Tips and Samples Ch 3 demand and supply

8/17/2019 Tips and Samples Ch 3 demand and supply

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Tips and Sample Questions for chapter 3

To determine the price of any good or service we need to study the

behavior of buyers and sellers of the goods and services in a market.

A market consists of the Demand side and Supply side. Demandrepresents the behavior of buyers (consumers demanders

customers etc.! who want to ma"imi#e their utility. $hile Supply

captures the behavior of sellers (producers distributors retailers

whole%sellers businesses companies etc.! that want to ma"imi#e

their economic pro&ts.

'n chapter three start studying the concept of Demand disregarding

the supply side of the market &rst.

$hat is Demand )Demand refers to the willingness and ability of buyers to purchase

di*erent +uantities of a well%speci&ed good or service at di*erent

prices during a speci&c period of time., Subtitles of demand include-

• Table or schedule of Demand umerical presentation of /rice

and Quantity Demanded.

• Demand 0urve 1raphical presentation of table of Demand.

• The 2aw of Demand- There e"ists an inverse relationship

between the /rice of a good itself at present time and the

Quantity demanded of it 0eteris /aribus.

• 'ndividual Demand vs. arket demand.

• Quantity demanded vs. Demand these similar words are two

di*erent concepts each meaning a di*erent thing4 (2ike

number 5 and letter 6 which are very similar but they cannot

be used interchangeably4!

• )A change in Quantity demanded, is not the same as )a change

in Demand.,

A change in Quantity demanded is represented by a movement

from one point to another point on the same demand curve and it

is determined by price variations. And the determinant of

+uantity demanded is the own price of the good at the present


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time (6ne factor only.! $hile a change in Demand is represented

by the entire demand curve to shift. $hen Demand increases the

entire demand curve shifts rightward. $hen on the other hand

Demand decreases the entire Demand curve shifts leftward. A

change in demand has &ve determinants that cause the demandto shift-

• /references or Tastes

• 'ncome (ormal 'nferior and 7nrelated goods.!

• umber of buyers

• /rices of related goods or services (Substitutes

0ompliments and 'ndependents pairs of goods.!

• 8"pected future prices

Students need to master the complete impact of each of

these factors in determining the rightward or leftward shifts

or changes of Demand.)

To continue in chapter three studying the concept of Supply now

disregard the Demand side of the market. $hat is Supply

)Supply refers to the willingness and ability of sellers to o*er to sell

di*erent +uantities of a well%speci&ed good or service at di*erent

prices during a speci&c period of time., Subtitles of Supply include-

• Table or schedule of Supply umerical presentation of /rice

and Quantity Supplied.

• Supply 0urve 1raphical presentation of table of Supply.

• The 2aw of Supply- There e"ists a direct (positive! relationship

between the /rice of a good itself at present time and the

Quantity supplied of it 0eteris /aribus.• 'ndividual Supply vs. arket Supply.

• Quantity supplied vs. Supply these similar words are two

di*erent concepts each meaning a di*erent thing4 (2ike

number 5 and letter 6 which are very similar but they cannot

be used interchangeably4!


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• )A change in Quantity supplied, is not the same as )a change

in Supply.,

A change in Quantity supplied is represented by a movement

from one point to another point on the same supply curve and itis determined by price variations. And the determinant of

+uantity supplied is the own price of the good at the present time

(6ne factor only.! $hile a change in Supply is represented by the

entire supply curve to shift. $hen Supply increases the entire

supply curve shifts rightward. $hen Supply declines the entire

Supply curve shifts leftward. A change in supply has si" general

determinants that cause the supply curve to shift-

• Technology or /roductivity• 'nput /rices

• umber of sellers

• /rices of other goods in production

• 8"pected future prices

• Ta"es Subsidies and 1overnment 9estrictions

Students need to master the complete impact of each of

these factors in determining the rightward or leftward shifts

or changes of supply.)

$hat is 8+uilibrium

The last step in determining the price (recall that the goal of chapter

three was price determination! is putting demand and supply

together The arket.

A market consists of buyers and sellers through demand and supply

interactions. The price of a good or service is determined whereDemand curve intersects Supply curve. The point at which supply

curve crosses demand curve is the market e+uilibrium point. The

price at which Quantity demanded e+uals Quantity supplied is

e+uilibrium /rice or market%clearing /rice. The +uantity that

corresponds to the e+uilibrium price is called e+uilibrium +uantity.


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Any other price is a dise+uilibrium price. A surplus e"ists if Q%

supplied is greater than Q%demanded. A shortage e"ists if Q%

demanded is greater than Q%supplied. $hat happens to price when

there is a surplus or shortage The price falls to e+uilibrium price

when there is a surplus in the market and it rises to e+uilibrium pricewhen there is a shortage. ote that not all markets e+uilibrate at the

same speed4

6nce the 8+uilibrium /rice and 8+uilibrium Quantity for any given

good or services is determined don:t they ever change 6r what

can change 8+uilibrium /rice and Quantity ;ou guessed it right.

Since e+uilibrium price and +uantity are


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____ ". Suppose the government decides that every family should own its own home. To ringthis aout, the government decides to susidi#e the home$construction industry ygiving the home$construction companies %1&,&&& for every house that they uild. 's aresult of this,a. the supply curve of new houses would shift leftward, since it now costs

%1&,&&& more for uilders to produce a house. . the demand curve for new houses would shift rightward, since now

every family would want to uy a house.c. the demand curve for new houses would shift leftward.d. the supply curve of new houses would shift rightward, since uilders

would e willing to produce and sell more houses at each given price.e. c and d

____ (. )hich of the following will not shift a supply curve*a. a change in the price of relevant resources

. a change in the good+s own pricec. a change in the numer of sellersd. a change in per$unit costs rought aout y a change in taes.

Exhibit 3-1

____ -. efer to /hiit "$1. 't a price of %! there is aa. shortage of 1&& units. . shortage of !&& units.c. shortage of 1-& units.d. surplus of !&& units..e. surplus of 1-& units.


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____ 0. efer to /hiit "$1. 't a price of %0 there is aa. surplus of 1&& units.

. surplus of 1-& units.c. surplus of !&& units.d. shortage of 1-& units.e. shortage of !&& units.

Exhibit 3-3

2

r i c e

3 d o l l a r s 4

5

)

6

1

!

Quantity

1

!

"

(

-

0

____ 7. efer to /hiit "$". ' shift in demand from 1 to ! can 89T occur from a changeina. population.

. price of a sustitute.c. income.d. the good:s own price.

Exhibit 3-4


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2 r i

c e 3 d o l l a r s 4

S

- 1& 1- !& !- Quantity

!

(

0

;

____ ;. efer to /hiit "$(. 't a price of %! _______________ units will e echanged.a. -

. 1&c. 1-

d. !&

Exhibit 3-5

2 r

i c e 3 d o l l a r s 4

S

56 S

)<

1

!

1

!

Quantity

____ =. efer to /hiit "$-. In the mar>et shown, if equilirium was originally at point 5 andthe new equilirium is now at point 6, this change may have een caused ya. a decrease in consumers: income 3assuming that this is an inferior

good4 and a simultaneous decline in technology in the production of

this good. . an increase in consumers: income 3assuming that this is an inferior

good4 and a simultaneous improvement in technology in the production of this good.

c. a decrease in consumers: income 3assuming that this is an inferiorgood4 and no change in supply.

d. an increase in consumers: income 3assuming that this is an inferior


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good4 and no change in supply.

Exhibit 3-6

____1&. efer to /hiit "$0. If a decrease in income causes the demand for good < to shiftfrom 1 to !, good < isa. a normal good.

. an inferior good.c. a sustitute good.d. a complementary good.e. a neutral good.

____11. efer to /hiit "$0. If an increase in the price of good ? causes the demand for good< to shift from 1 to !, goods < and ? area. normal goods.

. inferior goods.c. sustitutes.d. complements.e. neutral goods.

Exhibit 3-9


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____1!. efer to /hiit "$=. Consumers view < and ? as sustitutes. If the price of ?increases, you epect a movement in the mar>et for < froma. @ to /.

. ' to A.c. / to @.d. A to '.

____1". )hich of the following pairs of goods would e most li>ely to e complements*a. utter and margarine.

. peanuts and peanut utter.c. 6+s and 6 players.

d. hi>ing oots and tennis shoes.e. 'll of the aove

Exhibit 3-16


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____1(. efer to /hiit "$10. If there are empty seats for a as>etall game at the price 2B,the situation is est depicted on grapha. 314, with 2B 21.

. 3!4, with 2B 2".

c. 3"4, with 2B 2!.d. 3"4, with 2B 2".e. 3(4, with 2B 21.

____1-. In the supply$and$demand diagram of the mar>et for peanut utter, the equilirium point has moved up and to the right. )hat could have caused this*a. a fall in the price of peanuts

. a rise in the price of peanuts

c. a rise in income, assuming that peanut utter is an inferior goodd. a shift in preferences toward peanut utter e. none of the aove

____10. If the demand for computer software rises as incomes rise, then computer software is a3an4


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____!&. In year 1 the price of good < is %1& and 1&& units are ought and sold. In year ! the price of good < is %1" and !"& units are ought and sold. )hat can eplain this*a. The supply of good < was higher in year ! than in year 1 and the

demand for good < was the same in year ! as in year 1. . The demand for good < was higher in year ! than in year 1 and the

supply of good < was the same in year ! as in year 1.c. Aoth the demand for, and supply of, good < were higher in year ! than

year 1.d. or ce. a, , or c

____!1. Alan> Question. Ignore it.

____!!. ?ou can determine producers: surplus if you >now the minimum selling price anda. price received.

. price paid.c. ta paid.d. ta received.e. a and c

Exhibit 3-13

Quantity Demanded…………………………………

!"ice #ose $aitlyn %eah Ma"ia Ma"&et

%- !& 11 1- "& 3'4

0 17 1& 1" !0 3A4

7 1( = 1& !! 3C4

; 11 ; 7 1; 34

= 7 7 ( 1" 3/4

1& " 0 & 7 3@4

'ssume that Eose, Faitlyn, Geah, and Haria are the only uyers in this mar>et.


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____!". efer to /hiit "$1". /ach individual consumer:s demand curve is ________________ sloping and the mar>et demand curve is _________________sloping.a. upwardD also upward

. downwardD also downwardc. upwardD downwardd. downwardD upward

Essay

!(. Suppose that the average prices of refrigerators have fallen over the past few years,yet the refrigerator companies have offered more and more of them for sale. oes thismean that the supply curve for refrigerators is downward sloping* /plain.

!-. )hen urricane Fatrina hit the Julf Coast of the Knited States in !&&- it destroyed-,&&&,&&& acres of timer. Jiven that lumer is timer that has een sawed or splitinto plan>s and oards, eplain in terms of supply andLor demand how the hurricaneimpacted each of the following mar>ets 3e sure to note the epected impact onequilirium price and quantity4Ma. omestic lumer

. Imported lumer c. 8ew home construction


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'ample Questions (o" Chapte" )h"ee

*ns+e" 'ection

M,%)!%E C./CE'

1. '8SM ' 2TSM 1 I@M Hoderate 8'TM 'nalyticG9CM Supply and demand

!. '8SM ' 2TSM 1 I@M Hoderate 8'TM 'nalyticG9CM Supply and demand

". '8SM 2TSM 1 I@M Hoderate 8'TM 'nalyticG9CM Supply and demand

(. '8SM A 2TSM 1 I@M Hoderate 8'TM 'nalyticG9CM Supply and demand

-. '8SM A 2TSM 1 I@M Hoderate 8'TM 'nalyticG9CM Supply and demand 89TM 8ew

0. '8SM C 2TSM 1 I@M Hoderate 8'TM 'nalyticG9CM Supply and demand 89TM 8ew

7. '8SM 2TSM 1 I@M Hoderate 8'TM 'nalyticG9CM Supply and demand

;. '8SM A 2TSM 1 I@M Hoderate 8'TM 'nalyticG9CM Supply and demand 89TM 8ew

=. '8SM C 2TSM 1 I@M ifficult 8'TM 'nalyticG9CM Supply and demand 89TM 8ew

1&. '8SM A 2TSM 1 I@M Hoderate 8'TM 'nalytic

G9CM Supply and demand 89TM 8ew

11. '8SM C 2TSM 1 I@M ifficult 8'TM 'nalyticG9CM Supply and demand

1!. '8SM A 2TSM 1 I@M ifficult 8'TM 'nalyticG9CM Supply and demand


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1". '8SM C 2TSM 1 I@M /asy 8'TM 'nalyticG9CM Supply and demand

1(. '8SM C 2TSM 1 I@M Hoderate 8'TM 'nalyticG9CM Supply and demand

1-. '8SM 2TSM 1 I@M Hoderate 8'TM 'nalyticG9CM Supply and demand

10. '8SM C 2TSM 1 I@M /asy 8'TM 'nalyticG9CM Supply and demand

17. '8SM A 2TSM 1 I@M ifficult 8'TM 'nalytic

G9CM Supply and demand

1;. '8SM A 2TSM 1 I@M /asy 8'TM 'nalyticG9CM Supply and demand

1=. '8SM 2TSM 1 I@M Hoderate 8'TM 'nalytic

!&. '8SM 2TSM 1 I@M ifficult 8'TM 'nalyticG9CM Supply and demand

!1. Alan> 'nswer. Ignore it.

!!. '8SM ' 2TSM 1 I@M Hoderate 8'TM 'nalyticG9CM Supply and demand

!". '8SM A 2TSM 1 I@M /asy 8'TM 'nalyticG9CM Supply and demand 89TM 8ew

E''*0

!(. '8SM


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The reason that refrigerator prices have fallen is li>ely a result of a change in oneof the determinants of supply. @or eample, a technological improvement in the

production of refrigerators may have occurred. This advance in technology wouldcause the supply curve for refrigerators to shift to the right, lowering equilirium

price and raising the equilirium quantity. Since one of the determinants of supply,this is not a case of a movement along a single supply curve 3and thus does notvaiolate the law of supply4.

2TSM 1 I@M ifficult 8'TM'nalytic G9CM Supply anddemand

!-. '8SM

a. The severe weather would e epected to shift the supply curve for

domestic lumer to the left, ut would not automatically shift the demandcurve. This would result in a higher equilirium price and a lowerequilirium quantity for domestic lumer.

. Imported lumer is a sustitute for KS$grown luner, therefore the demandcurve for imported lumer would e epected to shift to the right. Thesupply curve for imported lumer would not automatically shift. Thiswould result in a higher equilirium price and a higher equiliriumquantity for imported lumer.

c. 'n increase in the price of timer would e an increase in a resource cost

for those who are uilding new homes. igher resource costs shift thesupply curve for new home construction to the left, ut the demand curvewould not automatically shift. This would result in a higher equilirium

price and a lower equilirium quantity for new homes.

2TSM 1 I@M ifficult 8'TM'nalytic G9CM Supply anddemand


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Tips and Samples Ch 3 demand and supply