Handout 2 - Ch 4 Flashcards
What is a competitive market? Briefly describe a type of market that is not perfectly competitive.
A competitive market is a market in which there are many buyers and many sellers of an identical product so market is a monopoly, in which there is only one seller. There are also other markets that fall that each has a negligible impact on the market price. Another type of between perfect competition and monopoly.
What are the demand schedule and the demand curve, and how are they related? Why does the demand curve slope downward?
The demand schedule is a table that shows the relationship between the price of a good and the quantity demanded. The demand curve is the downward-sloping line relating price and quantity demanded. The demand schedule and demand curve are related because the demand curve is simply a graph showing the points in the demand schedule. The demand curve slopes downward because of the law of demand—other things being equal, when the price of a good rises, the quantity demanded of the good falls. People buy less of a good when its price rises, both because they cannot afford to buy as much and because they switch to purchasing other goods.
Does a change in consumers’ tastes lead to a movement along the demand curve or a shift in the demand curve? Does a change in price lead to a movement along the demand curve or a shift in the demand curve?
A change in consumers’ tastes leads to a shift of the demand curve. A change in price leads to a movement along the demand curve.
Popeye’s income declines, and as a result, he buys more spinach. Is spinach an inferior or a normal good? What happens to Popeye’s demand curve for spinach?
Because Popeye buys more spinach when his income falls, spinach is an inferior good for him. His demand curve for spinach shifts out as a result of the decrease in his income.
What are the supply schedule and the supply curve, and how are they related? Why does the supply curve slope upward?
A supply schedule is a table showing the relationship between the price of a good and the quantity a producer is willing and able to supply. The supply curve is the upward-sloping line relating price and quantity supplied. The supply schedule and the supply curve are related because the supply curve is simply a graph showing the points in the supply schedule. The supply curve slopes upward because when the price is high, suppliers’ profits increase, so they supply more output to the market. The result is the law of supply—other things being equal, when the price of a good rises, the quantity supplied of the good also rises.
Does a change in producers’ technology lead to a movement along the supply curve or a shift in the supply curve? Does a change in price lead to a movement along the supply curve or a shift in the supply curve?
A change in producers’ technology leads to a shift in the supply curve. A change in price leads to a movement along the supply curve.
Define the equilibrium of a market. Describe the forces that move a market towards its equilibrium.
At the equilibrium of a market is the point at which the quantity demanded is equal to quantity supplied. If the price is above the equilibrium price, sellers want to sell more than buyers want to buy, so there is a surplus. Sellers try to increase their sales by cutting prices. That continues until they reach the equilibrium price. If the price is below the equilibrium price, buyers want to buy more than sellers want to sell, so there is a shortage. Sellers can raise their price without losing customers. That continues until they reach the equilibrium price.
Beer and pizza are complements because they are often enjoyed together. When the price of beer rises, what happens to the supply, demand, quantity supplied, quantity demanded, and the price in the market for pizza?
When the price of beer rises, the demand for pizza declines, because beer and pizza are complements and people want to buy less beer. When we say the demand for pizza declines, we mean that the demand curve for pizza shifts to the left as in Figure 5. The supply curve for pizza is not affected. With a shift to the left in the demand curve, the equilibrium price and quantity both decline, as the figure shows. Thus, the quantity of pizza supplied and demanded both fall. In sum, supply is unchanged, demand is decreased, quantity supplied declines, quantity demanded declines, and the price falls.
Describe the role of prices in market economics.
Prices play a vital role in market economies because they bring markets into equilibrium. If the price is different from its equilibrium level, quantity supplied and quantity demanded are not equal. The resulting surplus or shortage leads suppliers to adjust the price until equilibrium is restored. Prices thus serve as signals that guide economic decisions and allocate scarce resources.
Explain using supply and demand diagrams.
Cold weather damages the orange crop, reducing the supply of oranges and raising the price of oranges. This leads to a decline in the supply of orange juice because oranges are an important input in the production of orange juice. This can be seen as a shift to the left in the supply curve for orange juice. The new equilibrium price is higher than the old equilibrium price.
Explain using supply and demand diagrams.
People often travel to the Caribbean from New England to escape cold weather, so the demand for Caribbean hotel rooms is high in the winter. In the summer, fewer people travel to the Caribbean, because northern climates are more pleasant. The result is a shift to the left in the demand curve. The equilibrium price of Caribbean hotel rooms is thus lower in the summer than in the winter, as the figure shows.
Explain using supply and demand diagrams.
When a war breaks out in the Middle East, many markets are affected. Because a large proportion of oil production takes place there, the war disrupts oil supplies, shifting the supply curve for gasoline to the left, as shown in Figure 8. The result is a rise in the equilibrium price of gasoline. With a higher price for gasoline, the cost of operating a gas-guzzling automobile like a Cadillac will increase. As a result, the demand for used Cadillacs will decline, as people in the market for cars will not find Cadillacs as attractive. In addition, some people who already own Cadillacs will try to sell them. The result is that the demand curve for used Cadillacs shifts to the left, while the supply curve shifts to the right. The result is a decline in the equilibrium price of used Cadillacs.
“An increase in the demand for notebooks raises the quantity of notebooks demanded but not the quantity supplied.” Is this statement true or false? Explain.
The statement, in general, is false. As Figure 10 shows, the increase in demand for notebooks results in an increased quantity supplied. The only way the statement would be true is if the supply curve was a vertical line, as shown in Figure 11.
Consider the market for minivans. For each of the events listed here, identify which of the determinants of demand or supply are affected. Also indicate whether demand or supply increases or decreases. Then draw a diagram to show the effect on the price and quantity of minivans. - People decide to have more children.
If people decide to have more children, they will want larger vehicles for hauling their kids around, so the demand for minivans will increase. Supply will not be affected. The result is a rise in both the price and the quantity sold, as Figure 12 shows.
Consider the market for minivans. For each of the events listed here, identify which of the determinants of demand or supply are affected. Also indicate whether demand or supply increases or decreases. Then draw a diagram to show the effect on the price and quantity of minivans. - A strike by steelworkers raises steel prices.
If a strike by steelworkers raises steel prices, the cost of producing a minivan rises and the supply of minivans decreases. Demand will not be affected. The result is a rise in the price of minivans and a decline in the quantity sold, as Figure 13 shows.
Consider the market for minivans. For each of the events listed here, identify which of the determinants of demand or supply are affected. Also indicate whether demand or supply increases or decreases. Then draw a diagram to show the effect on the price and quantity of minivans. - Engineers develop new automated machinery for the production of minivans.
The development of new automated machinery for the production of minivans is an improvement in technology. This reduction in firms’ costs will result in an increase in supply. Demand is not affected. The result is a decline in the price of minivans and an increase in the quantity sold, as Figure 14 shows.
Consider the market for minivans. For each of the events listed here, identify which of the determinants of demand or supply are affected. Also indicate whether demand or supply increases or decreases. Then draw a diagram to show the effect on the price and quantity of minivans. - The price of sports utility vehicles rises.
The rise in the price of sport utility vehicles affects minivan demand because sport utility vehicles are substitutes for minivans. The result is an increase in demand for minivans. Supply is not affected. The equilibrium price and quantity of minivans both rise, as Figure 12 shows.
Consider the market for minivans. For each of the events listed here, identify which of the determinants of demand or supply are affected. Also indicate whether demand or supply increases or decreases. Then draw a diagram to show the effect on the price and quantity of minivans. - A stock market crash lowers people’s wealth.
The reduction in peoples’ wealth caused by a stock-market crash reduces their income, leading to a reduction in the demand for minivans, because minivans are likely a normal good. Supply is not affected. As a result, both the equilibrium price and the equilibrium quantity decline, as Figure 15 shows.
Consider the market for DVDs, TV screens, and tickets at movie theaters. Suppose a technological advance reduces the cost of manufacturing TV screens. Draw a diagram to show what happens in the market for TV screens.
The technological improvement would reduce the cost of producing a TV screen, shifting the supply curve to the right. The demand curve would not be affected. The result is that the equilibrium price will fall, while the equilibrium quantity will rise. This is shown in Figure 16.
Consider the market for DVDs, TV screens, and tickets at movie theaters. Draw two more diagrams to show how the change in the market for TV screens affects the markets for DVDs and movie tickets.
The reduction in the price of TV screens would lead to an increase in the demand for DVDs because TV screens and DVDs are complements. The effect of this increase in the demand for DVDs is an increase in both the equilibrium price and quantity, as shown in Figure 17.
Over the past 30 years, technological advances have reduced the cost of computer chips. How do you think this has affected the market for computers? For computer software? For typewriters?
Technological advances that reduce the cost of producing computer chips represent a decline in an input price for producing a computer. The result is a shift to the right in the supply of computers, as shown in Figure 19. The equilibrium price falls and the equilibrium quantity rises, as the figure shows.
Using the supply and demand diagrams, show the effect of the following events on the market for sweatshirts. A hurricane in South Carolina damages the cotton crop.
When a hurricane in South Carolina damages the cotton crop, it raises input prices for producing sweatshirts. As a result, the supply of sweatshirts shifts to the left, as shown in Figure 22. The new equilibrium price is higher and the new equilibrium quantity of sweatshirts is lower.
Using the supply and demand diagrams, show the effect of the following events on the market for sweatshirts. The price of leather jackets falls.
A decline in the price of leather jackets leads more people to buy leather jackets, reducing the demand for sweatshirts. The result, shown in Figure 23, is a decline in both the equilibrium price and quantity of sweatshirts.
Using the supply and demand diagrams, show the effect of the following events on the market for sweatshirts. All colleges require morning exercise in appropriate attire.
The effects of colleges requiring students to engage in morning exercise in appropriate attire raises the demand for sweatshirts, as shown in Figure 24. The result is an increase in both the equilibrium price and quantity of sweatshirts.
Using the supply and demand diagrams, show the effect of the following events on the market for sweatshirts. New knitting machines are invented.
The invention of new knitting machines increases the supply of sweatshirts. As Figure 25 shows, the result is a reduction in the equilibrium price and an increase in the equilibrium quantity of sweatshirts.
A survey shows an increase in drug use by young people. In the ensuing debate, two hypotheses are proposed: - Reduced police efforts have increased the availability of drugs on the street.
Reduced police efforts would lead to an increase in the supply of drugs. As Figure 26 shows, this would cause the equilibrium price of drugs to fall and the equilibrium quantity of drugs to rise.
A survey shows an increase in drug use by young people. In the ensuing debate, two hypotheses are proposed: - Cutbacks in education efforts
On the other hand, cutbacks in education efforts would lead to a rise in the demand for drugs. This would push the equilibrium price and quantity up, as shown in Figure 27.
Suppose that in the year 2015 the number of births is temporarily high. How does this baby boom affect the price of babysitting services in 2020? (Hint: 5-year olds need babysitters, whereas 15 year olds can be babysitters.)
In the year 2020, there are more five-year-olds
who need sitters, so the demand for baby-sitting services rises, as shown in Figure 28.
Suppose that in the year 2015 the number of births is temporarily high. How does this baby boom affect the price of babysitting services in 2030? (Hint: 5-year olds need babysitters, whereas 15 year olds can be babysitters.)
However, in the year 2030, the
increased number of 15-year-olds shifts the supply of baby-sitting services to the right, as
shown in Figure 29. The result is a decline in the price of baby-sitting services.
The market for pizza has the following demand and supply schedule. Graph the demand and supply curves. What is the equilibrium price and quantity in this market?
Quantity supplied equals quantity demanded at a price of $6 and quantity of 81 pizzas
(Figure 30).
The market for pizza has the following demand and supply schedule. If the actual price in this market were below the equilibrium price, what would drive the market toward the equilibrium?
If the price were less than $6,
quantity demanded would exceed quantity supplied, so suppliers could raise the price without
losing sales. In both cases, the price would continue to adjust until it reached $6, the only
price at which there is neither a surplus nor a shortage.
Because bagels and cream cheese are often eaten together, they are complements. We observe that both the equilibrium price of cream cheese and the equilibrium quantity of cream cheese and the equilibrium quantity of bagles have risen. What could be responsible for this pattern - a fall in the price of flour or a fall in the price of milk? Illustrate and explain your answer.
Because flour is an ingredient in bagels, a decline in the price of flour would shift the
supply curve for bagels to the right. The result, shown in Figure 31, would be a fall in the
price of bagels and a rise in the equilibrium quantity of bagels.
Because bagels and cream cheese are often eaten together, they are complements. We observe that both the equilibrium price of cream cheese and the equilibrium quantity of cream cheese and the equilibrium quantity of bagles have risen. What could be responsible for this pattern - a fall in the price of flour or a fall in the price of milk? Illustrate and explain your answer.
Because cream cheese is a complement to bagels, the fall in the equilibrium price of
bagels increases the demand for cream cheese, as shown in Figure 32. The result is a
rise in both the equilibrium price and quantity of cream cheese. So, a fall in the price of
flour indeed raises both the equilibrium price of cream cheese and the equilibrium
quantity of bagels.
Because bagels and cream cheese are often eaten together, they are complements. We observe that both the equilibrium price of cream cheese and the equilibrium quantity of cream cheese and the equilibrium quantity of bagles have risen. What would happen with a fall in the price of milk?
What happens if the price of milk falls? Because milk is an ingredient in cream cheese,
the fall in the price of milk leads to an increase in the supply of cream cheese. This leads
to a decrease in the price of cream cheese (Figure 33), rather than a rise in the price of
cream cheese. So a fall in the price of milk could not have been responsible for the
pattern observed.
Because bagels and cream cheese are often eaten together, they are complements. Suppose instead that the equilibrium price of cream cheese has risen but the equilibrium quantity of bagels has fallen. What could be responsible for this pattern - a rise in the price of flour or a rise in the price of milk? Illustrate and explain your answer.
In part (a), we found that a fall in the price of flour led to a rise in the price of cream
cheese and a rise in the equilibrium quantity of bagels. If the price of flour rose, the
opposite would be true; it would lead to a fall in the price of cream cheese and a fall in
the equilibrium quantity of bagels. Because the question says the equilibrium price of
cream cheese has risen, it could not have been caused by a rise in the price of flour.
What happens if the price of milk rises? From part (a), we found that a fall in the price of
milk caused a decline in the price of cream cheese, so a rise in the price of milk would
cause a rise in the price of cream cheese. Because bagels and cream cheese are
complements, the rise in the price of cream cheese would reduce the demand for
bagels, as Figure 34 shows. The result is a decline in the equilibrium quantity of bagels.
So a rise in the price of milk does cause both a rise in the price of cream cheese and a
decline in the equilibrium quantity of bagels.
Suppose that the price of basketball tickets at your college is determined by market forces. Currently, the demand and supply schedules are in the following table. Draw the demand and supply curves. What is unusual about this supply curve? Why might this be true?
As Figure 35 shows, the supply curve is vertical. The constant quantity supplied makes
sense because the basketball arena has a fixed number of seats at any price.
Suppose that the price of basketball tickets at your college is determined by market forces. Currently, the demand and supply schedules are in the following table. What are the equilibrium price and quantity of tickets?
Quantity supplied equals quantity demanded at a price of $8. The equilibrium quantity is
8,000 tickets.
