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

Explain how the input and output markets are connected.

Answer 2

Input and output markets are connected through the behavior of both firms and households. Firms determine the quantities and character of outputs produced and the types and quantities of inputs demanded. Households determine the types and quantities of products demanded and the quantities and types of inputs supplied.

Question 3

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?

Answer 3

The economic concept is the law of diminishing marginal utility. By the 7 inning most of the patrons have already had a bite to eat and something to drink. As they become close to satiated they are deriving less and less marginal utility. Therefore, their willingness to pay to consume more of these items falls.

Question 4

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

Question 5

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

Question 6

What is a demand schedule? Provide an example and explain it.

Question 7

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

Question 8

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

Question 9

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

Question 10

Explain what an entrepreneur is and its function.

Question 11

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 12

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

Question 13

List and describe three different input markets.

Question 14

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

Question 15

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 16

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?

Question 17

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 18

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 19

What relationship is shown by a demand curve?

Question 20

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

Question 21

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 22

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

Question 23

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

Question 24

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 25

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 26

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 27

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

Question 28

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

Question 29

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 30

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

Question 31

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 32

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 33

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

Question 34

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 35

What relationship is shown by a supply curve?

Question 36

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

Question 37

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 38

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

Question 39

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 40

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

Question 41

Refer to the information provided in Scenario 2 below to answer the questions that follow.
SCENARIO 2: Graphically illustrate each of the following effects on the market for home fitness equipment with supply and demand curves. State the effects on price and quantity. Consider each effect separately.
Refer to Scenario 2. The existence of a new health craze occurs simultaneously as new home exercise products enter the market.

Question 42

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 43

Refer to the information provided in Scenario 2 below to answer the questions that follow.
SCENARIO 2: Graphically illustrate each of the following effects on the market for home fitness equipment with supply and demand curves. State the effects on price and quantity. Consider each effect separately.
Refer to Scenario 2. "Infomercials" advertising home fitness equipment begin to run at night on Cable TV stations.

Question 44

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

Question 45

SCENARIO 1: Consider the market for generic light beer, a product that only has "Light Beer" on its label. We know that demand for generic light beer falls when income increases, demand rises when the price of other beer increases, and that demand rises when the price of potato chips falls.
Refer to Scenario 1. Graph and explain the effect on equilibrium price and quantity of an increase in income. What type of good is "Light Beer"?

Question 46

SCENARIO 3: Events prior to the 1995 baseball season, including a threatened "lockout" by owners if the players decided to end their strike, likely had a great effect on attendance at baseball games. Consider in this scenario market attendance as a measure of quantity and ticket prices as the measure of price.
Refer to Scenario 3. Graphically illustrate the effect of a shortened season.
What effect will this have on the price and quantity of tickets sold?

Question 47

SCENARIO 3: Events prior to the 1995 baseball season, including a threatened "lockout" by owners if the players decided to end their strike, likely had a great effect on attendance at baseball games. Consider in this scenario market attendance as a measure of quantity and ticket prices as the measure of price.
Refer to Scenario 3. Draw the supply and demand curves and explain why they have the slope they do.

Question 48

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

Question 49

SCENARIO 3: Events prior to the 1995 baseball season, including a threatened "lockout" by owners if the players decided to end their strike, likely had a great effect on attendance at baseball games. Consider in this scenario market attendance as a measure of quantity and ticket prices as the measure of price.
Refer to Scenario 3. Graphically illustrate the effect of both fan dissatisfaction and shorter seasons. What effect will these changes have on price and quantity?

Question 50

SCENARIO 3: Events prior to the 1995 baseball season, including a threatened "lockout" by owners if the players decided to end their strike, likely had a great effect on attendance at baseball games. Consider in this scenario market attendance as a measure of quantity and ticket prices as the measure of price.
Refer to Scenario 3. Explain the effect of consumer dissatisfaction on the market for beer purchased at baseball games.

Question 51

SCENARIO 3: Events prior to the 1995 baseball season, including a threatened "lockout" by owners if the players decided to end their strike, likely had a great effect on attendance at baseball games. Consider in this scenario market attendance as a measure of quantity and ticket prices as the measure of price.
Refer to Scenario 3. Graphically illustrate the effect of dissatisfaction with the team by fans. What effect does this have on the price and quantity of tickets sold?

Question 52

SCENARIO 1: Consider the market for generic light beer, a product that only has "Light Beer" on its label. We know that demand for generic light beer falls when income increases, demand rises when the price of other beer increases, and that demand rises when the price of potato chips falls.
Refer to Scenario 1. Graph and explain the effect on equilibrium price and quantity of beer due to an increase in the price of potato chips. How are the goods related?

Question 53

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 54

SCENARIO 1: Consider the market for generic light beer, a product that only has "Light Beer" on its label. We know that demand for generic light beer falls when income increases, demand rises when the price of other beer increases, and that demand rises when the price of potato chips falls.
Refer to Scenario 1. Graph and explain the effect on equilibrium price and quantity of an increase in the price of premium beer. How are the goods related?

Question 55

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 56

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 57

Refer to the information provided in Scenario 2 below to answer the questions that follow.
SCENARIO 2: Graphically illustrate each of the following effects on the market for home fitness equipment with supply and demand curves. State the effects on price and quantity. Consider each effect separately.
Refer to Scenario 2. Assume that the price of dues in local health clubs decreases.

Question 58

The table below shows the supply and demand for T-shirts:
(a.) If the price in the market is currently $11.00, is the market in equilibrium? Explain.
(b.) If the price in the market is currently $8.00 and the supply and demand for T-shirts are stable, will the price remain $8.00? Why or why not?

Question 59

Refer to the information provided in Scenario 2 below to answer the questions that follow.
SCENARIO 2: Graphically illustrate each of the following effects on the market for home fitness equipment with supply and demand curves. State the effects on price and quantity. Consider each effect separately.
The cost of steel used in the production of many of the exercise products increases.

Question 60

Refer to the information provided in Scenario 2 below to answer the questions that follow.
SCENARIO 2: Graphically illustrate each of the following effects on the market for home fitness equipment with supply and demand curves. State the effects on price and quantity. Consider each effect separately.
Refer to Scenario 2. Health clubs begin to offer extras to make going to health clubs easier, such as free parking and baby-sitting to encourage family memberships.

Question 61

The figure below shows the market for cotton fabric:
(a.) If the price in the market is $8.00, would the market be at equilibrium? If not, is there a shortage or a surplus? How large is the shortage or surplus?
(b.) If the price in the market is $5.00, would the market be at equilibrium? If not, is there a shortage or a surplus? How large is the shortage or surplus?
(c.) If the price in the market is $2.00, would the market be at equilibrium? If not, is there a shortage or a surplus? How large is the shortage or surplus?

Question 62

Explain what is meant by excess demand or s shortage.

Question 63

Using the diagram below describe the current condition of the market if the price is currently at $3.00 and what will be necessary for the market to return to equilibrium.

Question 64

If incomes grow during the next year, what will happen in the market for RVs? (Assume that RVs are normal goods.)

Question 65

A decrease in the demand for eggs results in a surplus of eggs at the original equilibrium price. Explain how market forces will act to eliminate the surplus.

Question 66

Comment on the following statement: "A decrease in supply will lead to an increase in the price which decreases demand, thus lowering price. Therefore, a decrease in supply has no effect on the price of a good."

Question 67

In 1999, both the equilibrium price and equilibrium quantity of widgets increased. Use supply and demand analysis to explain how these changes could have occurred.

Question 68

Some people will often remark that the used car market is a counter-cyclical business, meaning that the fortunes of the business tend to move in the opposite direction of the health of the economy. Why might this be true and what conclusion can you make about what kind of a good used cars would be classified as economically speaking?

Question 69

Using the diagram below explain what will happen to equilibrium price and quantity if the supply curve shifts to the left as depicted from So to S2.

Question 70

Suppose you want to buy a popular brand of digital camera. Every store in town is out of stock. You are willing and able to pay the current market price of $300 for a camera, but you cannot find any available. Is the market for the digital camera in equilibrium? If not, is the market equilibrium price of the camera above or below $300? Use supply and demand analysis to explain your answer.

Question 71

The table below shows the supply and demand for pencils:
(a.) What is the equilibrium price and quantity? How can you tell?
(b.) Suppose the current price is $0.20. What situation is present? Will the price remain at $0.20? Why or why not?

Question 72

A new medical study reports that washing your hair everyday increases the probability of baldness. Predict the effects of this report on the market for shampoo.

Question 73

Suppose that, last year, the price of peanuts fell and the quantity sold increased. Use supply and demand analysis to explain how these changes could have occurred.

Question 74

The figure below shows the market for macaroni:
(a.) What is the equilibrium price and quantity?
(b.) At what price shown on the graph would there be an excess demand for macaroni? What would be the size of this excess demand?
(c.) At what price shown on the graph would there be an excess supply of macaroni? What would be the size of this excess supply?

Question 75

Suppose that the local hospital claims that the wages of nurses are too high. Yet, the hospital has 10 nursing positions open and no applicants for the jobs. Is the hospital's claim legitimate? Why or why not?

Question 76

Using the diagram below explain why it the market is in disequilibrium at a price of $1.75 and the process that will be necessary to restore it.

Question 77

Land in the South can often be used to grow either tobacco or cotton. Suppose the price of tobacco increases. Explain how the market for cotton will be affected.

Question 78

Explain how price adjusts to eliminate excess demand.

Question 79

You attend a rock concert and notice that there are hundreds of empty seats. What might you conclude about the market price of the concert ticket?

Question 80

A decrease in the supply of steel results in a shortage of steel at the original equilibrium price. Explain how market forces will act to eliminate the shortage.