Competitive Equilibrium Flashcards
Demand curve shifts up
due to factors that increase demand
Demand curve shifts down
due to factors that decrease demand
Supply curve shifts left
due to factors that decrease supply
Supply shifts right
due to factors that increase
Why can’t you just ask what happens to a price in a market?
You need to know WHY it shifted.
Reasons for demand curve shifts
Changes in…
- Consumer income
- Price of subtitute goods
- Price of complementary goods
- Tastes and preferences
- Number of consumers
- In expectations
Reasons for supply curve shifts
- Input costs
- Technology costs
The graph below shows the supply and demand curves for Pepsi.
A new medical study is released showing that drinking soda every day leads to worse health. Which of the following is most likely to occur as a result?
The equilibrium price of Pepsi will decrease. The new health study is likely to shift the demand curve down, as consumers react to the news that drinking soda every day leads to worse health. A downward shift in the demand curve, with the supply curve staying the same, results in a lower equilibrium price and a lower equilibrium quantity.
Again, refer to the supply and demand curves for Pepsi in Question 1A.
If Pepsi develops a new assembly line that allows it to produce bottles of Pepsi much more efficiently, which of the following is most likely to occur as a result?
The equilibrium quantity of Pepsi will increase. The new assembly line will allow Pepsi to produce its product at a lower cost, shifting the supply curve to the right. At any given price, Pepsi will now be able to produce more bottles of its product. A rightward shift in the supply curve, with the demand curve staying the same, results in a lower equilibrium price and a higher equilibrium quantity.
Consider the market for a good shown in the graph below. If the price of the good is set at $4, there will be ____________.
A surplus and the price will eventually fall. At a price of $4, which is above the market equilibrium price of $3, suppliers will choose to produce more than consumers want to buy. Therefore, there will be a surplus of this good that gets produced but not purchased. This surplus will put downward pressure on the price as suppliers need to lower their prices to compete for consumers and sell their surplus, so prices will eventually fall.
All of the following could cause the demand curve for peanut butter to shift this year EXCEPT:
A change in consumer income
A change in the price of jelly, which is commonly eaten with peanut butter
The invention of a new style of peanut butter sandwich that becomes wildly popular
A rumor sweeping across social media that peanut butter will be in low supply next year
A new technology that allows for cheaper production of peanut butt
A new technology that allows for cheaper production of peanut butter. This new technology may cause a shift in the supply curve, but not the demand curve. A rise in consumer income will shift the demand curve up (if peanut butter is a normal good) or down (if it is an inferior good). Peanut butter and jelly are complementary goods, so a change in the price of one can affect the demand curve of the other. A newly popular peanut butter sandwich increases preferences for peanut butter, leading to an upward shift of the demand curve. And fears of a low supply of peanut butter next year may lead to consumers stocking up on peanut butter this year, again shifting the demand curve up.
Which of the following could cause the supply curve for cars to shift?
Both a drop in the price of steel and the invention of a new type of factory. The two main reasons the supply curve shifts is (1) the price of an input – such as steel – has changed, and (2) the production technology – such as new, faster factory – has changed. Both the price drop for steel and the new factor will lower the marginal cost of car production, shifting the supply curve to the right.
Suppose that electric cars (which, unlike traditional cars, do not use gasoline) become enormously popular, and at the same time, gasoline suppliers develop a new technology that allows for cheaper extraction of gasoline. As a result, the equilibrium price and quantity of gasoline will most likely change in which of the following ways?
Price decreases; Effect on quantity is uncertain. The surging popularity of electric cars will shift the demand curve for gasoline downward, as consumers’ taste for gasoline changes – especially the tastes of those consumers now driving electric cars. The new technology, meanwhile, will shift the supply curve to the right, as the marginal cost of producing gasoline is lowered by the technology. With the demand curve shifting down and the supply curve shifting to the right, the equilibrium price will certainly fall. But the effect of the changes on the equilibrium quantity is unclear. Consumers’ taste shifting away from gasoline suggests a lower quantity, but cheaper extraction of gasoline suggests a higher quantity.
Positive analysis
Describes the world the way it is. Includes the calculation of the value of the goods and services produced and available to satisfy our needs and wants.
Normative analysis
is the activity of evaluating, and making, arguments pertaining to questions of right and wrong.
Welfare economics
is a branch of economics that uses microeconomic techniques to evaluate well-being (welfare) at the aggregate (economy-wide) level.
Consumer Surplus
The amount by which the willingness to pay for a good exceeds the price paid for that good
Producer Surplus
The amount by which the price of a good exceeds the firm’s willingness to supply that good
Which area of the graph below best represents consumer surplus?
A. Consumer surplus is the area below the demand curve and above the equilibrium price.
In the two graphs below, the equilibrium price and quantity are the same: $10 and 50 units, respectively.
Compared to Graph B, Graph A shows a consumer surplus that is ___________ and a producer surplus that is ____________.
Smaller; The same. The only difference between the two graphs is the demand curve. The supply curve, along with the equilibrium price and quantity, are the same in both graphs. As a result, the producer surplus, which is the area above the supply curve but below the price line, is the same in both graphs. The demand curve in Graph A is less steep than that in Graph B, since it intersects the vertical axis at a price of $20 compared to a price of $40 in Graph B. Since the market price is $10 in both cases, the consumer surplus that accrues to the first customers with a willingness to pay of $20 in the case of Graph A (consumer surplus of 20 – 10 = $10) is less than that which accrues to the first customers with a willingness to pay of $40 in the case of Graph B (consumer surplus of 40 – 10 = $30). Mathematically, we can also compute the area of the triangle that represents the consumer surplus in Graph A (0.5 x 50 x $10 = $250) and compare it to the area of the triangle that represents the consumer surplus in Graph B (0.5 x 50 x $30 = $750).
In the supply and demand graph below, the equilibrium price is $10 and the equilibrium quantity is 500 units. Calculate the consumer and producer surplus.
onsumer surplus is the area of the triangle below the demand curve and above the price line. The height of this triangle is $20 - $10 = $10, and the base of this triangle is 500. The area of a triangle is 0.5 x base x height, or 0.5 x 500 x $10 = $2500. Producer surplus is the area of the triangle above the supply curve and below the price line. The height of this triangle is $10 - $0 = $10, and the base of this triangle is 500. The area is 0.5 x 500 x $10 = $2500.
The graph below shows the supply and demand curves for milk.
Which of the following will occur if the government establishes a price ceiling of $1.60 per gallon?
A shortage of 1,600,000 gallons. If the government establishes a price ceiling of $1.60, the new quantity demanded will rise to 2,400,000 gallons, and the quantity supplied will drop to 800,000 gallons. That means demand is 1,600,000 gallons higher than supply, leading to a shortage.
Consider the graph below, which shows the market for milk. Suppose that the equilibrium price and quantity in the market start out at P3 and Q2, but then the government imposed a price floor at price = P4.
Q1 demanded; Q3 supplied. At a price of P4, the quantity demanded is Q1 (where the price = P4 line intersects the demand curve) and the quantity supplied is Q3 (where the price = P4 line intersects the supply curve).
Refer to the graph in Question 2A. Which areas represent consumer surplus before and after the price floor went into effect?
Q1 demanded; Q3 supplied. At a price of P4, the quantity demanded is Q1 (where the price = P4 line intersects the demand curve) and the quantity supplied is Q3 (where the price = P4 line intersects the supply curve).
Refer to the graph in Question 2A. Which areas represent producer surplus before and after the price floor went into effect?
D + E + F before; B + D + F after. Producer surplus is the area above the supply curve and below the price line for all units sold. Before the price floor, the price was P3. The area above the supply curve and below the price = P3 line is D + E + F. After the price floor, the price is P4. Remember that producers only earn surplus on the units that are sold. If a unit is produced but not sold, no surplus is earned. We know that after the price floor, Q1 units are sold (since consumers only demand Q1 units). Producer surplus is the area above the supply curve and below the price = P4 line for all the units up to quantity = Q1, or B + D + F.
The graph below shows the supply and demand curves for milk.
Which of the following will occur if the government establishes a price ceiling of $1.60 per gallon?
A shortage of 1,600,000 gallons. If the government establishes a price ceiling of $1.60, the new quantity demanded will rise to 2,400,000 gallons, and the quantity supplied will drop to 800,000 gallons. That means demand is 1,600,000 gallons higher than supply, leading to a shortage.
Submit
