Chapter 03 – Demand, Supply, and Market Equilibrium (+ Appendix)
3-1
CHAPTER 3
Demand, Supply, and Market Equilibrium (+ Appendix)
A. Short-Answer, Essays, and Problems
1. Explain what is meant by a competitive market.
2. Define “demand.”
3. State the law of demand and explain why the other-things-equal assumption is critical to it.
4. Give three explanations for the law of demand.
5. Suppose a producer sells 1000 units of a product at $5 per unit one year, 2000 units at $8 the next year, and
3000 units at $10 the third year. Is this evidence that the law of demand is violated? Explain.
6. Suppose the price of beef fell dramatically as the price of feed grain decreased. Use the income effect and
the substitution effect to explain why there was an increase in the quantity of beef purchased.
7. The demand schedules of three individuals (Tom, Dick, and Harry) are shown. If they are the only three
buyers of DVDs, complete the market demand schedule for DVDs. Graphically, is the market demand for
a product the horizontal or vertical sum of the individual demand schedules?
Quantity demanded,
DVDs
Price
Tom
Dick
Harry
Total
$15.00
1
4
0
_____
13.00
3
5
1
_____
11.00
6
6
5
_____
9.00
10
7
10
_____
7.00
15
8
16
_____
8. List five basic determinants of market demand that could cause demand to decrease.
9. List five basic determinants of market demand that could cause demand to increase.
10. Differentiate between a normal (superior) and an inferior good.
11. Explain how the prices of related goods also affect demand.
12. Give examples of two substitute goods and two complementary goods. In each case explain why the goods
are substitutes or complements.
13. What effect should each of the following have upon the demand for portable music players in a competitive
market? Explain your reasoning in each case.
(a) the development of improved, low-priced devices that compete with music players
(b) an increase in population and incomes
(c) a substantial increase in the number and quality of music for players
(d) consumer expectations of substantial price increases in music players
14. Evaluate how the following situations will affect the demand curve for iPods.
(a) Income statistics show that income of 18–25-year-olds have increased by 10 percent over the last year.
Chapter 03 – Demand, Supply, and Market Equilibrium (+ Appendix)
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(b) Efforts of music artists wanting greater protection of their music result in more stringent enforcement
of copyrights and the shutdown of numerous illegal downloading sites.
(c) Believing that it has significant control of the market for portable digital music players, Apple decides
to raise the price of iPods with the goal of increasing profits.
(d) The price of movie tickets decreases.
15. What effect should each of the following have on the demand for gasoline in a competitive market? State
what happens to demand. Explain your reasoning in each case and relate it to a demand determinant.
(a) an increase in the number of cars
(b) the economy moves into a recession
(c) an increase in the price of car insurance, taxes, maintenance
(d) consumer expectations of substantial price increases in gasoline
16. What is the difference between a change in demand and a change in quantity demanded?
17. Define “supply.”
18. Describe and give a reason for the law of supply.
19. List six basic determinants of market supply.
20. Newspaper item: “Due to lower grain prices, consumers can expect retail prices of choice beef to begin
dropping slightly this spring with pork becoming cheaper after midsummer,” the Agriculture Department
predicted. “This reflects increasing supply,” the department said. Does the statement use the term
“supply” correctly? What effects might this announcement have on consumer demand? Explain.
21. Suppose the U.S. Congress is considering passing an excise tax that would increase the price of a pack of
cigarettes by $1.00. What would be the likely effect of this change on the demand and supply of cigarettes?
What is likely to happen to cigarette prices and the quantity consumed if the tax bill is enacted?
22. What is the difference between a change in supply and a change in quantity supplied?
23. What effect will each of the following have upon the supply of television sets in a competitive market?
Explain your reasoning in each case.
(a) an increase in the price of electronic equipment used in producing television sets
(b) a decline in the number of firms producing television sets
(c) a large new tariff on imported TV sets
(d) new inexpensive satellite dishes which make televisions more popular among consumers
24. What effect will each of the following most likely have on the supply of corn in a competitive market?
State what happens to supply. Explain your reasoning in each case and relate it to a supply determinant.
(a) the development of an improved corn seed that resists drought conditions
(b) an increase in the price of soybeans which can also be planted on land used for growing corn
(c) an increase in government payments for growing corn
(d) an increase in the price of fertilizer
25. Economist Jones defines an increase in supply as a decrease in the prices needed to ensure various amounts
of a good being offered for sale. Economist Brown defines an increase in supply as an increase in the
amounts that producers will offer at various possible prices. Economist Cole defines an increase in supply
as an increase in the amount firms will offer in the market which is caused by an increase in the price of the
product. Which, if any, of these is defining an increase in supply correctly? Explain.
Chapter 03 – Demand, Supply, and Market Equilibrium (+ Appendix)
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26. Assuming no government intervention, describe the market behavior that should result if the price of a
product is below its equilibrium price; then describe the behavior that should occur if the price is above its
equilibrium price.
27. Describe in words how one can recognize the market equilibrium point in a graph of a demand schedule
and a supply schedule.
28. Using the schedules given, plot the demand curve and the supply curve on the below graph. Label the axes
and indicate for each axis the units being used to measure price and quantity. Then answer the questions.
Price
Price
Quantity supplied
(bushels of oats)
$1.50
$4.40
40,000
1.40
4.20
35,000
1.30
4.00
30,000
1.20
3.80
25,000
1.10
3.60
20,000
1.00
3.20
15,000
(a) Give the equilibrium price and quantity for oats.
(b) Indicate the equilibrium price and quantity on the graph by drawing lines from the intersection of the
supply and demand curves to the price and quantity axes.
(c) If the Federal government decided to support the price of oats at $1.40 per bushel, tell whether there
would be a surplus or shortage and how much it would be.
(d) Demonstrate your answer to part (c) on your graph being sure to label the quantity you designated as
the shortage or surplus.
29. Using the schedules given, plot the demand curve and the supply curve on the below graph. Label the axes
and indicate for each axis the units being used to measure price and quantity. Then answer the questions.
Price
Price
Quantity supplied
(bushels of wheat)
$4.20
$4.20
230,000
4.00
4.00
220,000
3.80
3.80
210,000
3.60
3.60
200,000
3.40
3.40
190,000
3.20
3.20
180,000
3.00
3.00
170,000
Chapter 03 – Demand, Supply, and Market Equilibrium (+ Appendix)
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(a) Give the equilibrium price and quantity for wheat.
(b) Indicate the equilibrium price and quantity on the graph by drawing lines from the intersection of the
supply and demand curves to the price and quantity axes.
(c) If the Federal government decided to support the price of wheat at $4.00 per bushel, tell whether there
would be a surplus or shortage and how much it would be.
(d) Demonstrate your answer to part (c) on your graph being sure to label the quantity you designated as
the shortage or surplus.
30. Is demand more important than supply in determining equilibrium price and quantity in a competitive
market? Explain.
31. (Consider This) Can ticket “scalping” be justified? Explain using economic analysis.
32. What is productive efficiency and how does it differ from allocative efficiency?
33. What are the conditions necessary to produce neither an “underallocation” nor “overallocation” of
resources?
34. In the space below each of the following, indicate the effect [increase (+), decrease (−)] on equilibrium
price (P) and equilibrium quantity (Q) of each of these changes in demand and /or supply.
P Q
(a) Increase in demand, supply constant ________ ________
(b) Increase in supply, demand constant ________ ________
(c) Decrease in demand, supply constant ________ ________
(d) Decrease in supply, demand constant ________ ________
35. In the spaces below each of the following, indicate the [increase (+), decrease (−), or indeterminant (?)]
on equilibrium price (P) and equilibrium quantity (Q) of each of these changes in demand and/or supply.
P Q
(a) Increase in demand, increase in supply ________ ________
(b) Increase in demand, decrease in supply ________ ________
(c) Decrease in demand, decrease in supply ________ ________
(d) Decrease in demand, increase in supply ________ ________
Chapter 03 – Demand, Supply, and Market Equilibrium (+ Appendix)
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36. In each case below, indicate the effect [increase (+); decrease (−); indeterminant (ind)] upon equilibrium
price (P) and equilibrium quantity (Q) and illustrate the change graphically. Where you believe the effect
is indeterminant, two graphical illustrations may be necessary to demonstrate your point.
P Q
(a) Increase in demand, supply constant ________ ________
(b) Decrease in supply, demand constant ________ ________
(c) Decrease in demand, decrease in supply ________ ________
(d) Decrease in demand, increase in supply ________ ________
37. Given the products below and the events that affect them, indicate what happens to demand or supply, and
the equilibrium price and quantity in a competitive market. Identify the determinant of demand or supply
that causes the shift.
(a) Blue jeans. The wearing of blue jeans becomes less fashionable among consumers.
(b) Computers. Parts for making computers fall in price because of improvements in technology.
(c) Lettuce. El Nino produces heavy rains that destroy a significant portion of the lettuce crop.
(d) Chicken. Beef prices rise because severe winter weather reduces cattle herds.
38. Given the products below and the events that affect them, indicate what happens to demand or supply, and
the equilibrium price and quantity in a competitive market. Identify the determinant of demand or supply
that causes the shift.
(a) Digital cameras. There are improvements in the technology that increase the economic efficiency of
production.
(b) Automobiles. Consumer incomes rise as the economy moves out of recession.
(c) Beef. Chicken prices fall because of a decline in the cost of feeding chickens.
(d) Fast-food meals. The government imposes a significant tax on fast-food meals.
Chapter 03 – Demand, Supply, and Market Equilibrium (+ Appendix)
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39. Given the products below and the events that affect them, indicate what happens to demand, supply,
equilibrium quantity, and equilibrium price in a competitive market. Identify the determinant of demand
and supply that causes the shifts.
(a) Calculators. More schools require students to buy and use calculators; improved productivity shortens
the time it takes to make calculators.
(b) Gasoline. Oil production declines due to a crisis in the Middle East; people take more car vacations
and drive more.
(c) New homes. The average incomes fall as the economy moves into recession; the productivity of home
construction workers and builders increases.
(d) Tobacco. The government cut its subsidy to tobacco farmers; more people quit smoking.
40. Given the products below and the events that affect them, indicate what happens to demand, supply,
equilibrium quantity, and equilibrium price in a competitive market. Identify the determinant of demand
and supply that causes the shifts.
(a) Home heating oil. There is a severe winter in the regions using the oil; the cost of a barrel of oil rises
for producers of home heating oil.
(b) Organic foods. People become more concerned about chemical additives in food; traditional farms are
switching to more organic methods.
(c) Film cameras. The price of digital cameras falls for consumers; there is a decline in the number of
stores selling film cameras.
(d) Bread. Many consumers adopt a low carbohydrate diet and avoid bread products; the price of flour
falls for bread producers.
41. (Consider This) Suppose a salsa manufacturers sells 1 million bottles of salsa at $4 a bottle in year 1; 2
million bottles at $5 in year 2; and 3 million bottles at $6 in year 3. Do these data show that the law of
demand does not hold? Explain.
42. What is a price ceiling and what are its economic effects?
43. Use data in the table below to explain the economic effects of a price ceiling at $6, at $5, and at $4.
Price
Quantity
demanded
Quantity
supplied
$7.00
4500
4500
6.00
5000
3500
5.00
5500
2500
4.00
6000
1500
44. Use economic analysis to explain why tenants in New York City who are covered by rent-controlled laws
do not want to move.
45. What is a price floor and what are its economic effects?
46. In the debate over passing a bill providing a minimum guaranteed price for corn, a congressman argued,
“Minimum guaranteed prices always cause a disruption of the natural equilibrium of a market, ultimately
costing taxpayers money.” Evaluate this statement.
Chapter 03 – Demand, Supply, and Market Equilibrium (+ Appendix)
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47. Use data in the following table to explain the economic effects of a price floor at $8, at $9, and at $10.
Explain the economic effects.
Price
Quantity
demanded
Quantity
supplied
$10.00
3000
7500
9.00
3500
6500
8.00
4000
5500
7.00
4500
4500
48. “Government–set prices undermine the rationing function of competitive prices.” Explain carefully in
terms of both price ceilings and price floors.
49. (Last Word) Why is there a shortage of donated human organs that can be used for transplants?
50. (Last Word) Explain how a market for human organs would affect the supply curve and equilibrium price
and quantity.
Chapter 03 – Demand, Supply, and Market Equilibrium (+ Appendix)
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B. Answers to Short-Answer, Essays, and Problems
1. Explain what is meant by a competitive market.
2. Define “demand.”
3. State the law of demand and explain why the other-things-equal assumption is critical to it.
4. Give three explanations for the law of demand:
5. Suppose a producer sells 1000 units of a product at $5 per unit one year, 2000 units at $8 the next year, and
3000 units at $10 the third year. Is this evidence that the law of demand is violated? Explain.
6. Suppose the price of beef fell dramatically as the price of feed grain decreased. Use the income effect and
the substitution effect to explain why there was an increase in the quantity of beef purchased.
Chapter 03 – Demand, Supply, and Market Equilibrium (+ Appendix)
3-9
7. The demand schedules of three individuals (Tom, Dick, and Harry) are shown. If they are the only three
buyers of DVDs, complete the market demand schedule for DVDs. Graphically, is the market demand for
a product the horizontal or vertical sum of the individual demand schedules?
Quantity demanded,
DVDs
Price
Tom
Dick
Harry
Total
$15.00
1
4
0
_____
13.00
3
5
1
_____
11.00
6
6
5
_____
9.00
10
7
10
_____
7.00
15
8
16
_____
Price
Tom
Dick
Harry
Total
$15.00
1
4
0
5
13.00
3
5
1
9
11.00
6
6
5
17
9.00
10
7
10
27
7.00
15
8
16
39
8. List five basic determinants of market demand that could cause demand to decrease.
9. List five basic determinants of market demand that could cause demand to increase.
10. Differentiate between a normal (superior) and an inferior good.
Chapter 03 – Demand, Supply, and Market Equilibrium (+ Appendix)
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11. Explain how the prices of related goods also affect demand.
12. Give examples of two substitute goods and two complementary goods. In each case explain why the goods
are substitutes or complements.
13. What effect should each of the following have upon the demand for portable music players in a competitive
market? Explain your reasoning in each case.
(a) the development of improved, low-priced devices that compete with music players
(b) an increase in population and incomes
(c) a substantial increase in the number and quality of music for players
(d) consumer expectations of substantial price increases in music players
14. Evaluate how the following situations will affect the demand curve for iPods.
(a) Income statistics show that income of 18–25-year-olds have increased by 10 percent over the last year.
(b) Efforts of music artists wanting greater protection of their music result in more stringent enforcement
of copyrights and the shutdown of numerous illegal downloading sites.
(c) Believing that it has significant control of the market for portable digital music players, Apple decides
to raise the price of iPods with the goal of increasing profits.
(d) The price of movie tickets decreases.
Chapter 03 – Demand, Supply, and Market Equilibrium (+ Appendix)
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15. What effect should each of the following have on the demand for gasoline in a competitive market? State
what happens to demand. Explain your reasoning in each case and relate it to a demand determinant.
(a) an increase in the number of cars
(b) the economy moves into a recession
(c) an increase in the price of car insurance, taxes, maintenance
(d) consumer expectations of substantial price increases in gasoline
16. What is the difference between a change in demand and a change in quantity demanded?
17. Define “supply.”
18. Describe and give a reason for the law of supply.
19. List six basic determinants of market supply.
Chapter 03 – Demand, Supply, and Market Equilibrium (+ Appendix)
3-12
20. Newspaper item: “Due to lower grain prices, consumers can expect retail prices of choice beef to begin
dropping slightly this spring with pork becoming cheaper after midsummer,” the Agriculture Department
predicted. “This reflects increasing supply,” the department said. Does the statement use the term
“supply” correctly? What effects might this announcement have on consumer demand? Explain.
21. Suppose the U.S. Congress is considering passing an excise tax that would increase the price of a pack of
cigarettes by $1.00. What would be the likely effect of this change on the demand and supply of cigarettes?
What is likely to happen to cigarette prices and the quantity consumed if the tax bill is enacted?
22. What is the difference between a change in supply and a change in quantity supplied?
23. What effect will each of the following have upon the supply of television sets in a competitive market?
Explain your reasoning in each case.
(a) an increase in the price of electronic equipment used in producing television sets
(b) a decline in the number of firms producing television sets
(c) a large new tariff on imported TV sets
(d) new inexpensive satellite dishes which make televisions more popular among consumers
Chapter 03 – Demand, Supply, and Market Equilibrium (+ Appendix)
3-13
24. What effect will each of the following most likely have on the supply of corn in a competitive market?
State what happens to supply. Explain your reasoning in each case and relate it to a supply determinant.
(a) the development of an improved corn seed that resists drought conditions
(b) an increase in the price of soybeans which can also be planted on land used for growing corn
(c) an increase in government payments for growing corn
(d) an increase in the price of fertilizer
25. Economist Jones defines an increase in supply as a decrease in the prices needed to ensure various amounts
of a good being offered for sale. Economist Brown defines an increase in supply as an increase in the
amounts that producers will offer at various possible prices. Economist Cole defines an increase in supply
as an increase in the amount firms will offer in the market which is caused by an increase in the price of the
product. Which, if any, of these is defining an increase in supply correctly? Explain.
26. Assuming no government intervention, describe the market behavior that should result if the price of a
product is below its equilibrium price; then describe the behavior that should occur if the price is above its
equilibrium price.
27. Describe in words how one can recognize the market equilibrium point in a graph of a demand schedule
and a supply schedule.
Chapter 03 – Demand, Supply, and Market Equilibrium (+ Appendix)
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28. Using the schedules given, plot the demand curve and the supply curve on the below graph. Label the axes
and indicate for each axis the units being used to measure price and quantity. Then answer the questions.
Price
Price
Quantity supplied
(bushels of oats)
$1.50
$4.40
40,000
1.40
4.20
35,000
1.30
4.00
30,000
1.20
3.80
25,000
1.10
3.60
20,000
1.00
3.20
15,000
(a) Give the equilibrium price and quantity for oats.
(b) Indicate the equilibrium price and quantity on the graph by drawing lines from the intersection of the
supply and demand curves to the price and quantity axes.
(c) If the Federal government decided to support the price of oats at $1.40 per bushel, tell whether there
would be a surplus or shortage and how much it would be.
(d) Demonstrate your answer to part (c) on your graph being sure to label the quantity you designated as
the shortage or surplus.
29. Using the schedules given, plot the demand curve and the supply curve on the below graph. Label the axes
and indicate for each axis the units being used to measure price and quantity. Then answer the questions.
Price
Price
Quantity supplied
(bushels of wheat)
$4.20
$4.20
230,000
4.00
4.00
220,000
3.80
3.80
210,000
3.60
3.60
200,000
3.40
3.40
190,000
3.20
3.20
180,000
3.00
3.00
170,000
(a) Give the equilibrium price and quantity for wheat.
(b) Indicate the equilibrium price and quantity on the graph by drawing lines from the intersection of the
supply and demand curves to the price and quantity axes.
(c) If the Federal government decided to support the price of wheat at $4.00 per bushel, tell whether there
would be a surplus or shortage and how much it would be.