Chapter 2. Demand and Supply

QUESTIONS AND PROBLEMS

QUESTIONS

  1. What determines the level of prices in a market?
  2. What does a downward-sloping demand curve mean about how buyers in a market will react to a higher price?
  3. Will demand curves have the same exact shape in all markets? If not, how will they differ?
  4. Will supply curves have the same shape in all markets? If not, how will they differ?
  5. What is the relationship between quantity demanded and quantity supplied at equilibrium? What is the relationship when there is a shortage? What is the relationship when there is a surplus?
  6. If the price is above the equilibrium level, would you predict a surplus or a shortage? If the price is below the equilibrium level, would you predict a surplus or a shortage? Why?
  7. When the price is above the equilibrium, explain how market forces move the market price to equilibrium. Do the same when the price is below the equilibrium.
  8. What is the difference between the demand and the quantity demanded of a product, say milk? Explain in words and show the difference on a graph with a demand curve for milk.
  9. What is the difference between the supply and the quantity supplied of a product, say cookies? Explain in words and show the difference on a graph with the supply curve of cookies.
  10. Review 2.4. Suppose the government decided that, since gasoline is a necessity, its price should be legally capped at $1.30 per gallon. What do you anticipate would be the outcome in the gasoline market?
  11. Explain why the following statement is false: “In the goods market, no buyer would be willing to pay more than the equilibrium price.”
  12. Explain why the following statement is false: “In the goods market, no seller would be willing to sell for less than the equilibrium price.”
  13. Review Figure 2.4 again. Suppose the price of gasoline is $1.00. Will the quantity demanded be lower or higher than at the equilibrium price of $1.40 per gallon? Will the quantity supplied be lower or higher? Is there a shortage or a surplus in the market? If so, of how much?
  14. When analyzing a market, how do economists deal with the problem that many factors that affect the market are changing at the same time?
  15. List and describe some factors that can cause a shift in the demand curve in markets for goods and services.
  16. List and describe some factors that can cause a shift in the supply curve in markets for goods and services.
  17. Consider the demand for hamburgers. If the price of a substitute good (for example, hot dogs) increases and the price of a complement good (for example, hamburger buns) increases, can you tell for sure what will happen to the demand for hamburgers? Why or why not? Illustrate your answer with a graph.
  18. How do you suppose the demographics of an aging population of “Baby Boomers” in the United States will affect the demand for healthcare? Justify your answer.
  19. We know that a change in the price of a product causes a movement along the demand curve. Suppose consumers believe that prices will be rising in the future. How will that affect demand for the product in the present? Can you show this graphically?
  20. Suppose there is a soda tax to curb obesity. What should a reduction in the soda tax do to the supply of sodas and to the equilibrium price and quantity? Can you show this graphically? Hint: Assume that the soda tax is collected from the sellers.
  21. How does one analyze a market where both demand and supply shift?
  22. Does a price ceiling attempt to make a price higher or lower?
  23. How does a price ceiling set below the equilibrium level affect quantity demanded and quantity supplied?
  24. Does a price floor attempt to make a price higher or lower?
  25. How does a price floor set above the equilibrium level affect quantity demanded and quantity supplied?
  26. Most government policy decisions have winners and losers. What are the effects of raising the minimum wage? Who are the winners and who are the losers, and what exactly do they win and lose? To what extent does the policy change achieve its goals?
  27. Agricultural price supports result in governments holding large inventories of agricultural products. Why do you think the government cannot simply give the products away to poor people?
  28. Can you propose a policy that would induce the market to supply more affordable rental housing?
  29. Refer to the Table 2.8 showing information on the demand and supply of bicycles, where quantities of bicycles are measured in thousands.
Table 2.8 Quantity Supplied and Demanded of Bicycles
Price Qd Qs
$120 50 36
$150 40 40
$180 32 48
$210 28 56
$240 24 70
  1. What is the quantity demanded and the quantity supplied at a price of $210?
  2. At what price is the quantity supplied equal to 48,000?
  3. Graph the demand and supply curve for bicycles. How can you determine the equilibrium price and quantity from the graph? How can you determine the equilibrium price and quantity from the table? What are the equilibrium price and equilibrium quantity?
  4. If the price was $120, what would the quantities demanded and supplied be? Would a shortage or surplus exist? If so, how large would the shortage or surplus be? Table 2.8shows information on the demand and supply for bicycles, where the quantities of bicycles are measured in thousands.

30. The computer market in recent years has seen many more computers sell at much lower prices. What shift in demand or supply is most likely to explain this outcome? Sketch a demand and supply diagram and explain your reasoning for each.

  1. A rise in demand
  2. A fall in demand
  3. A rise in supply
  4. A fall in supply

31.  Table 2.9 illustrates the market’s demand and supply for cheddar cheese. Graph the data and find the equilibrium. Next, create a table showing the change in quantity demanded or quantity supplied, and a graph of the new equilibrium, in each of the following situations:

  1. The price of milk, a key input for cheese production, rises, so that the supply decreases by 80 pounds at every price.
  2. A new study says that eating cheese is good for your health, so that demand increases by 20% at every price.
Table 2.9 Quantity Demanded and Supplied of Cheddar Cheese
Price per Pound Qd Qs
$3.00 750 540
$3.20 700 600
$3.40 650 650
$3.60 620 700
$3.80 600 720
$4.00 590 730

32. Table 2.10 shows the supply and demand for movie tickets in a city. Graph demand and supply and identify the equilibrium. Then calculate in a table and graph the effect of the following two changes.

  1. Three new nightclubs open. They offer decent bands and have no cover charge, but make their money by selling food and drink. As a result, demand for movie tickets falls by six units at every price.
  2. The city eliminates a tax that it placed on all local entertainment businesses. The result is that the quantity supplied of movies at any given price increases by 10%.
Table 2.10 Quantity Supplied and Demanded of Movie Tickets
Price per Movie Ticket Qd Qs
$10.00 26 16
$12.00 24 18
$14.00 22 20
$16.00 21 21
$18.00 20 22

33.  A low-income country decides to set a price ceiling on bread so it can make sure that bread is affordable to the poor. Table 2.11 provides the conditions of demand and supply. What are the equilibrium price and equilibrium quantity before the price ceiling? What will the excess demand or the shortage (that is, quantity demanded minus quantity supplied) be if the price ceiling is set at $2.40? At $1.60? At $3.60?

Table 2.11 Quantity Supplied and Quantity Demanded of Bread
Price Qd Qs
$1.60 9,000 5,000
$2.00 8,500 5,500
$2.40 8,000 6,400
$2.80 7,500 7,500
$3.20 7,000 9,000
$3.60 6,500 11,000
$4.00 6,000 15,000

 

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