Chapter 3

Question 1

When you need a new pair of running shoes, want a bagel and a latte, plan to upgrade your cellphone, or need to fly home for Thanksgiving, you must find a place where people sell those items or offer those services. The place in which you find them is a _______.

Answer 1

When you need a new pair of running shoes, want a bagel and a latte, plan to upgrade your cellphone, or need to fly home for Thanksgiving, you must find a place where people sell those items or offer those services. The place in which you find them is a market.

You learned in Chapter 2 (p. 44) that a market is any arrangement that enables buyers and sellers to get information and to do business with each other.

Question 2

A market has two sides: ______ and _______.

Answer 2

A market has two sides: buyers and sellers.

Question 3

There are markets for _____ such as apples and hiking boots, for ______ such as haircuts and tennis lessons, for ________________ such as computer programmers and earthmovers, and for other manufactured _____ such as memory chips and auto parts.

Answer 3

There are markets for goods such as apples and hiking boots, for services such as haircuts and tennis lessons, for factors of production such as computer programmers and earthmovers, and for other manufactured inputs such as memory chips and auto parts.

Question 4

Markets vary in the __________________ that buyers and sellers face

Answer 4

Markets vary in the intensity of competition that buyers and sellers face

Question 5

Competitive market

Answer 5

a market that has many buyers and many sellers, so no single buyer or seller can influence the price

Question 6

Producers offer items for sale only if the price is high enough to cover their _____________. And consumers respond to changing _____________ by seeking cheaper alternatives to expensive items.

Answer 6

Producers offer items for sale only if the price is high enough to cover their opportunity cost. And consumers respond to changing opportunity cost by seeking cheaper alternatives to expensive items.

Question 7

Money price

Answer 7

the number of dollars that must be given up in exchange for a good or service

If, when you buy a cup of coffee, the highest-valued thing you forgo is some gum, then the opportunity cost of the coffee is the quantity of gum forgone. We can calculate the quantity of gum forgone from the money prices of the coffee and the gum.

Question 8

Relative price

Answer 8

the ratio of the price of one good or service to the price of another good or service. A relative price is an opportunity cost

If the money price of coffee is $1 a cup and the money price of gum is 50¢ a pack, then the opportunity cost of one cup of coffee is two packs of gum. To calculate this opportunity cost, we divide the price of a cup of coffee by the price of a pack of gum and find the ratio of one price to the other.

Question 9

Calculating relative price

Answer 9

The normal way of expressing a relative price is in terms of a “basket” of all goods and services.

To calculate this relative price, we divide the money price of a good by the money price of a “basket” of all goods (called a price index).

The resulting relative price tells us the opportunity cost of the good in terms of how much of the “basket” we must give up to buy it.

Question 10

The demand and supply model that we are about to study determines _____________

Answer 10

The demand and supply model that we are about to study determines relative prices, and the word “price” means relative price.

When we predict that a price will fall, we do not mean that its money price will fall—although it might. We mean that its relative price will fall. That is, its price will fall relative to the average price of other goods and services.

Question 11

If you demand something, then you: (three things)

Answer 11

Want it.

Can afford it.

Plan to buy it.

Question 12

Wants are ____________________

Answer 12

Wants are the unlimited desires or wishes that people have for goods and services.

How many times have you thought that you would like something “if only you could afford it” or “if it weren’t so expensive”? Scarcity guarantees that many—perhaps most—of our wants will never be satisfied. Demand reflects a decision about which wants to satisfy.

Question 13

Quantity demanded

Answer 13

the amount of a good or service that consumers plan to buy during a given time period at a particular price

The quantity demanded is not necessarily the same as the quantity actually bought. Sometimes the quantity demanded exceeds the amount of goods available, so the quantity bought is less than the quantity demanded.

Question 14

The quantity demanded is measured as _____________.

Answer 14

The quantity demanded is measured as an amount per unit of time.

For example, suppose that you buy one cup of coffee a day. The quantity of coffee that you demand can be expressed as 1 cup per day, 7 cups per week, or 365 cups per year.

Question 15

Law of Demand

Answer 15

“Other things remaining the same, the higher the price of a good, the smaller is the quantity demanded; and the lower the price of a good, the greater is the quantity demanded.”

Question 16

Why does a higher price reduce the quantity demanded? For two reasons:

Answer 16

Substitution effect

Income effect

Question 17

Substitution Effect

Answer 17

When the price of a good rises, other things remaining the same, its relative price—its opportunity cost—rises. Although each good is unique, it has substitutes—other goods that can be used in its place.

As the opportunity cost of a good rises, the incentive to economize on its use and switch to a substitute becomes stronger.

Question 18

Income Effect

Answer 18

When a price rises, other things remaining the same, the price rises relative to income.

Faced with a higher price and an unchanged income, people cannot afford to buy all the things they previously bought. They must decrease the quantities demanded of at least some goods and services.

Normally, the good whose price has increased will be one of the goods that people buy less of.

Question 19

Substitution and Income effect - examples

Answer 19

Suppose that an energy bar initially sells for $3 and then its price falls to $1.50. People now substitute energy bars for energy drinks—the substitution effect. And with a budget that now has some slack from the lower price of an energy bar, people buy even more energy bars—the income effect. The quantity of energy bars demanded increases for these two reasons.

Now suppose that an energy bar initially sells for $3 and then the price doubles to $6. People now buy fewer energy bars and more energy drinks—the substitution effect. And faced with a tighter budget, people buy even fewer energy bars—the income effect. The quantity of energy bars demanded decreases for these two reasons.

Question 20

Demand

Answer 20

refers to the entire relationship between the price of a good and the quantity demanded of that good

Question 21

Demand is illustrated by the demand curve and the demand schedule. The term “quantity demanded” refers to a ____________—the quantity demanded at a particular price.

Answer 21

Demand is illustrated by the demand curve and the demand schedule. The term “quantity demanded” refers to a point on a demand curve—the quantity demanded at a particular price.

Question 22

Demand curve

Answer 22

shows the relationship between the quantity demanded of a good and its price when all other influences on consumers’ planned purchases remain the same

Question 23

Demand schedule

Answer 23

lists the quantities demanded at each price when all the other influences on consumers’ planned purchases remain the same. (Check Fig 3.1 on Word document)

For example, if the price of a bar is 50¢, the quantity demanded is 22 million a week. If the price is $2.50, the quantity demanded is 5 million a week. The other rows of the table show the quantities demanded at prices of $1.00, $1.50, and $2.00.

Question 24

Another way of looking at the demand curve is as a _____________________ curve

Answer 24

Another way of looking at the demand curve is as a willingness-and-ability-to-pay curve

Question 25

The willingness and ability to pay is a measure of _____________.

Answer 25

The willingness and ability to pay is a measure of marginal benefit.

Question 26

If a small quantity is available, the highest price that someone is willing and able to pay for one more unit is ______.

Answer 26

If a small quantity is available, the highest price that someone is willing and able to pay for one more unit is high.

But as the quantity available increases, the marginal benefit of each additional unit falls and the highest price that someone is willing and able to pay also falls along the demand curve.

Question 27

willingness-and-ability-to-pay - example

Answer 27

If only 5 million energy bars are available each week, the highest price that someone is willing to pay for the 5 millionth bar is $2.50. But if 22 million energy bars are available each week, someone is willing to pay 50¢ for the last bar bought.

Question 28

Change in demand

Answer 28

A change in buyers’ plans that occurs when some influence on those plans other than the price of the good changes. It is illustrated by a shift of the demand curve.

Question 29

When demand increases, the demand curve shifts ________ and the quantity demanded at each price is greater.

Answer 29

When demand increases, the demand curve shifts right-ward and the quantity demanded at each price is greater.

Fig 3.2 - For example, at $2.50 a bar, the quantity demanded on the original (blue) demand curve is 5 million energy bars a week. On the new (red) demand curve, at $2.50 a bar, the quantity demanded is 15 million bars a week. Look closely at the numbers in the table and check that the quantity demanded at each price is greater.

Question 30

Six main factors bring changes in demand. They are changes in:

Answer 30

The prices of related goods

Expected future prices

Income

Expected future income and credit

Population

Preferences

Question 31

The quantity of energy bars that consumers plan to buy depends in part on the prices of ______ FOR energy bars.

Answer 31

The quantity of energy bars that consumers plan to buy depends in part on the prices of substitutes for energy bars.

Question 32

Substitute

Answer 32

a good that can be used in place of another good.

For example, a bus ride is a substitute for a train ride; a hamburger is a substitute for a hot dog; and an energy drink is a substitute for an energy bar.

Question 33

If the price of a substitute for an energy bar rises, people buy ____ of the substitute and _____ energy bars.

Answer 33

If the price of a substitute for an energy bar rises, people buy less of the substitute and more energy bars.

For example, if the price of an energy drink rises, people buy fewer energy drinks and more energy bars. The demand for energy bars increases.

Question 34

The quantity of energy bars that people plan to buy also depends on the prices of ________ WITH energy bars.

Answer 34

The quantity of energy bars that people plan to buy also depends on the prices of complements with energy bars.

Question 35

Complement

Answer 35

a good that is used in conjunction with another good

Question 36

Hamburgers and fries are complements, and so are energy bars and exercise. If the price of an hour at the gym falls, people buy _____ gym time and _____ energy bars.

Answer 36

Hamburgers and fries are complements, and so are energy bars and exercise. If the price of an hour at the gym falls, people buy more gym time and more energy bars.

Question 37

If the expected future price of a good rises and if the good can be stored, the opportunity cost of obtaining the good for future use is ______ today than it will be in the future when people expect the price to be higher.

Answer 37

If the expected future price of a good rises and if the good can be stored, the opportunity cost of obtaining the good for future use is lower today than it will be in the future when people expect the price to be higher.

So people retime their purchases—they substitute over time. They buy more of the good now before its price is expected to rise (and less afterward), so the demand for the good today increases.

Question 38

Expected Future Prices - example

Answer 38

Suppose that a Florida frost damages the season’s orange crop. You expect the price of orange juice to rise, so you fill your freezer with enough frozen juice to get you through the next six months. Your current demand for frozen orange juice has increased, and your future demand has decreased.

Question 39

If the expected future price of a good falls, the opportunity cost of buying the good today is _____ relative to what it is expected to be in the future.

Answer 39

Similarly, if the expected future price of a good falls, the opportunity cost of buying the good today is high relative to what it is expected to be in the future.

So again, people retime their purchases. They buy less of the good now before its price is expected
60
to fall, so the demand for the good decreases today and increases in the future.

Question 40

When income increases, consumers buy _____ of most goods; and when income decreases, consumers buy _____ of most goods.

Answer 40

When income increases, consumers buy more of most goods; and when income decreases, consumers buy less of most goods.

Although an increase in income leads to an increase in the demand for most goods, it does not lead to an increase in the demand for all goods.

Question 41

Normal good

Answer 41

one for which demand increases as income increases

Question 42

Inferior good

Answer 42

one for which demand decreases as income increases

Question 43

As incomes increase, the demand for air travel (a normal good) ________ and the demand for long-distance bus trips (an inferior good) ________.

Answer 43

As incomes increase, the demand for air travel (a normal good) increases and the demand for long-distance bus trips (an inferior good) decreases.

Question 44

When expected future income increases or credit becomes easier to get, demand for a good might __________.

Answer 44

When expected future income increases or credit becomes easier to get, demand for a good might increase now.

For example, a salesperson gets the news that she will receive a big bonus at the end of the year, so she goes into debt and buys a new car right now, rather than waiting until she receives the bonus.

Question 45

Demand also depends on the size and the age structure of the population. The larger the population, the _______ is the demand for all goods and services; the smaller the population, the _______ is the demand for all goods and services.

Answer 45

Demand also depends on the size and the age structure of the population. The larger the population, the greater is the demand for all goods and services; the smaller the population, the smaller is the demand for all goods and services.

For example, the demand for parking spaces, running shoes, movies, or just about anything that you can imagine is much greater in the Greater Toronto Area (population 6 million) than it is in Thunder Bay, Ontario (population 146,000).

Question 46

The larger the proportion of the population in an age group, the ________ is the demand for the goods and services used by that group.

Answer 46

Also, the larger the proportion of the population in an age group, the greater is the demand for the goods and services used by that group.

For example, in 2010, there were 2.3 million 20-to-24-year-olds in Canada compared with 2.1 million in 2000. As a result, the demand for university places in 2010 was greater than in 2000. During this period, the number of Canadians aged 90 years more than doubled and the demand for nursing home services increased.

Question 47

Change in the quantity demanded

Answer 47

A point on the demand curve shows the quantity demanded at a given price, so a movement along the demand curve shows a change in the quantity demanded

Question 48

Change in demand

Answer 48

The entire demand curve shows demand, so a shift of the demand curve shows a change in demand.

Fig 3.3

Question 49

If the price of the good changes but no other influence on buying plans changes, we illustrate the effect as a ______________________

Answer 49

If the price of the good changes but no other influence on buying plans changes, we illustrate the effect as a movement along the demand curve.

Question 50

A fall in the price of a good increases the quantity demanded of it.

We illustrate the effect of a fall in price as a movement _____ along the demand curve

Answer 50

We illustrate the effect of a fall in price as a movement down along the demand curve

Question 51

A rise in the price of a good decreases the quantity demanded of it.

We illustrate the effect of a rise in price as a movement ____ along the demand curve

Answer 51

We illustrate the effect of a rise in price as a movement up along the demand curve

Question 52

If the price of a good remains constant but some other influence on buying plans changes, there is a change in demand for that good.

We illustrate a change in demand as ______ of the demand curve.

Answer 52

We illustrate a change in demand as a shift of the demand curve.

For example, if more people work out at the gym, consumers buy more energy bars regardless of the price of a bar. That is what a rightward shift of the demand curve shows—more energy bars are demanded at each price.

Question 53

Demand increases and the demand curve shifts ________

Answer 53

Demand increases and the demand curve shifts rightward

Question 54

if the price of a substitute rises

Answer 54

Demand increases and the demand curve shifts rightward

Question 55

if the price of a complement falls

Answer 55

Demand increases and the demand curve shifts rightward

Question 56

if the expected future price of the good rises

Answer 56

Demand increases and the demand curve shifts rightward

Question 57

if income increases (for a normal good)

Answer 57

Demand increases and the demand curve shifts rightward

Question 58

if expected future income or credit increases

Answer 58

Demand increases and the demand curve shifts rightward

Question 59

if the population increases

Answer 59

Demand increases and the demand curve shifts rightward

Question 60

Demand decreases and the demand curve shifts ________

Answer 60

Demand decreases and the demand curve shifts leftward

Question 61

if the price of a substitute falls

Answer 61

Demand decreases and the demand curve shifts leftward

Question 62

if the price of a complement rises

Answer 62

Demand decreases and the demand curve shifts leftward

Question 63

if the expected future price of the good falls

Answer 63

Demand decreases and the demand curve shifts leftward

Question 64

if income decreases (for a normal good)

Answer 64

Demand decreases and the demand curve shifts leftward

Question 65

if expected future income or credit decreases

Answer 65

Demand decreases and the demand curve shifts leftward

Question 66

if the population decreases

Answer 66

Demand decreases and the demand curve shifts leftward

Question 67

If a firm supplies a good or service, the firm: (three things)

Answer 67

Has the resources and technology to produce it.

Can profit from producing it.

Plans to produce it and sell it.

Question 68

Many useful things can be produced, but they are not produced unless it is _______ to do so.

Answer 68

Many useful things can be produced, but they are not produced unless it is profitable to do so.

Question 69

Quantity supplied

Answer 69

the quantity supplied of a good or service is the amount that producers plan to sell during a given time period at a particular price.

The quantity supplied is not necessarily the same amount as the quantity actually sold.
Sometimes the quantity supplied is greater than the quantity demanded, so the quantity sold is less than the quantity supplied.

Question 70

Like the quantity demanded, the quantity supplied is measured as ________________

Answer 70

Like the quantity demanded, the quantity supplied is measured as an amount per unit of time

For example, suppose that GM produces 1,000 cars a day. The quantity of cars supplied by GM can be expressed as 1,000 a day, 7,000 a week, or 365,000 a year. Without the time dimension, we cannot tell whether a particular quantity is large or small.

Question 71

Law of Supply

Answer 71

“Other things remaining the same, the higher the price of a good, the greater is the quantity supplied; and the lower the price of a good, the smaller is the quantity supplied.”

Question 72

Why does a higher price increase the quantity supplied?

Answer 72

It is because marginal cost increases.

As the quantity produced of any good increases, the marginal cost of producing the good increases.

Question 73

When the price of a good rises, other things remaining the same, producers are willing to incur a higher marginal cost, so they __________ production.

Answer 73

When the price of a good rises, other things remaining the same, producers are willing to incur a higher marginal cost, so they increase production.

The higher price brings forth an increase in the quantity supplied.

Question 74

Supply

Answer 74

the entire relationship between the price of a good and the quantity supplied of it.

Supply is illustrated by the supply curve and the supply schedule. The term quantity supplied refers to a point on a supply curve—the quantity supplied at a particular price.

Question 75

Supply curve

Answer 75

shows the relationship between the quantity supplied of a good and its price when all other influences on producers’ planned sales remain the same. The supply curve is a graph of a supply schedule.

Question 76

supply schedule

Answer 76

lists the quantities supplied at each price when all the other influences on producers’ planned sales remain the same.

Fig 3.4
For example, if the price of an energy bar is 50¢, the quantity supplied is zero—in row A of the table. If the price of an energy bar is $1.00, the quantity supplied is 6 million energy bars a week—in row B. The other rows of the table show the quantities supplied at prices of $1.50, $2.00, and $2.50.

Question 77

Graphing supply curves

Answer 77

To make a supply curve, we graph the quantity supplied on the x-axis and the price on the y-axis. The points on the supply curve labelled A through E correspond to the rows of the supply schedule.

For example, point A on the graph shows a quantity supplied of zero at a price of 50¢ an energy bar. Point E shows a quantity supplied of 15 million bars at $2.50 an energy bar.

Question 78

For a given price, the supply curve tells us the quantity that producers _______________.

Answer 78

For a given price, the supply curve tells us the quantity that producers plan to sell at that price.

For example, at a price of $1.50 a bar, producers are planning to sell 10 million bars a week.

Question 79

For a given quantity, the supply curve tells us the minimum price at which producers _______________.

Answer 79

For a given quantity, the supply curve tells us the minimum price at which producers are willing to sell one more bar.

For example, if 15 million bars are produced each week, the lowest price at which a producer is willing to sell the 15 millionth bar is $2.50.

Question 80

The supply curve can be interpreted as a minimum-supply-price curve—__________________.

Answer 80

The supply curve can be interpreted as a minimum-supply-price curve—a curve that shows the lowest price at which someone is willing to sell.

This lowest price is the marginal cost.

Question 81

If a small quantity is produced, the lowest price at which someone is willing to sell one more unit is _____.

Answer 81

If a small quantity is produced, the lowest price at which someone is willing to sell one more unit is low.

But as the quantity produced increases, the marginal cost of each additional unit rises, so the lowest price at which someone is willing to sell an additional unit rises along the supply curve.

Question 82

Minimum Supply Price - example

Answer 82

In Fig. 3.4, if 15 million bars are produced each week, the lowest price at which someone is willing to sell the 15 millionth bar is $2.50. But if 10 million bars are produced each week, someone is willing to accept $1.50 for the last bar produced.

Question 83

Change in supply

Answer 83

A change in sellers’ plans that occurs when some influence on those plans other than the price of the good changes. It is illustrated by a shift of the supply curve.

Question 84

Six main factors bring changes in supply. They are changes in:

Answer 84

The prices of factors of production

The prices of related goods produced

Expected future prices

The number of suppliers

Technology

The state of nature

Question 85

If the price of a factor of production rises, the lowest price that a producer is willing to accept for that good ______, so supply ___________

Answer 85

If the price of a factor of production rises, the lowest price that a producer is willing to accept for that good rises, so supply decreases

For example, during 2008, as the price of jet fuel increased, the supply of air travel decreased. Similarly, a rise in the minimum wage decreases the supply of hamburgers.

Question 86

Prices of Related Goods Produced - example

Answer 86

If the price of an energy drink rises, firms switch production from bars to drinks. The supply of energy bars decreases. Energy bars and energy drinks are substitutes in production—goods that can be produced by using the same resources.

If the price of beef rises, the supply of cowhide increases. Beef and cowhide are complements in production—goods that must be produced together.

Question 87

If the expected future price of a good rises, the return from selling the good in the future ______ and is ______ than it is today.

Answer 87

If the expected future price of a good rises, the return from selling the good in the future increases and is higher than it is today.

So supply decreases today and increases in the future.

Question 88

The larger the number of firms that produce a good, the _______ is the supply of the good.

Answer 88

The larger the number of firms that produce a good, the greater is the supply of the good.

As new firms enter an industry, the supply in that industry increases. As firms leave an industry, the supply in that industry decreases.

Question 89

A technology change occurs when a new method is discovered that ______ the cost of producing a good.

Answer 89

A technology change occurs when a new method is discovered that lowers the cost of producing a good.

For example, new methods used in the factories that produce computer chips have lowered the cost and increased the supply of chips.

Question 90

Good weather can _______ the supply of many agricultural products and bad weather can _______ their supply.

Answer 90

Good weather can increase the supply of many agricultural products and bad weather can decrease their supply.

Extreme natural events such as earthquakes, tornadoes, and hurricanes can also influence supply.

Question 91

When supply increases, the supply curve shifts _______

Answer 91

When supply increases, the supply curve shifts rightward and the quantity supplied at each price is larger

Fig 3.5
For example, at $1.00 per bar, on the original (blue) supply curve, the quantity supplied is 6 million bars a week. On the new (red) supply curve, the quantity supplied is 15 million bars a week.

Question 92

Change in the quantity supplied

Answer 92

A change in sellers’ plans that occurs when the price of a good changes but all other influences on sellers’ plans remain unchanged.

It is illustrated by a movement along the supply curve.

Question 93

If the price of the good changes and other things remain the same, there is a ______________ of that good.

Answer 93

f the price of the good changes and other things remain the same, there is a change in the quantity supplied of that good.

Question 94

If the price of the good falls, the quantity supplied decreases and there is a movement ______ along the supply curve

Answer 94

If the price of the good falls, the quantity supplied decreases and there is a movement down along the supply curve

Question 95

If the price of the good rises, the quantity supplied increases and there is a movement ______ along the supply curve

Answer 95

If the price of the good rises, the quantity supplied increases and there is a movement up along the supply curve

Question 96

If supply increases, the supply curve shifts _________

Answer 96

If supply increases, the supply curve shifts rightward

Question 97

If supply decreases, the supply curve shifts ________

Answer 97

If supply decreases, the supply curve shifts leftward

Question 98

An ___________ is a situation in which opposing forces balance each other.

Answer 98

An equilibrium is a situation in which opposing forces balance each other.

Question 99

Equilibrium price

Answer 99

– the price at which the quantity demanded equals the quantity supplied.

Question 100

Equilibrium quantity

Answer 100

the quantity bought and sold at the equilibrium price.

Question 101

A market moves toward its equilibrium because

Answer 101

Price regulates buying and selling plans.

Price adjusts when plans don’t match.

Question 102

The price of a good regulates the quantities demanded and supplied. If the price is too high, the quantity supplied ________ the quantity demanded.

Answer 102

The price of a good regulates the quantities demanded and supplied. If the price is too high, the quantity supplied exceeds the quantity demanded. (Surplus)

Question 103

If the price is too low, the quantity demanded _______ the quantity supplied.

Answer 103

If the price is too low, the quantity demanded exceeds the quantity supplied. (Shortage)

Question 104

Figure 3.7

Answer 104

Figure 3.7 shows the market for energy bars. The table shows the demand schedule (from Fig. 3.1) and the supply schedule (from Fig. 3.4). If the price is 50¢ a bar, the quantity demanded is 22 million bars a week but no bars are supplied. There is a shortage of 22 million bars a week. The final column of the table shows this shortage. At a price of $1.00 a bar, there is still a shortage but only of 9 million bars a week.

If the price is $2.50 a bar, the quantity supplied is 15 million bars a week but the quantity demanded is only 5 million. There is a surplus of 10 million bars a week.

The one price at which there is neither a shortage nor a surplus is $1.50 a bar. At that price, the quantity demanded equals the quantity supplied: 10 million bars a week. The equilibrium price is $1.50 a bar, and the equilibrium quantity is 10 million bars a week.

Question 105

A Shortage Forces the Price Up - information

Answer 105

Suppose the price of an energy bar is $1. Consumers plan to buy 15 million bars a week, and producers plan to sell 6 million bars a week. Consumers can’t force producers to sell more than they plan, so the quantity that is actually offered for sale is 6 million bars a week. In this situation, powerful forces operate to increase the price and move it toward the equilibrium price. Some producers, noticing lines of unsatisfied consumers, raise the price. Some producers increase their output. As producers push the price up, the price rises toward its equilibrium. The rising price reduces the shortage because it decreases the quantity demanded and increases the quantity supplied. When the price has increased to the point at which there is no longer a shortage, the forces moving the price stop operating and the price comes to rest at its equilibrium.

Question 106

A Surplus Forces the Price Down - information

Answer 106

Suppose the price of a bar is $2. Producers plan to sell 13 million bars a week, and consumers plan to buy 7 million bars a week. Producers cannot force consumers to buy more than they plan, so the quantity that is actually bought is 7 million bars a week. In this situation, powerful forces operate to lower the price and move it toward the equilibrium price. Some producers, unable to sell the quantities of energy bars they planned to sell, cut their prices. In addition, some producers scale back production. As producers cut the price, the price falls toward its equilibrium. The falling price decreases the surplus because it increases the quantity demanded and decreases the quantity supplied. When the price has fallen to the point at which there is no longer a surplus, the forces moving the price stop operating and the price comes to rest at its equilibrium.

Question 107

When the price is below equilibrium, it is forced upward. Why don’t buyers resist the increase and refuse to buy at the higher price?

Answer 107

The answer is because they value the good more highly than its current price and they can’t satisfy their demand at the current price. In some markets—for example, the markets that operate on eBay—the buyers might even be the ones who force the price up by offering to pay a higher price.

Question 108

When the price is above equilibrium, it is bid downward. Why don’t sellers resist this decrease and refuse to sell at the lower price?

Answer 108

The answer is because their minimum supply price is below the current price and they cannot sell all they would like to at the current price. Sellers willingly lower the price to gain market share.

Question 109

If more people join health clubs, the demand for energy bars _________.

Answer 109

If more people join health clubs, the demand for energy bars increases.

The table in Fig. 3.8 shows the original and new demand schedules for energy bars as well as the supply schedule of energy bars.

Question 110

Increase in demand creates a ________ at the original price, and to eliminate the shortage the price must ______.

Answer 110

The increase in demand creates a shortage at the original price, and to eliminate the shortage the price must rise.

Question 111

Increase in demand - example

Answer 111

The original equilibrium price is $1.50 an energy bar, and the equilibrium quantity is 10 million energy bars a week. When demand increases, the demand curve shifts rightward. The equilibrium price rises to $2.50 an energy bar, and the quantity supplied increases to 15 million energy bars a week, as highlighted in the figure.

There is an increase in the quantity supplied but no change in supply—a movement along, but no shift of, the supply curve.

Question 112

A Decrease in Demand - example

Answer 112

We can reverse this change in demand. Start at a price of $2.50 a bar with 15 million energy bars a week being bought and sold, and then work out what happens if demand decreases to its original level. Such a decrease in demand might arise if people switch to energy drinks (a substitute for energy bars). The decrease in demand shifts the demand curve leftward. The equilibrium price falls to $1.50 a bar, the quantity supplied decreases, and the equilibrium quantity decreases to 10 million bars a week.

Question 113

When demand increases, the price ____ and the quantity ________.

Answer 113

When demand increases, the price rises and the quantity increases.

Question 114

When demand decreases, the price ____ and the quantity _________.

Answer 114

When demand decreases, the price falls and the quantity decreases.

Question 115

Increase in Supple - information

Answer 115

Figure 3.9 illustrates the effect of an increase in supply. It shows the demand curve for energy bars and the original and new supply curves. The initial equilibrium price is $1.50 a bar, and the equilibrium quantity is 10 million bars a week. When supply increases, the supply curve shifts rightward. The equilibrium price falls to $1.00 a bar, and the quantity demanded increases to 15 million bars a week, highlighted in the figure.

There is an increase in the quantity demanded but no change in demand—a movement along, but no shift of, the demand curve.

Question 116

Decrease in Supply - information

Answer 116

Start out at a price of $1.00 a bar with 15 million bars a week being bought and sold. Then suppose that the cost of labour or raw materials rises and the supply of energy bars decreases. The decrease in supply shifts the supply curve leftward. The equilibrium price rises to $1.50 a bar, the quantity demanded decreases, and the equilibrium quantity decreases to 10 million bars a week.

Question 117

When supply increases, the price ____ and the quantity __________.

Answer 117

When supply increases, the price falls and the quantity increases.

Question 118

When supply decreases, the price ____ and the quantity __________.

Answer 118

When supply decreases, the price rises and the quantity decreases.

Question 119

If demand increases by more than supply increases, the price _______.

Answer 119

If demand increases by more than supply increases, the price rises.

Question 120

If supply increases by more than demand increases, the price ________.

Answer 120

If supply increases by more than demand increases, the price falls.

Question 121

An increase in demand shifts the demand curve rightward to become a new demand curve and an increase in supply shifts the supply curve rightward to become a new supply curve. The _____ might rise or fall, but the _______ increases.

Answer 121

An increase in demand shifts the demand curve rightward to become a new demand curve and an increase in supply shifts the supply curve rightward to become a new supply curve. The price might rise or fall, but the quantity increases.

Question 122

A decrease in demand shifts the demand curve leftward to become a new demand curve and a decrease in supply shifts the supply curve leftward to become a new supply curve. The _____ might rise or fall, but the ______ decreases.

Answer 122

A decrease in demand shifts the demand curve leftward to become a new demand curve and a decrease in supply shifts the supply curve leftward to become a new supply curve. The price might rise or fall, but the quantity decreases.

Question 123

A decrease in demand shifts the demand curve leftward to become a new demand curve and an increase in supply shifts the supply curve rightward to become a new supply curve. The _____ falls, but the _______ might increase or decrease.

Answer 123

A decrease in demand shifts the demand curve leftward to become a new demand curve and an increase in supply shifts the supply curve rightward to become a new supply curve. The price falls, but the quantity might increase or decrease.

Question 124

An increase in demand shifts the demand curve rightward to become a new demand curve and a decrease in supply shifts the supply curve leftward to become a new supply curve. The _____ rises, but the _______ might increase or decrease.

Answer 124

An increase in demand shifts the demand curve rightward to become a new demand curve and a decrease in supply shifts the supply curve leftward to become a new supply curve. The price rises, but the quantity might increase or decrease.

Question 125

When the demand curve is a straight line, the following equation describes it:

Answer 125

P = a − bQD

where P is the price and QD is the quantity demanded. The a and b are positive constants.

Question 126

1

The demand equation tells us three things:

Answer 126

The price at which no one is willing to buy the good (QD is zero). That is, if the price is a, then the quantity demanded is zero. You can see the price a in Fig. 1.

It is the price at which the demand curve hits the y-axis—what we call the demand curve’s “y-intercept.”

Question 127

2

The demand equation tells us three things:

Answer 127

As the price falls, the quantity demanded increases. If QD is a positive number, then the price P must be less than a. As QD gets larger, the price P becomes smaller.

That is, as the quantity increases, the maximum price that buyers are willing to pay for the last unit of the good falls.

Question 128

3

The demand equation tells us three things:

Answer 128

The constant b tells us how fast the maximum price that someone is willing to pay for the good falls as the quantity increases.

That is, the constant b tells us about the steepness of the demand curve. The equation tells us that the slope of the demand curve is −b.

Question 129

When the supply curve is a straight line, the following equation describes it:

Answer 129

P = c + dQS

where P is the price and QS is the quantity supplied. The c and d are positive constants.

Question 130

1

The supply equation tells us three things:

Answer 130

The price at which sellers are not willing to supply the good (QS is zero). That is, if the price is c, then no one is willing to sell the good. You can see the price c in Fig. 2. It is the price at which the supply curve hits the y-axis—what we call the supply curve’s “y-intercept.”

Question 131

2

The supply equation tells us three things:

Answer 131

As the price rises, the quantity supplied increases. If QS is a positive number, then the price P must be greater than c. As QS increases, the price P becomes larger.

That is, as the quantity increases, the minimum price that sellers are willing to accept for the last unit rises.

Question 132

3

The supply equation tells us three things:

Answer 132

The constant d tells us how fast the minimum price at which someone is willing to sell the good rises as the quantity increases.

That is, the constant d tells us about the steepness of the supply curve. The equation tells us that the slope of the supply curve is d.

Question 133

Refer to word document for more information on 76

Mathematical Note Demand, Supply, and Equilibrium

Answer 133

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