Supply and Demand Flashcards
1
Q
- In the figure below. Suppose the price of gasoline is $1.60 per gallon. Is the quantity demanded higher or lower than at the equilibrium price of $1.40 per gallon? And what about the quantity supplied? Is there a shortage or a surplus in the market? If so, of how much?
A
- Since $1.60 per gallon is above the equilibrium price, the quantity demanded would be lower at 550 gallons and the quantity supplied would be higher at 640 gallons. (These results are due to the laws of demand and supply, respectively.) The outcome of lower Qd and higher Qs would be a surplus in the gasoline market of 640 ? 550 = 90 gallons.
2
Q
- Why do economists use the ceteris paribus assumption?
A
- To make it easier to analyze complex problems. Ceteris paribus allows you to look at the effect of one factor at a time on what it is you are trying to analyze. When you have analyzed all the factors individually, you add the results together to get the final answer.
3
Q
- In an analysis of the market for paint, an economist discovers the fact listed below. State whether the change will affect supply or demand, and in what direction. There have recently been some important cost-saving inventions in the technology for making paint.
A
- An improvement in technology that reduces the cost of production will cause an increase in supply. Alternatively, you can think of this as a reduction in price necessary for firms to supply any quantity. Either way, this can be shown as a rightward (or downward) shift in the supply curve.
4
Q
- In an analysis of the market for paint, an economist discovers the fact listed below. State whether the change will affect supply or demand, and in what direction. Paint is lasting longer, so that property owners need not repaint as often.
A
- An improvement in product quality is treated as an increase in tastes or preferences, meaning consumers demand more paint at any price level, so demand increases or shifts to the right. If this seems counterintuitive, note that demand in the future for the longer-lasting paint will fall, since consumers are essentially shifting demand from the future to the present.
5
Q
- In an analysis of the market for paint, an economist discovers the fact listed below. State whether the change will affect supply or demand, and in what direction. Because of severe hailstorms, many people need to repaint now.
A
- An increase in need causes an increase in demand or a rightward shift in the demand curve.
6
Q
- In an analysis of the market for paint, an economist discovers the fact listed below. State whether the change will affect supply or demand, and in what direction. Factory damage means that firms are unable to supply as much in the present. Technically, this is an increase in the cost of production. Either way you look at it, the supply curve shifts to the left.
A
- The hailstorms damaged several factories that make paint, forcing them to close down for several months.
7
Q
- Many changes are affecting the market for oil. Predict how the following event will affect the equilibrium price and quantity in the market for oil. State how the event will affect the supply and demand diagram. Cars are becoming more fuel efficient, and therefore get more miles to the gallon.
A
- More fuel-efficient cars means there is less need for gasoline. This causes a leftward shift in the demand for gasoline and thus oil. Since the demand curve is shifting down the supply curve, the equilibrium price and quantity both fall.
8
Q
- Many changes are affecting the market for oil. Predict how the following event will affect the equilibrium price and quantity in the market for oil. State how the event will affect the supply and demand diagram. The winter is exceptionally cold.
A
- Cold weather increases the need for heating oil. This causes a rightward shift in the demand for heating oil and thus oil. Since the demand curve is shifting up the supply curve, the equilibrium price and quantity both rise.
9
Q
- Many changes are affecting the market for oil. Predict how the following event will affect the equilibrium price and quantity in the market for oil. State how the event will affect the supply and demand diagram. A major discovery of new oil is made off the coast of Norway.
A
- A discovery of new oil will make oil more abundant. This can be shown as a rightward shift in the supply curve, which will cause a decrease in the equilibrium price along with an increase in the equilibrium quantity. (The supply curve shifts down the demand curve so price and quantity follow the law of demand. If price goes down, then the quantity goes up.)
10
Q
- Many changes are affecting the market for oil. Predict how the following event will affect the equilibrium price and quantity in the market for oil. State how the event will affect the supply and demand diagram. The economies of some major oil-using nations, like Japan, slow down.
A
- When an economy slows down, it produces less output and demands less input, including energy, which is used in the production of virtually everything. A decrease in demand for energy will be reflected as a decrease in the demand for oil, or a leftward shift in demand for oil. Since the demand curve is shifting down the supply curve, both the equilibrium price and quantity of oil will fall.
11
Q
- Many changes are affecting the market for oil. Predict how the following event will affect the equilibrium price and quantity in the market for oil. State how the event will affect the supply and demand diagram. A war in the Middle East disrupts oil-pumping schedules.
A
- Disruption of oil pumping will reduce the supply of oil. This leftward shift in the supply curve will show a movement up the demand curve, resulting in an increase in the equilibrium price of oil and a decrease in the equilibrium quantity.
12
Q
- Many changes are affecting the market for oil. Predict how the following event will affect the equilibrium price and quantity in the market for oil. State how the event will affect the supply and demand diagram. Landlords install additional insulation in buildings.
A
- Increased insulation will decrease the demand for heating. This leftward shift in the demand for oil causes a movement down the supply curve, resulting in a decrease in the equilibrium price and quantity of oil.
13
Q
- Many changes are affecting the market for oil. Predict how the following event will affect the equilibrium price and quantity in the market for oil. State how the event will affect the supply and demand diagram. The price of solar energy falls dramatically.
A
- Solar energy is a substitute for oil-based energy. So if solar energy becomes cheaper, the demand for oil will decrease as consumers switch from oil to solar. The decrease in demand for oil will be shown as a leftward shift in the demand curve. As the demand curve shifts down the supply curve, both equilibrium price and quantity for oil will fall.
14
Q
- Many changes are affecting the market for oil. Predict how the following event will affect the equilibrium price and quantity in the market for oil. State how the event will affect the supply and demand diagram. Chemical companies invent a new, popular kind of plastic made from oil.
A
- A new, popular kind of plastic will increase the demand for oil. The increase in demand will be shown as a rightward shift in demand, raising the equilibrium price and quantity of oil.
15
Q
- Let’s think about the market for air travel. From 2009 to 2012, the price of jet fuel increased roughly 84%. Using the four-step analysis, how do you think this fuel price increase affected the equilibrium price and quantity of air travel?
A
- Step 1. Draw the graph with the initial supply and demand curves. Label the initial equilibrium price and quantity. Step 2. Did the economic event affect supply or demand? Jet fuel is a cost of producing air travel, so an increase in jet fuel price affects supply. Step 3. An increase in the price of jet fuel caused an increase in the cost of air travel. We show this as an upward or leftward shift in supply. Step 4. A leftward shift in supply causes a movement up the demand curve, raising the equilibrium price of air travel and lowering the equilibrium quantity.
16
Q
- A tariff is a tax on imported goods. Suppose the U.S. government cuts the tariff on imported flat screen televisions. Using the four-step analysis, how do you think the tariff reduction will affect the equilibrium price and quantity of flat screen TVs?
A
- Step 1. Draw the graph with the initial supply and demand curves. Label the initial equilibrium price and quantity. Step 2. Did the economic event affect supply or demand? A tariff is treated like a cost of production, so this affects supply. Step 3. A tariff reduction is equivalent to a decrease in the cost of production, which we can show as a rightward (or downward) shift in supply. Step 4. A rightward shift in supply causes a movement down the demand curve, lowering the equilibrium price and raising the equilibrium quantity.
17
Q
- What is the effect of a price ceiling on the quantity demanded of the product? What is the effect of a price ceiling on the quantity supplied? Why exactly does a price ceiling cause a shortage?
A
- A price ceiling (which is below the equilibrium price) will cause the quantity demanded to rise and the quantity supplied to fall. This is why a price ceiling creates a shortage.
18
Q
- Does a price ceiling change the equilibrium price?
A
- A price ceiling is just a legal restriction. Equilibrium is an economic condition. People may or may not obey the price ceiling, so the actual price may be at or above the price ceiling, but the price ceiling does not change the equilibrium price.
19
Q
- What would be the impact of imposing a price floor below the equilibrium price?
A
- A price ceiling is a legal maximum price, but a price floor is a legal minimum price and, consequently, it would leave room for the price to rise to its equilibrium level. In other words, a price floor below equilibrium will not be binding and will have no effect.
