Microeconomics Chapter 4: Desmans, Supply, and Markets

If you get a phone call telling you that you have won an all-expenses-paid, 3-day, 2-night trip to Aruba, that trip is free! And, the meals are included. Therefore, there is such a thing as a free lunch!

False. There is no such thing as a free lunch. Even if this whole trip is free, you are still have to give up something to receive it. For example, you would be giving up the money you could be making in the three days you would be missing from work, or you would be giving up time spent doing other things. Everything has a cost, and most of the times, the tradeoff is time and money.

Consider a hypothetical situation where there is a simultaneous change in demand and supply. How will the equilibrium quantity and price will change as a result of the possible combination of changes to supply and demand in demand and in supply? Explain why.

If both the supply and demand increase, the equilibrium price is ambiguous and the equilibrium quantity is increased. If there is a decrease in supply and a increase in demand, the equilibrium price would increase and the equilibrium quantity is ambiguous. If there is a decrease in both supply and demand, the equilibrium price is ambiguous and the equilibrium quantity is decreased. Lastly, if there is a increase in supply and a decrease in demand, the equilibrium price is decreased and the equilibrium quantity is ambiguous.

"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?

Increase as consumers buy more now to avoid higher prices later

Oprah Winfrey made comments about the possibility of contracting mad-cow disease from eating beef. Some observers said that those comments had negative effects on the beef market. In the same period of time, changes in rate of production may have been the real culprit. How and why would an increase in beef production, "oversupply," and weak exports affect prices?

Increased beef production would increase supply with the result of lower prices and increased quantities. Weak exports would cause a decrease in demand and lower prices and lower quantities. Oversupply may mean that the result of the two changes created outcomes with quantities supplied larger than the quantities demanded and that is what drove down prices.

Can you think of exceptions to the law of demand?

This is very rare, but if individuals are very poor and a food, such as instant noodle soup, becomes more expensive, individuals may buy more of it because they are unable to afford any other type of food. Let's say an individual must eat 7 dinners in a week. Currently they purchase 5 dinners of instant noodle soup (inexpensive meal) and 2 meals of grilled chicken salad (More expensive meal). If the price of instant noodle soup increases, it could mean the individual cannot afford to buy their usual mix of dinners. In order to continue to eat 7 meals a week, they drop one of the grilled chicken dinners and buy another instant noodle soup meal.

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

Marginal Cost

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

PPF

A decrease in the price of another good firms in the industry could produce

Shift the supply curve to the right; an increase in supply.

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.

Supply; increase

Using methods to produce goods and services such that there are no wasted (or redundant) inputs.

Technical efficiency

A decrease in income will cause which of the following to happen to the demand for used cars? Assume used cars are inferior goods.

The demand for used cars will increase.

Equilibrium quantity

The market quantity where the quantity demanded and quantity supplied are equal.

Equilibrium

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

An increase in the number of potential buyers will most likely cause which of the following?

An increase in demand

Surplus

At the current market price, the quantity supplied is greater than the quantity demanded.

Can you think of a good that someone might buy less of if his or her income increases?

Bus rides. If income increases, most individuals will choose to buy a car and no longer ride the bus.

Which of the following lists the three generalized items economists refer to as inputs?

Capital, labor and land

Law of Demand

If everything else remains unchanged, a decrease in price will cause the quantity demanded to increase. An increase in price will cause the quantity demanded to decrease.

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?

In almost every case, individuals will buy less music if the price increases. Consumers have to decide what they will spend their money on; if music becomes more expensive, that would mean they could buy less of other goods if the quantity of music they purchase stays the same.

Law of supply

- as price increase, quantity supply increases. Other things being equal, when the price of a good rises, the quantity supplied of the good also rises, and when the price falls, the quantity supplied falls as well.

Shift factors of supply

1. Price of inputs 2. Technology 3. Expectations 4. Taxes and subsidies 5. Number of sellers

An increase in the cost of an input will cause which of the following?

A decrease in supply and a shift to the left of the supply curve

The price at which quantity supplied is equal to quantity demanded.

Equilibrium price

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

excess quantity supplied

A change in price does change

quantity demanded and quantity supplied.

How does an decrease in input costs affect suppliers?

supply increases

The concept of scarcity is important in economics because:

it implies people must have a way to make choices between opportunities.

In your own words, explain how and why changes in prices cause the amounts supplied by producers to change.

A firm is always trying to maximize profit. If prices increase, there is an increased benefit to producing more output. Therefore, firms have an incentive to increase production to earn more profit.

A decrease in the price of the good itself

A movement along a supply curve; no change in supply

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

Sometimes changes in income will not increase or decrease the quantity of a good or service purchased. Can you think of an example?

An individual's consumption of water does not change much with income. Individuals typically consume and use the same amount of water for drinking, cooking, and bathing.

Shortage

At the current market price, the quantity demanded is greater than the quantity supplied.

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?

Decrease

Indicate how a decrease in the cost of producing oranges (a substitute for apples) will affect the equilibrium price and the equilibrium quantity in the market for apples.

Decrease; decrease

All other things being the same, a new technology that lowers the cost of production of fidget spinners will cause the equilibrium price of fidget spinners to ______________ and the equilibrium quantity of fidget spinners to ______________.

Decrease; increase

The quantity of a good or service people are willing and able to purchase at each price, assuming that all possible influencing factors other than price remain constant.

Demand

How will an increase in the price of DVDs affect the demand for DVD players? Why?

Demand for DVD players decreases

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

Economic model

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

Economic resources

Input prices (supply)

Increase price= increases costs of production = decrease in supply

Assume Chromebooks are substitutes for laptop computers. An increase in the price of Chromebooks (all other things the same) will likely cause the equilibrium price of laptop computers to ______________ and the equilibrium quantity of laptop computers purchased to ______________ if all other factors remain constant.

Increase; increase

Assume that the tariff posed in the previous question still holds. How will that same tariff affect the market for domestic computers? The equilibrium price of domestic computers will ______________ and the equilibrium quantity of domestic computers will ______________.

Increase; increase

Indicate how an increase in tastes for apples will affect the equilibrium price and the equilibrium quantity in the market for apples.

Increase; increase

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 ______________.

Increase; not change

A decrease in price, assuming nothing else changes, will cause an increase in the quantity demanded and an increase in price, assuming nothing else changes, will cause a decrease in the quantity demanded.

Law of Demand

Recently, stores have been reporting increased sales of DVD players and a reduction in their prices. In accordance with this trend, one might predict that there has been a(n) ______________ in demand and a(n) ______________ in supply.

No change; increase

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.

Not change

Which of the following does not cause a change in demand?

Price of the good

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

Quantity Demanded

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?

Substitute goods

When a fall in the price of one good reduces the demand for another good, the two goods are called

Substitutes

Equilibrium Price

This market price, where the quantity supplied equals the quantity demanded

Law of supply and demand

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.

Tates/preferences for demand

if Tates shift toward a good, the demand increases.

What shifts demand?

income, price of related goods, tastes/preferences, expectations, and number of buyers, taxes, and seasons

Quantity demanded

is how much buyers are willing and able to buy at a particular price.

A tax on the land used by the producer

shift the supply curve to the left; a decrease in supply

Expectations of rising prices of the good in the near future

shift the supply curve to the left; a decrease in supply.

A decrease in the price of an input, such as wages for labor

shift the supply curve to the right; an increase in supply.

Ceteris-paribus

with other conditions remaining the same.

Lady Gaga performed at the 2017 Super Bowl halftime show for free (The NFL covered production costs). Why would an artist who regularly grosses $1.3 million dollars per concert agree to perform for free?

​The super bowl is viewed by over 100 million individuals. It is a venue that provides an opportunity to increase the number of buyers and change tastes and preferences for her music that is normally not available. The increased demand for concert tickets as a result increases ticket prices and the number of records sold.

Price of related goods shifts what?

Demand and supply

What is the opportunity cost of a small business investing $1 million in a new project that will pay back $1.5 million in one year? The firm's goal is to end the year with the most assets possible. Its other alternatives are: I. Leave $1 million in a bank account and earn $50,000 in interest. II. Invest $1 million in new equipment that will have a value of $1 million at the end of the year and have earned an additional $100,000 in profits during the year What is the opportunity cost of the new project?

$1,100,000

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.

Demand & Increase

Assume that tastes change so that tennis is no longer as desirable to play as it is now. What would happen to the market for tennis balls?

Demand decreases, the equilibrium quantity is smaller, and the price is lower.

If I have to drop out of college, the choice will cost me all of the tuition I have already paid and the income I could have earned during those years while I was in college.

False. I did pay these costs, but they are sunk and thus not relevant to the decision.

Expectations of lower prices in the near future may cause some producers to do what?

Increase the supply of the good now

What are the key influences on buyers' decision-making? Summarize the demand discussion in your own words.

When you are buying a good, there will be multiple things that will determine if you get it. For example, your preference, income, price of related goods, changes in the price of the good in the future, and how many buyers there are in the market. All of these can affect my decision to get a good/service.

When a fall in the price of one good raises the demand for another good, the two goods are called

complements

Quantity supplied

is how much sellers are willing and able to produce at each specific price.

Demand

is the whole table, the whole schedule, or the whole curve.

Income- shift factor for demand

normal good- when income rises, demand will also increase. If the demand for a good falls when income falls, the good is called a normal good. If the demand for a good rises when income falls, the good is called an inferior good.

In 2017, the average MSRP (manufacturer's suggested retail price) of a Harley Davidson motorcycle was $20,999. 10,081 Harley Davidson motorcycles were sold in Canada. In 2018, the average MSRP of a Harley Davidson motorcycle was $19,000. 9,690 Harley Davidson motorcycles were sold in Canada. If the Harley Davidson motorcycle market in Canada was in equilibrium in both cases, this example represents a violation of the law of demand.

False. Although you observe a lower price and a lower equilibrium quantity, this may be the result of a shift in demand to the left (or decrease in demand). This would mean that something other than price has changed. The law of demand focuses only on the relationship between price and quantity demanded (when everything else is constant).

What will happen to current purchases if people expect lower prices in the future? What will happen with expectations of higher incomes?

Demand decreases; demand increases

Suppose a farmer has a choice between planting soybeans and planting corn. If the price of corn increases, what will happen to the eventual production of soybeans and corn? Why?

Eventually, the farmer will produce fewer soybeans and more corn. The opportunity cost of growing soybeans increases. The farmer is giving up more and more revenue by not planting corn and growing more soybeans. To maximize profit, the farmer will increase corn production and decrease soybean production.

In a two-good model, if a country is using all of its resources in a technically efficient way, its Production Possibilities Frontier must be sloping upward.

False. If all of its resources are being used in a technically efficient way, it must be the case that to make more of one good it will have to give up resources that are being used to produce the other good. This is a negative or downward sloping relationship.

The kale fad starts to fade as people realize it is just bitter lettuce. At the same time advances in agriculture reduce the cost of growing all leafy vegetables (including kale). If these two things happen at the same time we would expect the market price of kale to fall and the equilibrium quantity to fall as well (a drawing is permitted but not required).

False. It is false because the supply of the kale increases with the improvements of technology and the demand decreases. The demand decreases because of the change in taste and preferences. If the supply increases and the demand decreases at the same tame, the equilibrium quantity would be ambiguous and the price would go down.

An increase in the price of toilet paper will decrease the demand for toilet paper, all other things being equal.

False. The increase in price will lead to a decrease in the quantity demanded of toilet paper all other things being equal, not demand.

Assume that homeowners can sell their house whenever they want and they don't have to worry about finding a new job. How will a homeowner's decision to sell their home change if they expect housing prices to increase? What will happen to the number of houses in the market?

If homeowners expect higher prices in the future, they may decide to delay listing their house for sale. The future supply of houses for sale will be larger, but the supply in the present will shrink.

Analyze the process following an increase in the prices of the inputs used to produce the good.

If the prices of inputs increase, producers will no longer be able to earn a profit and will reduce the amount of production at each market price. A decrease in supply means there is a shortage (quantity supplied is smaller than quantity demanded) at the current price. Both the firms and consumers recognize there is a shortage. Consumers will offer a higher price to make sure they get the good and firms will charge a higher price upon recognizing the shortage in order to earn more profit. At a higher price, quantity demanded decreases and the incentive to produce increases, leading to a larger quantity supplied. There will still be a shortage, but this process with continue until a new equilibrium with a higher market price and small quantity of goods exchanged

A pizza parlor can make 100 pizzas in an evening. They make 40 pepperoni pizzas and 60 extra cheese pizzas. 100 people order pizza, but 50 people would like a pepperoni pizza and 50 would like an extra cheese pizza. This pizza parlor is what?

Technically efficient, but not allocatively efficient nor economically efficient

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?

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.

Describe the resulting situation. Nintendo released a limited supply of their original system, a product that many people wanted to buy. Due to a misestimate of potential demand, there were significantly more people that wanted the system than there were systems available for sale.

The price will increase. Stores sold out of the original Nintendo system and secondary market such as craigslist and eBay began listing them. A product that sold for $60 in stores sold for as much as $280 on eBay.

How would a market equilibrium change if people decided they didn't like a good anymore?

This is a change in tastes and preferences. As a result of tastes and preferences turning negative for a product, demand will decrease. This leads to a surplus that firms and consumers recognize. Consumers will offer a lower price and firms will offer to sell at a lower price. At the lower price, quantity demanded increases and quantity supplied decreases. There will still be a surplus. This whole process will continue until quantity supplied is equal to quantity demanded. The market will have a lower price and a smaller quantity exchanged.

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.

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.