price may increase, decrease, or remain unchanged. Note also that in the ambiguous cases where either price or quantity might increase or decrease, it is also possible that price or quantity might remain unchanged.
the diagram in panel a is an example of
a demand schedule
In the diagram, when supply decreases, ____ develops at the original price. Equilibrium price will ____ and equilibrium quantity will ____ as a new equilibrium is established.
a shortage; rise; fall
market equilibrium
a situation in which quantity demanded equals quantity supplied The purpose of markets is to bring buyers and sellers together. Notice that the demand curve crosses the supply curve at only one point. Only at this point is the quantity of goods consumers are willing to buy equal to the quantity of goods firms are willing to sell. This is the point of market equilibrium. Only at market equilibrium will the quantity demanded equal the quantity supplied. The price at the point of market equilibrium is known as the equilibrium price, and the quantity at the equilibrium point is know as the equilibrium quantity.
consider the following statement: "An increase in supply decreases the equilibrium price. The decrease in price increases demand. The statement is A. false: decreases in price affect the quantity demanded, not demand. B. false: increases in supply increase price. Decreases in price increase demand. C. false: increases in supply decrease price. D. true: increases in supply decrease price. Decreases in price increase demand.
a. false: decreases in price affect the quantity demanded, not demand. When a shift in the demand curve and/or the supply curve changes the equilibrium price, the resulting price change does not cause a further shift in the demand or supply curve. Changes in the price of a good or service only affect the quantity supplied or the quantity demanded. Changes in price do not affect the supply and demand curves. A change in quantity demanded or quantity supplied is the result of a change in the good's own price and causes a movement along the curve. A change in demand or supply is the result of changes in factors other than the good's own price and causes a shift in the entire curve.
According to the law of demand, there is an inverse relationship between price and quantity demanded. That is, the demand curve for goods and services slopes downward. Why? a. when the price of a good increases, consumers' purchasing power falls, and they cannot buy as much of the good as they did prior to the price change b. when price increases, quantity demanded increase c. when the price of a good increases, consumers purchase complementary goods that are now relatively less expensive d. A and C only
a. when the price of a good increases, consumers' purchasing power falls, and they cannot buy as much of the good as they did prior to the price change
in general the term ceteris paribus means
all else equal the requirement that when analyzing the relationship between two variables, such as price and quantity demanded, other variables must be held constant. That is, we assume that the only event that affects our consumption of a good or service is the price. In reality, the economy is much more complex. However, in order to create models—simplified versions of the economy—and make distinct statements about the effect of changes in price on amount consumed, we hold other factors that affect consumption constant.
Consider the figure to the right and assume that it is the market for health-care services. When the "baby boomer" generation retires, the number of people who require health care increases by 30%, and, as a result, the number of health-care providers also increases, but by only 25%. What is the effect on the price of health-care services over time? A. It decreases because demand increased by less than supply. B. It increases because demand increased by more than supply. C. It increases because demand increased by less than supply. D. It decreases because demand increased by more than supply.
b. it increases because demand increased by more than supply Whether the price of a product rises or falls over time depends on whether demand shifts by more than supply. When we consider the effect of a simultaneous increase in both supply and demand, the following rule applies: If demand increases by more than supply, the equilibrium price rises. If demand increases by less than supply, the equilibrium price falls. In this case, demand increases by more than supply increases.
Which of the following events would cause the supply curve to increase from S1 to S3? a. an increase in the price of inputs b. a decrease in the number of firms in the market c. a decrease in the price of inputs d. higher expected future prices
c. a decrease in the price of inputs When firms increase the quantity of a product that they wish to sell at a given price, the supply curve shifts to the right. This is shown by the shift from S1 to S3. When firms decrease the quantity of a product that they wish to sell at a given price, the supply curve shifts to the left. This is shown by the shift from S1 to S2. Changes in supply (shifts in the entire supply curve) are the result of changes in variables other than the good's own price. Changes in the following variables cause a shift in the entire supply curve: 1. Prices of inputs. When input prices increase (decrease), the amount of the good or service that firms are willing and able to supply decreases (increases) due to a change in the cost of production. 2. Technological change. Technological advances often streamline the production process and increase the amount of the product firms are able to produce at all prices. 3. Prices of substitutes in production. If a firm can produce similar goods, it might shift production resources into the good that has the higher market price. 4. Number of firms in the market. If there are more (fewer) firms in the market, supply increases (decreases). 5. Expected future prices. A firm might postpone production of a good or service to wait for higher expected future prices. As a result, current supply falls.
On the diagram to the right, what does a movement from B to C represent? a. a movement down the supply curve b. decrease in supply c. change in quantity supplied d. change in supply
c. change in supply If only the price of the product changes, there is a movement along the supply curve, which is an increase or a decrease in the quantity supplied. If any other variable that affects the willingness of firms to supply a good changes, the supply curve will shift, which is an increase or decrease in supply. When firms increase the quantity of a product they wish to sell at a given price, the supply curve shifts to the right.
according to the law of demand a. when the price of a product falls, quantity demanded will decrease b. when the price of a product increase, quantity demanded will increase c. there is an inverse relationship between price and quantity demanded d. all of the above
c. there is an inverse relationship between price and quantity demanded
What is the distinction between a normal and an inferior good a. when income increases, demand for a normal good decreases while demand for an inferior good increases b. normal goods are used together while inferior goods are used for the same purposes c. when income increases, demand for a normal good increases while demand for an inferior good falls d. normal goods are used for the same purposes while inferior good are used together
c. when the income increases, demand for a normal good increases while demand for an inferior good falls Normal good A good for which the demand increases as income rises and decreases as income falls. Inferior good A good for which the demand increases as income falls and decreases as income rises.
A change or shift in demand can be due to a
change in consumer preference A change in price is simply a movement up or down an existing demand curve. A cheaper production technology would result in a change in supply and not demand.
On the diagram to the right, a movement from a to b represents a
change in quantity demanded It is important to understand the difference between a change in demand and a change in quantity demanded. A change in demand refers to a shift of the demand curve. A shift occurs if there is a change in one of the variables, other than the price of the product, that affects the willingness of consumers to buy the product. A change in quantity demanded refers to a movement along the demand curve as a result of a change in the product's price.
Graphically show the impact of a cold winter on the natural gas market. 1.) Using the line drawing tool, show how a cold winter will affect the market for natural gas. Properly label your curve. 2.) Using the point drawing tool, show the new equilibrium. Label your point 'E2'. (a cold winter will push demand even higher)
d2, e2
In the diagram, point A provides the ____, point B the _____, and point C the ______.
equilibrium price; market equilibrium, equilibrium quantity
a reduction in natural gas stockpiles signals production should
increase A reduction in natural gas stockpiles signals production should increase. If stockpiles (i.e. inventories) are falling that means consumption (i.e. demand) is greater than production (i.e. supply). Therefore, falling stockpiles signal that producers need to increase output.
the multi year guy of natural gas is due to production ____ from fracking shales
increases
When a product's price changes it is a ______ an existing supply or demand curve
movement along
Graphically show the impact on price and quantity when production costs fall due to a new technology. 1.) Using the line drawing tool, show the effect of a decrease in production cost on the market for oil. Properly label your curve. 2.) Using the point drawing tool, show the new equilibrium. Label your point 'E2'.
s2. e2