Economics Module 3-Why It Matter: Supply and Demand

demand schedule

a table that shows the quantity demanded for a certain good or service at a range of prices

supply

the relationship between the price of a certain good or service and the quantity of that good or service producers are willing to offer for sale

demand

the relationship between the price of a certain good or service and the quantity of that good or service someone is willing and able to buy

The regional soda company in Michigan, Faygo, has recently run viral advertisements online and has increased their prices and number of supplied sodas to regional grocery stores. The graph of Faygo's supply schedule is shown below.

$400-50; $600-70...

inferior good

good or service whose demand decreases when a consumer's income increases and demand increases when income decreases

normal good

good or service whose demand increases when a consumer's income increases and demand decreases when income decreases

complements

goods or services that are used together because the use of one enhances the use of the other

The supply curve for televisions at the local Retail-Mart is illustrated by the supply curve below. If the Retail-Mart currently sells 200 televisions, which demand curve must represent the demand for televisions?

graph with the point at (200,$500)

Natalie runs a fast food stand selling hot dogs and soft drinks. A decrease in the price of which good below is likely to negatively impact her bottom line?

hamburgers

supply curve

a graphic representation of the relationship between price and quantity supplied of a certain good or service, with price on the vertical axis and quantity on the horizontal axis

free market

a market in which the government does not intervene in any way

Which country has characteristics of a command economy?

Cuba

Jamal is a small business owner who sells delivery trucks to local retailers. Last month the price of a new truck was $32,000 and he sold a total of 16 trucks during that month. This month the price of a new truck has increased to $35,000. Which quantity demanded might Jamal expect to observe this month according to the law of demand?

15 trucks

substitutes

goods or services that can be used in place of one another

Over the past century the quantity of potatoes purchased by Irish consumers has fallen significantly, while incomes have grown exponentially. Meanwhile potatoes are still the cheapest source of calories available to the consumer. From this information it would be correct to assume that potatoes are a(n) ________ good.

inferior

competitive market

is one in which there is a large number of buyers and sellers, so that no one can control the market price

The supply schedule and a set of supply curves for the laptop computer market are given below. Which colored supply curve corresponds to the given supply schedule?

the blue line

Below there are three supply schedules documenting the relationship between motor oil price and quantity supplied. Which supply schedule shown is wholly consistent with what you learned regarding the law of supply?

$2.00-700....$3.20-1300

Below is the demand curve for oranges in a Florida supermarket. Select the demand schedule that best corresponds to this demand curve.

1-$10; 2-$9; 3-$8; 4-$7 etc..

Alexis owns a small business selling power tools. This past month she has noticed that the quantity demanded for high-end electric drills has decreased by 25%. Which of the following demand curve shifting events is a possible explanation for this change?

Customer's incomes have decreased

You are in charge of data analytics for Home Depot's South Florida division. Recently you have observed a change in the market for power generators illustrated below. Which explanation best corresponds with the observed data?

A hurricane is expected to arrive next week.

Consider the combined yearly onion supply and demand schedules for one local supermarket below. Currently the market is at the equilibrium price A. Fill in the values for A and B that would cause market equilibrium to occur at that price.

A:$0.90; B:80

Michael is the owner of a steel refinery in Pittsburgh, PA. In October the price for a ton of steel was $400, which increased to $600 by November. According to the law of supply, what would be a rational response by Michael to this change in market price for steel?

Hire additional workers and increase output.

Jane Doe is a shop owner in the fictional country of Xanadu. Every month the government's planning ministry sends her a large booklet (which resembles a phone book) regulating the price of essential commodities including milk, flour, and eggs. In response to these regulations Jane Doe has reduced her inventory of essential goods and switched to selling luxuries such as cakes, pies, and soft drinks. Luxury goods are not price controlled. Does Jane Doe reside in a command economy? Why or why not?

Jane does not reside in a command economy. She owns her own business and is free to make some productions and price decisions.

You are the leader of a revolutionary movement which has recently overthrown the government of the tiny country of Tropico. During the 3rd Party Congress, which was held shortly before your glorious victory, the party committee decreed that "to free Tropico's struggling masses from the jackboots of capitalism and reactionary imperialism, it is necessary to immediately enforce a command economy upon realization of our final victory." Which of the following actions would betray your mandate to create a command economy in Tropico?

Maintain private ownership, but legalize labor unions which will now be free to bargain with private businesses fro improved wages and benefits.

After Jamal increased the price of his trucks, he actually observed that his buyers increased rather than decreased their number of vehicle purchases. While he sold 16 trucks to his customers the month before the price increase, he sold a total of 18 trucks one month later. What is the most likely explanation for this apparent violation in the law of demand?

Not all variables that effect demand have held constant this past month. For example, Jamal's customers' businesses have done exceptionally well this past month and so they are willing to buy more trucks than despite the higher price.

What would cause the level of demand (meaning the relationship between price and quantity demanded) to shift?

Population grows in a particular market area.

You are a consultant analyzing the American car market for the new Toyota Prius. Your chief competitor Tesla has recently dropped the list price of their vehicles by 20%. When illustrating shifts of the demand curve it is customary to draw arrows to show the direction of change. Which directions should the arrows be drawn in the graph below? Which curve represents old demand and which curve the new demand?

The arrows should be drawn pointing leftwards. The curve on the right represents the old demand and the curve on the left new demand.

Alice is analyzing the demand for American made moped market for the company Genuine. The main competition, BMW, increased their listing price by 20% recently. Arrows are used to indicate the direction of the demand curve shift in a graph. Which is the correct direction the arrows should be drawn to reflect the Genuine moped market and which line is the old demand and new demand curve?

The arrows should be drawn pointing rightwards. The curve on the right represents the new demand and the curve on the left old demand.

Displayed below is the supply curve for used automobiles. From the perspective of an economist this graph contains numerous errors. Which problem is apparent in the graph below?

The axes are incorrectly specified.

In the past year the price of pork, the main ingredient in hot dogs, has decreased by 20%. At the same time the price of hot dog buns has also dropped 20%. How will the new equilibrium quantity and price for hot dogs compare with the original equilibrium before these price changes? Hint: Using a pen and paper to illustrate supply and demand shifts could be helpful for this question

The equilibrium price in the hot dog market will increase relative to the old equilibrium, yet the effort on quantity is impossible to determine.

Note: Using a pen and paper to illustrate supply and demand shifts could be helpful for this question A recent health study reveals that red wine may be linked to increased longevity. At the same time, a severe drought is affecting wine production is Southern California. How will the new equilibrium quantity and price compare with the original equilibrium before the health study and drought?

The equilibrium price in the wine market will increase relative to the old equilibrium, yet the effort on quantity is impossible to determine.

List and explain three out of the four factors responsible for shifts in the supply curve.

The four factors that can shift the supply curve include natural conditions, input prices, technology, and government. Natural conditions include any natural event that may favorably or unfavorably impact production. Lower input costs will increase the profit margin of the supplier, encouraging them to provide more output at any given price. Improved technology can increase what a supplier can produce with a given set of inputs. Government intervention can either encourage or discourage production depending on the type of intervention (subsidy vs. tax, regulation vs. deregulation, etc).

Which of the following is a defining feature of free markets?

The government does not interfere in any way with the economic decisions of sellers and buyers.

As a member of the "Hungry for Apples?" national advertising campaign you are charged with analyzing future trends in Apple prices. The estimated demand and supply curve for apples is displayed below. If the current price is $100/ton, by how much must prices change before the market is in equilibrium? Is there currently a surplus or shortage in the current market for apples?

There is a surplus. The price must drop by $10/ton

ceteris paribus

When changing one variable in a function (e.g. demand for some product), we assume everything else held constant

The cost of gasoline used to produce plastics increases by 30%. This will result in ________.

a decrease in quantity demanded

Last year Hawaii did not received many rain storms and with eight months of little rain there was low demand for umbrellas. This year however, there have been three months of big rain storms and only a few weeks of sunny weather. If you were to draw a graph depicting the changing market for umbrellas from last year to this, how would the new equilibrium price and quantity demanded compare to last year's market?

With supply of umbrellas being constant, equilibrium price and quantity demanded increase for umbrellas compared to last year.

A recent pork shortage has increased its price by 25% on the world market. As an avid fan of hot dogs you would expect ________.

a decrease in supply

subsidy

a government payment to firms to encourage production of some good or service

Due to the negative health effects of smoking the number of cigarette consumers has steadily decreased over the past decade. During the same time period more permissive immigration laws has allowed for cheaper tobacco harvesting using migrant labor. As an economist, what movements in equilibrium quantity and price do you predict given the above information?

equilibrium price will decrease while quantity cannot be determined

A decrease in the quantity supplied can result from

a decrease in price

demand curve

a graphic representation of the relationship between price and quantity demanded of a certain good or service, with price on the vertical axis and quantity on the horizontal axis

supply schedule

a table that shows the quantity demanded for a certain good or service at a range of prices

The past year has had very favorable growing conditions for oranges in California. At the same time, a new study reports that eating citrus fruits are linked to better health and longevity. As an economist, what movements in equilibrium quantity and price do you predict given the above information?

equilibrium quantity will increase while price cannot be determined

market economy

an economy where economic decisions are decentralized, resources are owned by private individuals, and businesses supply goods and services based on demand

command economy

an economy where economic decisions are passed down from government authority and where resources are owned by the government

A recent study reveals that raisins are a natural aphrodisiac. This will likely result in ________ for raisins.

an increase in demand

An unexpected government tax rebate has given all the residents in your town $1,000 of extra income. This will result in ________ for goods at the local retail store.

an increase in quantity supplied

The cost of rubber used to produce tires falls by 20%. This will result in ________ for tires.

an increase in the quantity demanded

In East Germany, back before the Berlin wall fell, there was one manufacturer of cars (VEB Sachsenring Automobilwerke Zwickau). They produced one type of car, the Trabant, with a maximum speed of 55 mph (26 horsepower lawnmower type engine). Anyone who wished to buy a car put their name on a list and waited for two or three years to be able to purchase a 'Trabbi'. Whatever was available when their name came up was what they got--no choice of color, style, or engine size. East Germans were living with what type of economy?

command

The market for cement in a small town is defined by a demand curve that passes through the points ($50/ton, 300 tons), ($100/ton, 200 tons), ($150/ton, 100 tons). Meanwhile we know the supply curve passes through the points ($150/ton, 300 tons), ($100/ton, 200 tons), ($50/ton, 100 tons). If the market starts in a surplus of 200 tons, how much must the price change before the market is in equilibrium?

decrease by $50/ton

Complete the following sentence: If people think that the price of televisions will decrease in the near future, that belief may cause a(n)

decrease in the demand for televisions today

Over the past 10 years consumer incomes have grown by 15%, while the price of automobiles has increased by over 20%. Tires and automobiles are complement goods. What would be a reasonable expectation regarding the demand for tires today compared to 10 years ago?

it is impossible to know with the given information

Several unfavorable changes have occurred this past year for almond suppliers in California. A drought continues to ravage crops, and a recent strike by migrant farm laborers has sent production costs soaring. In response to these recent events the almond growers lobby has successfully petitioned the California state legislator for a significant subsidy to almond farmers. Given these events, how would we expect the supply curve for almonds to react?

it is impossible to tell with the given information

You are given the following demand schedule for used cars. Which of the following demand curves accurately represents this demand schedule and has proper formatting? The demand schedule for used cars

little curve at top and then straight down

The economy of Atlantia is defined by the private ownership of the means of production by Atlantia's citizens. While owners are usually free to utilize their property as they see fit, the government does intervene to ban certain harmful products (i.e. addictive drugs, lead paint, etc) from entering the market. Atlantia's parliament has recently passed a minimum wage law setting minimum hourly compensation at $5.00 per hour. Atlantia is an example of a ________ economy.

mixed market

equilibrium

price and quantity combination where supply equals demand

The market for corn is defined by the graph below. If the price is set at $20/ton will this result in a surplus or shortage? What is the magnitude of this surplus or shortage?

shortage of 80 million tons

shortage (or excess demand)

situation where the quantity demanded in a market is greater than the quantity supplied; occurs at prices above the equilibrium

surplus (or excess supply)

situation where the quantity demanded in a market is less than the quantity supplied; occurs at prices below the equilibrium

Joshua operates a small information technology business which supplies advanced microchips to local businesses. His supply schedule for microchips is displayed below. Which supply curve shown more accurately reflects his supply schedule?

straight line; first point on y-axis

equilibrium price

the (only) price where the quantity supplied in a market equals the quantity demanded

Which of the following demand curve for tomatoes violates the law of demand?

the backwards S-shaped graph

As a data analyst at a regional home water retailer, you are assigned the task of estimating the market supply curve for water heaters. From historical data you know that the supply curve will pass through three points: ($200, 100 heaters), ($800, 400 heaters), ($1,200, 800 heaters). Which supply curve in the graph below best fits the market for water heaters?

the blue curve

You are the chief data analyst of the U.S. Fish and Wildlife Service for the Northeast region. Recently the agency has become concerned about overfishing in the North Atlantic fisheries, and you are charged with estimating the demand curve for tuna as part of the agency's mitigation efforts. From public surveys you know that when the price of a freshly caught tuna is $400, the public will demand a quantity of 1 million fish. If the price is $275 then the public will demand 4 million fish. Finally, if the price was $185 consumers will demand a quantity of 8 million fish. Which curve below could be the correct demand curve for North Atlantic tuna given these three data points?

the blue curve

law of supply

the common relationship that a higher price leads to a higher quantity supplied of a certain good or service and a lower price leads to a higher quantity supplied, while all other variables are held constant

law of demand

the common relationship that a higher price leads to a lower quantity demanded of a certain good or service and a lower price leads to a higher quantity demanded, while all other variables are held constant

As an economist at the USDA you observe there has been a change in the market for processed corn this past year (displayed below). Which option below can best explain this recent market shift?

the cost of farm labor has decreased

When higher prices result in higher quantity supplied, economists call this relationship

the law of supply

equilibrium quantity

the quantity both supplied and demanded at the equilibrium price

Suppose Congress passes legislation that offers subsidies to orange farmers. The impact on the market for orange juice will be a rightward shift of

the supply curve

quantity demanded

the total number of units of a good or service consumers wish to purchase at a given price

quantity supplied

the total number of units of a good or service producers are willing to supply at a given price

A competitive market is one in which

there is a large number of sellers and buyers

price

what a buyer pays for a unit of the specific good or service

shift in demand

when a change in some economic factor (other than price) causes a different quantity to be demanded at every price

shift in supply

when a change in some economic factor (other than price) causes a different quantity to be supplied at every price

efficiency

when the optimal amount of goods are produced and consumed, minimizing waste