Chapter 4 Market Forces of Supply and Demand

Chapter 4 : (Market Forces of Supply and Demand) Section A 1. If buyers and sellers in a certain market are price takers, then individually a. they have no influence on market price. b. they have some influence on market price, but that influence is limited. c. buyers will be able to find prices lower than those determined in the market. d. sellers will find it difficult to sell all they want to sell at the market price. 2. Two goods are substitutes if a decrease in the price of one good a. decreases the demand for the other good. b. decreases the quantity demanded of the other good. c. increases the demand for the other good. d. increases the quantity demanded of the other good. 3. The law of demand says that a. an increase in quantity demanded causes price to decrease. b. an increase in price causes quantity demanded to increase. c. an increase in price causes quantity demanded to decrease. d. an increase in quantity demanded causes price to increase. 4. Which of the following events would cause a movement upward and to the right along the supply curve for tomatoes? a. The number of sellers of tomatoes increases. b. There is an advance in technology that reduces the cost of producing tomatoes. c. The price of fertilizer decreases, and fertilizer is an input in the production of tomatoes. d. The price of tomatoes rises. 5. Which of the following events could cause an increase in the supply of ceiling fans? a. The number of sellers of ceiling fans increases. b. There is an increase in the price of air conditioners, and consumers regard air conditioners and ceiling fans as substitutes. c. There is an increase in the price of the motor that powers ceiling fans. d. All of the above are correct. 6. If, at the current price, there is a shortage of a good, a. sellers are producing more than buyers wish to buy. b. the market must be in equilibrium c. the price is below the equilibrium price. d. quantity demanded equals quantity supplied. 7. A decrease in input costs to firms in a market will result in a. a decrease in equilibrium price and a decrease in equilibrium quantity. b. an increase in equilibrium price and no change in equilibrium quantity. c. d. an increase in equilibrium price and an increase in equilibrium quantity. a decrease in equilibrium price and an increase in equilibrium quantity. 8. Suppose that demand decreases and supply decreases. What would you expect to occur in the market for the good? a. Equilibrium price would increase, but the impact on equilibrium quantity would be ambiguous. b. Equilibrium price would decrease, but the impact on equilibrium quantity would be ambiguous. c. Equilibrium quantity would decrease, but the impact on equilibrium price would be ambiguous. d. Both equilibrium price and equilibrium quantity would increase. 9. Which of the following would not be a determinant of the demand for a particular good? a. prices of related goods b. income c. tastes d. the prices of the inputs used to produce the good 10. Two goods are complements if a decrease in the price of one good a. decreases the quantity demanded of the other good. b. decreases the demand for the other good. c. increases the quantity demanded of the other good. d. increases the demand for the other good. 11. Two goods are substitutes if a decrease in the price of one good a. decreases the demand for the other good. b. decreases the quantity demanded of the other good. c. increases the demand for the other good. d. increases the quantity demanded of the other good. 12. Proton Berhad announces that it will offer RM3,000 rebates on new Waja starting next month. As a result of this information, today’s demand curve for Waja a. shifts to the right. b. shifts to the left. c. shifts either to the right or to the left, but we cannot determine the direction of the shift from the given information. d. will not shift; rather, the demand curve for Mustangs will shift to the right next month. 13. Which of the following is consistent with the law of demand? a. An increase in the price of a tape causes an increase in the quantity of tapes demanded. b. An increase in the price of a soda causes a decrease in the quantity of soda demanded. c. A decrease in the price of a gallon of milk causes a decrease in the quantity of milk demanded. d. A decrease in the price of juice causes no change in the quantity of juice demanded. 14. A drop in the price of a compact disc shifts the demand curve for prerecorded tapes leftward. From that you know compact discs and prerecorded tapes are a. complements. b. substitutes. c. inferior goods. d. normal goods. 15. A reduction in the price of a good a. shifts the good’s demand curve leftward and also decreases the quantity demanded. b. shifts the good’s demand curve leftward but does not decrease the quantity demanded. c. does not shift the good’s demand curve leftward but does decrease the quantity demanded. d. neither shifts the good’s demand curve leftward nor decreases the quantity demanded. 16. The figure above represents the market for candy. People become more concerned that eating candy causes them to gain weight, which they do not like. As a result, the a. demand curve shifts from D2 to D1 and the supply curve will not shift. b. demand curve shifts from D1 to D2 and the supply curve shifts from S1 to S2. c. demand curve shifts from D2 to D1 and the supply curve shifts from S2 to S1. d. demand curve will not shift, and the supply curve shifts from S1 to S2. 17. Which of the following correctly describes how price adjustments eliminate a shortage? a. As the price rises, the quantity demanded decreases while the quantity supplied increases. b. As the price rises, the quantity demanded increases while the quantity supplied decreases. c. d. As the price falls, the quantity demanded decreases while the quantity supplied increases. As the price falls, the quantity demanded increases while the quantity supplied decreases. 18. Goods A and B are complementary goods (in consumption). The cost of a resource used in the production of A decreases. As a result, a. the equilibrium price of B will fall and the equilibrium price of A will rise. b. the equilibrium price of B will rise and the equilibrium price of A will fall. c. the equilibrium prices of both A and B will rise. d. the equilibrium prices of both A and B will fall. 19. The demand for hot dogs is given by QD = 8000 – 7000P, where QD is the quantity demanded and P is the price in dollars. The supply for hot dogs is given by QS = 4000 + 1000P, where QS is the quantity supplied and P is the price in dollars. Given these supply and demand relationships, a. At the equilibrium, the price = $0.50 and the quantity = 4500 hot dogs. b. At a price of $1, there is a shortage of 4000 hot dogs. c. At a price of $1, there is a surplus of 4000 hot dogs. d. Both answers A and C are correct. Section B Question 1 Outline the main determinants of quantity demanded and quantity supplied, and explain how these interact to determine the market price. When the price of the good changes and everything else remains the same, there is a movement along the demand curve and a change in the quantity demanded. The changes to the price which affected the quantity demanded are due the change in the supply of the good. When supply increases due to, for example, a fall in the price of inputs or improvement in the technology causing the price of the good to fall and quantity demanded to increase. When the price of the good changes and everything else remains the same, there is a movement along the supply curve and a change in the quantity supplied. The changes to the price which affected the quantity supplied are due the change in the demand for the good. When demand increases due to, for example, a fall in the price of complements or an increase in the price of substitutes causing the price of the good to increase and quantity supplied to increase. Equilibrium in a market occurs when the price balances the plans of buyers and sellers. The equilibrium price is the price at which the quantity demanded equals the quantity supplied. The equilibrium quantity is the quantity bought and sold at the equilibrium price. Question 2 Given the following demand and supply functions of product X (units/day). Demand : Qd = 20 – 2P Supply : Qs = 2 + 4P a) Currently, price = 2, is the market in equilibrium? if not, is there a shortage and surplus and how many units? P=2, Qs = 2+4(2) = 10 Qd = 20-2(2) = 16 Qd> Qs, so the market is not in equilibrium. Shortage = 6 units. b) Graph the demand and supply. Label the equilibrium price and equilibrium quantity. Equilibrium is where Qd = Qs, solving 20-2P = 2+4P. We find P*=3 and Q* = 14. Question 3 Suppose that the demand and supply for standard microwaves is described by the following equations: QD = 20,000 – 100P and QS = –1,000 + 50P where P is the price in dollars; QD is the quantity demanded in units per month; QS is the quantity supplied in units per month. a) Solve for the equilibrium price and quantity. At equilibrium: QD = QS20,000 – 100P = –1,000 + 50P 21,000 = 150P 140 = P The equilibrium price is $140 per unit. QD = 20,000 – 100(140) = 6,000 or QS = –1,000 + 50(120) = 6,000 The equilibrium quantity is 6,000 units per month. B)Determine the price the buyers pay and the price the sellers receive if a $30 unit tax is imposed on the sellers. QD = 20,000 – 100P QS1 = –1,000 + 50(P – 30) = -1000 + 50P -1500 = -2500 + 50P New equilibrium QD = QS1 20000 – 100P = -2500 + 50P 150P = 22500 Pe1 = 22500/150 = $150 per unit = Pb1 Ps1 = Pb1 – Tax = $150 - $30 = $120 per unit. QS = –1,000 + 50(P – 30) new supply 20,000 – 100P = –1,000 + 50(P – 30) 20,000 – 100P = –1000 + 50P – 1500 22,500 = 150P P=$150 The consumer will pay $150 per unit. QD = 20,000 – 100(150) = 5,000 or QS = –1,000 + 50(150 – 30) = 5,000 The equilibrium quantity is 5,000 units per month. 5000 = –1,000 + 50(P) 6000 = 50P P =$120 The producer will receive $120 per unit. Question 4 Below you find a demand schedule for ice cream cones for June, July and August. A, B and C are three different consumers. Price A B C $2 40 30 10 $3 30 22 8 $4 20 18 2 a) Draw a market demand schedule for ice cream cones. Quantity demanded Price (Market $2 80 $3 60 $4 40 b) The current market price is $3. What is market demand at this price? 60 units c) Show on your diagram what happens to the market demand curve when market demand declines by 20 percent owing to cold, rainy weather. The market demand curve shifts to the left. Textbooks always illustrate changes in demand with the help of a parallel shift of the demand curve. It is noteworthy that a 20-percent decline in demand does not lead to a parallel shift. The following is a supply table for trading cards. Price is stated in terms of price per package of 10. Quantity is package per week. a. Determine the market supply for trading cards using the table. Market supply Price Quantity supplied $1 26 $2 32 $3 39 $4 51 $5 67 $6 83 b. What is the relationship between price and market quantity supplied? What two things accounts for this relationship? As price rises, market quantity supplied also rises. The ability of the existing producers to substitute the production of one product for another product and also with the entry of new sellers into the market account for this relationship. Section C Question 1 Using supply and demand analysis, explain the effect on the equilibrium price and quantity traded of houses in a country of each of the following events. (Consider each event separately.) (a) A rise in real incomes. Initial market demand and supply are represented by the demand curve Do and supply curve S. The market initial equilibrium point is at eo and the corresponding equilibrium price and quantity are Op* and Oq* respectively. A rise in real incomes is likely to lead to an increase in the demand for houses since housing is generally regarded as a normal good. This will cause the demand curve to shift outwards from D0 to D1 in the diagram above. The new market equilibrium is now at e1, where D1 intersects S. This causes the equilibrium price and quantity traded of the good to rise. The effect of an increase in the demand for houses is that both the variables moves the same direction, that is, both the price of houses and quantity demanded for houses increases. The new equilibrium price and quantity for houses are Op** and Oq** respectively. (b) A fall in the rate of interest on loans for house purchases for an extended period of time. Initial market demand and supply are represented by the demand curve Do and supply curve S. The market initial equilibrium point is at eo and the corresponding equilibrium price and quantity are Op* and Oq* respectively. A fall in the rate of interest on loans would most likely increase the demand for houses. This will cause the demand curve to shift outwards from D0 to D1 in the diagram above. This causes the equilibrium price and quantity traded of the good to rise. The new market equilibrium is now at e1, where D1 intersects S. This causes the equilibrium price and quantity traded of the good to rise. The effect of an increase in the demand for houses is that both the variables moves the same direction, that is, both the price of houses and quantity demanded for houses increases. The new equilibrium price and quantity for houses are Op** and Oq** respectively. (c) A rise in the level of taxes to be paid on the sale of a house. Initial market demand and supply are represented by the demand curve D and supply curve So. The market initial equilibrium point is at eo and the corresponding equilibrium price and quantity are Op* and Oq* respectively. A rise in the level of taxes paid on the sale of a house would reduce supply since the net price received by sellers would fall and thus less people would want to sell their house at any given price. This will cause the supply curve to shift backwards from S0 to S1 in the diagram above. This causes the equilibrium price to rise and quantity traded of the good to fall. The new market equilibrium is now at e1, where D intersects S1. This causes the equilibrium price to increase and quantity traded of the good to decline. The effect of a decline in the supply of houses is that the variables move the opposite direction, that is, the price of houses increases and quantity of houses decreases. The new equilibrium price and quantity for houses are Op** and Oq** respectively. (d) The relaxation of planning controls allowing more land to be used for building new houses. Initial market demand and supply are represented by the demand curve D and supply curve So. The market initial equilibrium point is at eo and the corresponding equilibrium price and quantity are Op* and Oq* respectively. A relaxation of planning controls allowing more land to be used for building would decrease the costs that house builders face causing supply to increase. This will cause the supply curve to shift outwards from S0 to S1 in the diagram above. This causes the equilibrium price to fall and quantity traded of the good to rise. The new market equilibrium is now at e1, where D intersects S1. This causes the equilibrium price to decline and quantity traded of the good to rise. The effect of a decline in the supply of houses is that the variables move the opposite direction, that is, the price of houses decreases and quantity of houses increases. The new equilibrium price and quantity for houses are Op** and Oq** respectively. Question 2 Using supply and demand analysis, consider the effect on the market price and quantity traded of beef traded in a country following: a. An outbreak of a disease which affects the beef stock in the country. Given a market for beef with demand curve (D) and supply curve (S) and initial equilibrium (price, quantity) combination (p, q), an outbreak of disease affecting the beef stock will result in a backward shift in the supply curve for beef, to S’, yielding a new equilibrium (p’, q’): price increases and the quantity traded decreases . b. The introduction of new regulation for beef production which raises the cost of supplying beef. Given a market for beef with demand curve (D) and supply curve (S) and initial equilibrium (price, quantity) combination (p, q), an increase in the costs of producing beef will result in a backward shift in the supply curve for beef to S’, yielding a new equilibrium (p’, q’): price increases and the quantity traded decreases. c. An effective advertising campaign promoting the consumption of beef. Given a market for beef with demand curve (D) and supply curve (S) and initial equilibrium (price, quantity) combination (p, q), a successful advertising campaign for beef will result in an outward shift in the demand curve for beef to D’, yielding a new equilibrium (p’, q’): price and quantity traded increase.