Chapter 03 – Demand, Supply, and Market Equilibrium
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Chapter 03 – Demand, Supply, and Market Equilibrium
McConnell Brue Flynn 21e
DISCUSSION QUESTIONS
1. Explain the law of demand. Why does a demand curve slope downward? How is a market
demand curve derived from individual demand curves? LO2
Answer: As prices change, buyers will change the quantity they demand of that item. If
2. What are the determinants of demand? What happens to the demand curve when any of these
determinants change? Distinguish between a change in demand and a movement along a fixed
demand curve, noting the cause(s) of each. LO2
Answer: There are determinants of demand, which are factors that may shift the demand
curve, or cause a “change in demand.” These are the number of buyers, the tastes (or
Chapter 03 – Demand, Supply, and Market Equilibrium
3. Explain the law of supply. Why does the supply curve slope upward? How is the market supply
curve derived from the supply curves of individual producers? LO3
Answer: As prices rise because of increased demand for a commodity, producers find it
more and more profitable to increase the quantity they offer for sale; that is, the supply
4. What are the determinants of supply? What happens to the supply curve when any of these
determinants changes? Distinguish between a change in supply and a change in the quantity
supplied, noting the cause(s) of each. LO3
Answer: The non-price determinants of supply are: resource (input) prices,
5. In 2001 an outbreak of foot-and-mouth disease in Europe led to the burning of millions of
cattle carcasses. What impact do you think this had on the supply of cattle hides, hide prices, the
supply of leather goods, and the price of leather goods? LO5
Chapter 03 – Demand, Supply, and Market Equilibrium
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6. For each stock in the stock market, the number of shares sold daily equals the number of shares
purchased. That is, the quantity of each firm’s shares demanded equals the quantity supplied. So,
if this equality always occurs, why do the prices of stock shares ever change? LO5
Answer: During any given stock trading session, there will be both prospective buyers
and sellers, each willing to buy or sell a certain number of shares depending on price. If
7. What do economists mean when they say “price floors and ceilings stifle the rationing function
of prices and distort resource allocation”? LO6
Answer: When unrestrained, prices rise and fall to correct imbalances between the
quantity supplied and quantity demanded in a market. If sellers find themselves at a given
8. LAST WORD Real (inflation-adjusted) tuition costs were nearly constant during the 1960s
despite a huge increase in the number of college students as the very large Baby Boom generation
came of age. What does this suggest about the supply of higher education during that period?
When the much smaller Baby Bust generation followed in the 1970s, real tuition costs fell. What
does that suggest about demand relative to supply during the 1970s?
Chapter 03 – Demand, Supply, and Market Equilibrium
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Answer: As the large Baby Boom generation entered college, the demand for college
education would increase (increase in the number of “consumers”). This would be shown
Chapter 03 – Demand, Supply, and Market Equilibrium
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REVIEW QUESTIONS
1. What effect will each of the following have on the demand for small automobiles such
as the Mini-Cooper and Fiat 500? LO2
a. Small automobiles become more fashionable.
b. The price of large automobiles rises (with the price of small autos remaining the same).
c. Income declines and small autos are an inferior good.
d. Consumers anticipate that the price of small autos will greatly come down in the near
future.
e. The price of gasoline substantially drops.
2. True or False: A “change in quantity demanded” is a shift of the entire demand curve to the
right or to the left. LO2
3. What effect will each of the following have on the supply of auto tires? LO3
a. A technological advance in the methods of producing tires.
b. A decline in the number of firms in the tire industry.
c. An increase in the prices of rubber used in the production of tires.
d. The expectation that the equilibrium price of auto tires will be lower in the future than
currently.
e. A decline in the price of the large tires used for semi-trucks and earth-hauling rigs (with no
change in the price of auto tires).
f. The levying of a per-unit tax on each auto tire sold.
g. The granting of a 50-cent-per-unit subsidy for each auto tire produced.
Chapter 03 – Demand, Supply, and Market Equilibrium
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Answer:
a. Supply will increase because the technological advance allows the tire manufacturers
to produce more tires using the same amount of inputs.
their input costs.
4. Given the following two statements: LO3
A. In the corn market, demand often exceeds supply and supply sometimes exceeds demand.
B. The price of corn rises and falls in response to changes in supply and demand.
In which of these two statements are the terms “supply” and “demand” used correctly?
Answer:
In the first statement, “supply” and “demand” are used incorrectly. Supply and demand
are both schedules, or curves, that intersect where quantity supplied and quantity
5. Suppose that in the market for computer memory chips, the equilibrium price is $50 per chip. If
the current price is $55 per chip, then there will be ______________ of memory chips. LO4
a. A shortage.
b. A surplus.
c. An equilibrium quantity.
d. None of the above.
Answer:
Chapter 03 – Demand, Supply, and Market Equilibrium
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consent of McGraw-Hill Education.
quantity demanded decreases. Thus, at the $55 price, the quantity supplied exceeds the
quantity demanded. The result is a surplus of unsold chips because not all of the chips
that producers are willing to supply at the $55 price will find buyers at that price. In fact,
the equilibrium price of $50 is the only price at which the desires of suppliers with regard
to how much they wish to sell are consistent with the desires of buyers with regard to
how much they wish to purchase.
6. Critically evaluate: “In comparing the two equilibrium positions in Figure 3.7b , I note that a
smaller amount is actually demanded at a lower price. This refutes the law of demand.” LO5
Answer:
The key point here is that the second equilibrium occurs after demand has decreased, that
7. Label each of the follow scenarios with the correct combination of price change and
quantity change. In some scenarios, it may not be possible from the information given to
determine the direction of a particular price change or a particular quantity change. We will
symbolize those cases as, respectively, “P?” and “Q?” LO5
P↓ Q?
P↑ Q?
P? Q↓
P? Q↑
a. On a hot day, both the demand for lemonade and the supply of lemonade increase.
b. On a cold day, both the demand for ice cream and the supply of ice cream decrease.
c. When Hawaii’s Mt. Kiluea erupts violently, the demand on the part of tourists for sightseeing
flights increases but the supply of pilots willing to provide these dangerous flights decreases.
d. In a hot area of Arizona where they generate a lot of their electricity with wind turbines, the
demand for electricity falls on windy days as people switch off their air conditioners and enjoy
the breeze. But at the same time, the amount of electricity supplied increases as the wind turbines
spin faster.
Answer:
Chapter 03 – Demand, Supply, and Market Equilibrium
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consent of McGraw-Hill Education.
the left, then the intersection point will be higher vertically, implying that the equilibrium
price will rise.
c. P: increases, Q: ?
With demand increasing and supply decreasing, the intersection point between the
demand curve and the supply curve will have to be higher. Thus, the equilibrium price
will definitely rise. However, the change in the equilibrium quantity is uncertain. It will
depend on whether the horizontal rightward shift of the demand curve is bigger or smaller
than the horizontal leftward shift of the supply curve. If the demand curve moves right
more than the supply curve moves left, then the equilibrium quantity will increase. By
contrast, if the supply curve moves to the left more than the demand curve moves to the
right, the equilibrium quantity will fall.
d. P: decreases, Q: ?
With demand falling and supply increasing, the intersection point between the demand
curve and the supply curve will definitely move down vertically. Thus, the equilibrium
price will definitely decline. Whether the equilibrium quantity increases or decreases
will depend on which curve shifts further. If the rightward shift of the supply curve
exceeds the leftward shift of the demand curve, then the equilibrium quantity will
increase. By contrast, if the leftward shift of the demand curve exceeds the rightward
shift of the supply curve, the equilibrium quantity will decrease.
8. Suppose the total demand for wheat and the total supply of wheat per month in the Kansas City
grain market are as shown in the table below. Suppose that the government establishes a price
ceiling of $3.70 for wheat. What might prompt the government to establish this price ceiling?
Explain carefully the main effects. Demonstrate your answer graphically. Next, suppose that the
government establishes a price floor of $4.60 for wheat. What will be the main effects of this
price floor? Demonstrate your answer graphically. LO6
Thousands of Bushels Demanded
Price
Thousands of Bushels
Supplied
85
$3.40
71
80
$3.70
73
75
$4.00
75
70
$4.30
77
65
$4.60
79
60
$4.90
81
Answer:
The equilibrium price is found where quantity supplied equals quantity demanded. This
Chapter 03 – Demand, Supply, and Market Equilibrium
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Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
$4.60), there will be an excess supply of 14 thousand bushels. Buyers demand 65
thousand bushels at the price of $4.60, but sellers supply 79 thousand bushels.
9. A price ceiling will result in a shortage only if the ceiling price is ____________ the
equilibrium price. LO6
a. less than
b. equal to
c. greater than
d. louder than
PROBLEMS
1. Suppose there are three buyers of candy in a market: Tex, Dex, and Rex. The market demand
and the individual demands of Tex, Dex, and Rex for candy are given in the table below. LO2
a. Fill in the table for the missing values.
b. Which buyer demands the least at a price of $5? The most at a price of $7?
c. Which buyer’s quantity demanded increases the most when the price is lowered from $7 to $6?
d. Which direction would the market demand curve shift if Tex withdrew from the market? What
if Dex doubled his purchases at each possible price?
e. Suppose that at a price of $6, the total quantity demanded increases from 19 to 38. Is this a
“change in the quantity demanded” or a “change in demand”?
Chapter 03 – Demand, Supply, and Market Equilibrium
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Feedback: Consider the following set of values:
Part a: At each price (row) the total quantity demanded will equal the sum of the
individual quantities demanded. To find the total quantity demanded at the price of $8
2. The figure below shows the supply curve for tennis balls, S1, for Drop Volley tennis, a
producer of tennis equipment. Use the figure and the table below to give your answers to the
following questions. LO3
a. Use the figure to fill in the quantity supplied on supply curve S1 for each price in the table
below.
Chapter 03 – Demand, Supply, and Market Equilibrium
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b. If production costs were to increase, the quantities supplied at each price would be as shown by
the third column of the table (“S2 Quantity Supplied”). Use that data to draw supply curve S2 on
the same graph as supply curve S1.
c. In the fourth column of the table, enter the amount by which the quantity supplied at each price
changes due to the increase in product costs. (Use positive numbers for increases and negative
numbers for decreases.)
d. Did the increase in production costs cause a “decrease in supply” or a “decrease in quantity
supplied”?
Chapter 03 – Demand, Supply, and Market Equilibrium
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Part a: The quantity supplied is 15 at $3, 10 at $2, and 5 at $1. This is found by reading
3. Refer to the expanded table below from review question 8. LO4
a. What is the equilibrium price? At what price is there neither a shortage nor a surplus? Fill in
the surplus-shortage column and use it to confirm your answers.
b. Graph the demand for wheat and the supply of wheat. Be sure to label the axes of your graph
correctly. Label equilibrium price P and equilibrium quantity Q.
c. How big is the surplus or shortage at $3.40? At $4.90? How big a surplus or shortage results if
the price is 60 cents higher than the equilibrium price? 30 cents lower than the equilibrium price?