3.4 The Effect and Demand and Supply Shifts on Equilibrium

A student was asked to draw a demand and supply graph to illustrate the effect on the market for smartphones of a fall in the price of processorsprocessors used in​ smartphones, holding everything else constant. She drew the graph to the right and explained it as​ follows: ​"ProcessorsProcessors are an input to​ smartphones, so a fall in the price of processorsprocessors will cause the supply curve for smartphones to shift to the right​ (from Upper S 1S1 to Upper S 2 right parenthesis .S2). Because this shift in the supply curve results in a lower price left parenthesis Upper P 2 right parenthesis commaP2, consumers will want to buy more smartphones and the demand curve will shift to the right​ (from Upper D 1D1 to Upper D 2 right parenthesis .D2). We know that more smartphones will be​ sold, but we​ can't be sure whether the price of smartphones will rise or fall. That depends on whether the supply curve or the demand curve has shifted farther to the right. I assume that the effect on supply is greater than the effect on​ demand, so I show the final equilibrium price left parenthesis Upper P 3 right parenthesisP3 as being lower than the initial equilibrium price left parenthesis Upper P 1 right parenthesis .P1.​" 1. Where is the flaw in the​ student's argument?

1. Demand will not shift.

1. Which diagram represents the​ cancer-fighting drug? _________ Why?

1. Figure 2 Market demand shows few

Years​ ago, an apple producer argued that the United States should enact a​ tariff, or a​ tax, on imports of bananas. His reasoning was​ that: ​"the enormous imports of cheap bananas into the United States tend to curtail the domestic consumption of fresh fruits produced in the United​ States." 1. This producer apparently assumed apples and bananas to be _________. 2. In a graph​ (not shown) of the banana market in the United​ States, the imposition of a tariff on banana imports would

1. Substitutes 2. Shift supply​ leftward, increasing equilibrium price and decreasing equilibrium quantity.

1. If demand and supply both​ increase, which of the following will definitely​ occur? 2. If demand decreases and supply​ increases, which of the following will definitely​ occur?

1. The equilibrium quantity will increase. 2. The equilibrium price will decrease.

1. The equilibrium quantity of natural gas will 2. The equilibrium price of natural gas will

1. decrease only if demand decreases more than supply increases 2. decrease

1. The equilibrium quantity of gasoline will 2. The equilibrium price of gasoline will

1. decrease only if demand decreases more than supply increases. 2. decrease

An article in the Wall Street Journal noted that the demand for video Internet advertising was increasing at the same time that the number of Internet sites accepting advertising was also increasing. After reading the​ article, a student​ argues: ​"From this​ information, we know that the price of Internet ads should​ rise, but we​ don't know whether the total quantity of Internet ads will increase or​ decrease." Assume the equilibrium price of Internet advertisements is initially Upper P1 and the equilibrium quantity is Upper Q1. ​1.) Use the line drawing tool to draw a new supply curve for Internet advertisements ​(Upper S2​) and a new demand curve for advertisements ​(Upper D2​). Properly label the lines. ​2.) Use the point drawing tool to indicate the market equilibrium price and quantity. Label this point​ 'Equilibrium'. 1. The​ student's analysis is

1. incorrect because the quantity of Internet ads will​ rise, but the change in price depends on the magnitude of the relative shifts of demand and supply.

1. The equilibrium quantity of wine will 2. The equilibrium price of wine will

1. increase only if demand increases more than supply decreases. 2. increase

An unexpected frost in the orange groves of California would cause

a decrease in the supply of orange​ juice, increasing the equilibrium price.

The demand for grapes is highest during summer and lowest during winter. Yet grape prices are normally lower in summer than in winter. What must be happening to the supply of grapes​, from winter to​ summer, for the equilibrium price to​ fall?

The supply increases more than the demand increases.

​"Increased production leads to a lower​ price, which in turn increases​ demand." This student must be referring to

an increase in quantity demanded.

An increase in demand causes an increase in the equilibrium price. The increase in equilibrium price will then cause an increase in supply.

false

When the demand curve shifts to the​ right,

the equilibrium price and quantity will both increase.