Deck 3: Demand, Supply, and Market Equilibrium

Question 1

Explain the law of demand. What does it imply about the shape of the demand curve?

Answer 1

The law of demand describes the inverse relationship between price and quantity demanded. All else equal, as the price of a good rises, the quantity demanded of the good will fall. As the price of a good falls, the quantity demanded rises. This implies that the demand curve will be downward sloping.

Question 2

Newspaper machines and soda vending machines operate very differently. The newspaper machine is a mechanical box. You place your four quarters in the machine and you open the door and low and behold there is a stack of newspapers at your disposal. Most people take one and close the door for the next patron to purchase his own copy. But notice that soda vending machines don't operate the same way. They are also mechanical but when the four quarters are inserted and a selection is made only one can of soda is available for the consumer to purchase. Explain in terms of marginal utility why these two machines are designed so differently?

Answer 2

The marginal utility of a second newspaper is most likely to be zero for most people. That is, the extra added satisfaction of acquiring a second newspaper is probably negligible. After all, it contains all of the same news as the first copy. However, the cans of cold beverage that remain in the soda machine still have positive marginal utility even though it may be less than the marginal utility of the first can. It pays for the vendor to design a machine that keeps the rest of the cans of soda away from those who might not be inclined to pay for the second can of soda.

Question 3

List and describe three different input markets.

Answer 3

The labor market is where household members sell their labor services in exchange for wages. In capital markets, households supply funds for firms to purchase capital equipment. Land and other real property are exchanged in the land market.

Question 4

Explain how the input and output markets are connected.

Question 5

Explain the law of diminishing marginal utility. How does it relate to the shape of
the demand curve?

Question 6

Suppose the U.S. economy enters a recession and incomes fall. What will happen to
the equilibrium prices and quantities of normal goods? Would your answer be the same if you were discussing inferior goods? Why or why not?

Question 7

What types of things are sold in input or factor markets? Who are the buyers and
sellers in these markets?

Question 8

What is the difference between a demand schedule and a demand curve?

Question 9

List three things that can cause an increase in demand. Be specific.

Question 10

Explain the difference between a change in demand and a change in quantity
demanded.

Question 11

Draw a hypothetical example of the demand curve for gasoline and explain it.

Question 12

What is a demand schedule? Provide an example and explain it.
It is a table showing how much of a given product a household would be willing to buy at different prices. Below is an example of a demand schedule. As the price falls the quantity demanded rises.

Question 13

Explain what an entrepreneur is and its function.

Question 14

List three characteristics of demand curves. Make sure to explain the shape of the
curve and the meaning of the vertical and horizontal intercepts.

Question 15

Define what a firm is and its role in the market.

Question 16

Even though household have wide-ranging preferences, discuss some of the things
that all households have in common including their constraints.

Question 17

Some baseball parks have a "7th Inning Stretch" where beer, hotdogs and other food
items are offered for sale at a lower price. What economic concept is being used by the baseball park to justify this practice? If it is successful at selling more food and
drink with this practice why don't they lower prices at the beginning of the game?

Question 18

What relationship is shown by a demand curve?

Question 19

A free good is a good whose existence requires no opportunity cost to produce. How
is this different from a good that is offered for a price of zero?

Question 20

A video rental store rents old movies for $1.50 per day. On average, 300 movies are
rented each day. The store receives several copies of a new smash movie just released in video and decides to rent these movies at $3.50 per day. Now, 400 movies are rented each day. Thus, though the average rental price of a movie increased, the quantity rented increased. Does this mean that the law of demand does not hold for this market?

Question 21

Show graphically (in two separate graphs) the effects of an increase in the price of
peanut butter on the demand for peanut butter and on the demand for jelly.

Question 22

Each year Apple Computers produces a new line of IPods with greater storage capacity and more features. Sales continue to soar even though the prices each year
rise as well. Is this a refutation of the law of demand or is there something else going on here that doesn't meet the eye?

Question 23

Explain the law of supply. What does the law of supply imply about the shape of the
supply curve?

Question 24

Below are the demand curves for CDs for two individuals: Bob and Tom. Assume that Bob and Tom are the only two buyers in the market for CDs. Draw the market demand curve.

Question 25

Most goods and service that we enjoy are bought and sold in the market. However,
leisure is something that we value but we do not buy it explicitly. What is the price of leisure? Explain what would happen to the amount of leisure that we would enjoy if the wage rate went up. Make sure to use the substitution and income effect to explain your answer and postulate whether leisure is a normal or inferior good. Why is the ultimate net effect not determinable by appealing to logic alone?

Question 26

Suppose a long lost relative died and left you a trust fund worth $1 million that you
will receive ten years from now. What effect, if any, will this have on your demand for airline travel? (Assume that airline travel is a normal good.)

Question 27

Compare and contrast the concepts of income and wealth. Are these measured as a
stock or a flow? Explain.

Question 28

You are a major stockholder of a large corporation. You have news from a credible
source that the company's earnings report is going to indicate record losses. If you and other major stockholders receive the same news, what is your likely behavioral response and what impact will that have on the price of the company's stock?

Question 29

Explain the difference between a change in supply and a change in quantity supplied.

Question 30

What relationship is shown by a supply curve?

Question 31

In what ways can expectations change your demand for a product today?

Question 32

John's income has just increased by $10,000 per year. If Ramen noodles is an
inferior good in John's opinion, what will happen to his demand for Ramen noodles? Show your answer using a graph.

Question 33

Explain how the market demand curve can be derived. Does the law of demand
apply to the market demand curve?

Question 34

When the price of compact disc players decreases, the demand for compact discs
rises while the demand for cassette tapes decreases. What does this imply about the relationship between compact disc players, compact discs, and cassette tapes?

Question 35

When the price of good X rises, the demand for good Y rises. Explain what this
relationship implies about the two goods.

Question 36

Suppose there is news that indicates that gasoline supplies might suddenly become
disrupted by a truckers' union strike. What would you expect would happen to the demand for gasoline in the present? How might consumers change their behavior and why? What impact would this news have on the price of gasoline immediately? Would it matter whether the news story was accurate?

Question 37

Assume that you are currently making $15,000 a year as a sales clerk in a department
store. At the end of your senior year in college in May you get a job offer from a large
accounting firm that won't start until late August of that same year but which pays $45,000 per year. What would you expect might happen to your demand for an automobile and new clothes immediately and why?

Question 38

Explain how an increase in the price of leather brought about by shift in tastes may
lead to an increase in the supply of beef.

Question 39

When the price of good X rises, the demand for good Y falls. Explain what this
relationship implies about the two goods.

Question 40

Draw a supply curve for a hypothetical firm and explain the relationship.

Question 41

Show graphically the effect of an increase in the wage paid to autoworkers on the
supply of new cars.

Question 42

Define the following: market equilibrium, surplus, and shortage.

Question 43

Explain how the market supply curve is derived. Does the law of supply apply to the
market supply curve?

Question 44

A supermarket manager discovers that his generic brand beans are disappearing off of
his shelves faster than he can restock them and the premium brand beans are staying on the shelf going unsold. What can we probably say about the current prices of each of these products in relation to the market-clearing price?

Question 45

Homebuilders will often pay the closing costs (title, insurance, etc.) of prospective
homebuyers? Explain in terms of supply and demand what homebuilders are trying to do with this practice.

Question 46

Using graphs, explain the effect of an increase in the price of cheese on the supply of
cheese and the supply of pizza.

Question 47

The following are some changes that may take place in the market for textbooks. For
each of the following, indicate what will happen to either the demand for or the supply of textbooks by listing which curve is affected and then the terms: "shift right or "shift left".
(a.) An increase in student enrollment at universities across the country.
(b.) A decrease in the price of ink used to print textbooks.
(c.) A drop in income (textbooks are a normal good).
(d.) An improvement in the technology used to print textbooks.
(e.) An increase in college tuition.

Question 48

Assume that there is a shortage of lobster and that for whatever reason prices have not
risen to choke off the excess demand. Instead, the government has exhorted people to voluntary refrain from lobster consumption to "maintain a balance between supply and demand." Assume that the temporary public service announcements are "effective" and the public reduces its consumption of lobster. Explain using supply and demand analysis what should happen to the equilibrium quantity of lobster and its equilibrium price. Why would this plan not have much of an impact on the lobster market in the long run?

Question 49

The market for restaurant pizza in Chicago is currently in equilibrium at a price of $8
and 2,000 pizzas are sold each day. Explain what will happen to the equilibrium price and quantity of pizzas sold and why (which curve has changed) for each of the following situations:
(a.) Delivery personnel form a labor union and secure a higher wage of $7.50 per hour (a large increase in their wage).
(b.) Fast-food hamburger restaurants (Burger King & McDonalds) cut their prices in half.

Question 50

Explain how price expectations can affect the supply of a product.

Question 51

There is a practice in the stock market known as "short selling" whereby an
individual will borrow stock from someone, turn around and sell it and then buy it back when it's price has fallen in order to return the stock back to the lender. What expectation does this short seller have about the price of this company's stock? How can he expect to make money at this practice? What could go wrong that might cost him money?

Question 52

Below are the supply curves for cucumbers for two firms: Firm X and Firm Y. Assume that Firm X and Firm Y are the only two sellers in the market for cucumbers. Draw the market supply curve.