Ch. 4 - Equilibrium: Supply and Demand Shifts

How would a global fall in income affect oil prices? Oil prices would fall as demand for oil dropped. There would be no impact on oil prices. Oil prices would rise as firms strove to gain more income proportionately. Income is not a demand factor, so there would be no change.

Oil prices would fall as demand for oil dropped. → This assumes that oil is a normal good, which is a reasonable assumption.

How does a shortage affect prices? A shortage will push prices down. A shortage will push prices up. A shortage will cause prices to remain stable. A shortage will cause changes in quantities, not in prices.

A shortage will push prices up. → The higher price reduces quantity demanded and increases quantity supplied, thus reducing the shortage.

Suppose that when good L is free, buyers will demand 1,000 units of the good but that the quantity demanded falls by 40 units for every $3 increase in the price. If the quantity supplied of this good is fixed at 640 units, the equilibrium price in this market will be: $24. $30. $27. $48.

$27. → At a price of $27, quantity demanded will be equal to quantity supplied.

A movement along a fixed demand curve caused by a rightward shift in the supply curve is best described as: an increase in quantity demanded. an increase in demand. an increase in quantity supplied. a decrease in supply.

an increase in quantity demanded. → This increase in quantity demanded is in response to the price decrease caused by the shift of the supply curve.

An increase in quantity demanded is: a movement along a fixed demand curve caused by a rightward shift in the supply curve. a movement along a fixed supply curve caused by a rightward shift in the demand curve. a shift in the demand curve up and to the right. a shift in the supply curve up and to the left.

a movement along a fixed demand curve caused by a rightward shift in the supply curve. → Quantity demanded changes when the price changes.

Suppose that when good J is free, buyers will demand 100 units of the good, but that the quantity demanded falls by 5 units for every $2 increase in the price. If the quantity supplied of this good is fixed at 60 units, the equilibrium price in this market will be: $40. $24. $16. $30.

$16. → At a price of $16, quantity demanded will be equal to quantity supplied.

A decrease in the demand for Belorussian vodka will result in: an increase in the price and supply of Belorussian vodka. a decrease in the price and quantity of Belorussian vodka supplied. a decrease in the price and supply of Belorussian vodka. an increase in the price and a decrease in the quantity of Belorussian vodka supplied.

a decrease in the price and quantity of Belorussian vodka supplied. → The decrease in demand is shown as a leftward shift in the demand curve.

The financial crisis of 2007-2010 had a huge impact on the U.S. housing market, causing the number of uninhabited houses to be far greater than the number of Americans able and willing to buy a house. Which of the following is the best analysis of this situation? This surplus of houses led to increases in housing prices during this period. This surplus of houses led to decreases in housing prices during this period. This shortage of houses led to decreases in housing prices during this period. This shortage of houses led to increases in housing prices during this period.

This surplus of houses led to decreases in housing prices during this period. → Housing prices dropped over 25% between 2006 and 2010.

In Vernon Smith's classroom experiments, prices, quantities, and gains from trade all converged quickly to those predicted by economic theory: despite the fact that other experiments had consistently disproved the supply and demand model. because the students were fully aware of the supply and demand curves. despite the fact that students knew only their own willingness to buy or sell. because the students were all experts in the supply and demand model.

despite the fact that students knew only their own willingness to buy or sell. → The maximization of gains from trade by the free market is the product of human action, not of human design.

A(n) _____________ is a situation in which the quantity demand is equal to the quantity supplied. shortage surplus equilibrium price floor

equilibrium → When a market is in equilibrium, there is no pressure for price to rise or fall.

Suppose that when good Y is free, buyers will demand 200 units of the good, but that the quantity demanded falls by 5 units for every $2 increase in the price. If the price of the good is $40 and the quantity supplied of the good is 125 units: there is no pressure for the price to change. the price will eventually rise above $40. the price will eventually rise to exactly $80. the price will eventually fall below $40.

the price will eventually fall below $40. → There is a surplus in this market, because quantity demanded is less than quantity supplied.

When the free market maximizes the total gains from trade, the supply of goods is sold by: the sellers with the highest costs. the sellers with the lowest costs. the sellers who bring their output to the market first. the sellers who receive the most government subsidies.

the sellers with the lowest costs. → The market price keeps the sellers with the highest costs out of the market.

"According to the supply and demand model, all else equal, if the technology used to produce a good improves, supply of the good will increase, causing the price of the good to fall, which causes the quantity demanded of the good to rise as well." This statement is: false, because the price of the good will rise. false, because quantity supplied, not supply, of the good will increase. true. false, because the quantity demanded of the good will fall.

true. → The supply curve moved, and the equilibrium point moved along the fixed demand curve.

"According to the supply and demand model, all else equal, if the price of one of its substitutes increases, the price of a good will increase." This statement is: false, because whether the price rises or falls depends on whether the good is normal or inferior. false, because the prices of its substitutes cannot affect a good's own price. false, because if the price of one of its substitutes increases, the price of a good will decrease. true.

true. → This is because an increase in the price of a substitute will increase the demand for the good in question.

If peanuts become cheaper to produce because of a new peanut farming technology, what will happen to the equilibrium price and equilibrium quantity of peanuts? Both equilibrium price and equilibrium quantity will increase. The equilibrium price will remain the same, and the equilibrium quantity will increase. Equilibrium quantity will increase, but it is uncertain what will happen to the equilibrium price. Equilibrium price will decrease, and equilibrium quantity will increase.

Equilibrium price will decrease, and equilibrium quantity will increase. → This is the result of an increase in supply.

"According to the supply and demand model, all else equal, if consumer preferences change in favor of a good, demand for the good will rise, causing the price of the good to rise, which causes the supply of the good to rise as well." This statement is: true. false, because the price of the good will fall. false, because quantity supplied, not supply, of the good will rise. false, because the supply of the good will fall.

false, because quantity supplied, not supply, of the good will rise. → Because the supply curve does not move, it is not appropriate to say that supply has changed.

A __________ maximizes producer surplus plus consumer surplus. government free of corruption self-interested consumer highly regulated market free market

free market → The free market does this by having low-cost sellers produce output for high-value buyers, by encouraging all mutually beneficial trades, and by not wasting resources.

Holding supply constant, if the demand curve shifts to the right, there will be a(n): increase in equilibrium price and an increase in equilibrium quantity. increase in equilibrium price and a decrease in equilibrium quantity. decrease in equilibrium price and a decrease in equilibrium quantity. decrease in equilibrium price and an increase in equilibrium quantity.

increase in equilibrium price and an increase in equilibrium quantity. → This is an increase in demand, which causes an increase in quantity supplied.