978-1260152616 Chapter 3 Solution Manual Part 1

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Chapter 03 – Markets

CHAPTER 3

MARKETS

Chapter Overview

By the time you reach the end of this course, you’ll be quite familiar with the

words supply and demand. We take our time on this subject for good reason:

An understanding of supply and demand is the foundation of economic

problem solving. You’ll be hard-pressed to make wise economic choices

without it.

Although markets are not always perfectly competitive, you may be

surprised at how accurately many real-world phenomena can be described

using the simple rules of supply and demand. In the next chapters we’ll use

these rules to explain how consumers and producers respond to price

changes and government policies.

Learning Objectives

LO 3.1: Identify the defining characteristics of a competitive market.

LO 3.2: Draw a demand curve and describe the external factors that

determine demand.

LO 3.3: Distinguish between a shift in and a movement along the demand

curve.

LO 3.4: Draw a supply curve and describe the external factors that

determine supply.

LO 3.5: Distinguish between a shift in and a movement along the supply

curve.

LO 3.6: Explain how supply and demand interact to drive markets to

equilibrium.

LO 3.7: Evaluate the effect of changes in supply and demand on the

equilibrium price and quantity.

Chapter Outline

OPENING STORY: MOBILES GO GLOBAL

Markets

What Is a Market?

What Is a Competitive Market? (LO 3.1)

Demand

The Demand Curve (LO 3.2)

Determinants of Demand

BOX FEATURE: REAL LIFE – CAN INSTANT-NOODLE SALES PREDICT

A RECESSION?

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Chapter 03 – Markets

Shifts in the Demand Curve (LO 3.3)

Supply

The Supply Curve (LO 3.4)

Determinants of Supply

Shifts in the Supply Curve (LO 3.5)

Market Equilibrium

Reaching Equilibrium (LO 3.6)

BOX FEATURE: REAL LIFE – THE PRIUS SHORTAGE OF 2003

Changes in Equilibrium (LO 3.7)

BOX FEATURE: REAL LIFE – GIVE A MAN A FISH

Beyond the Lecture

Class Discussion: Shifts versus Movements in Demand and Supply

(LO 3.3, LO 3.5)

Consider discussing the past prohibition of alcohol in the United States to

stimulate a conversation about changes in supply, demand, and price. This

topic can also be used to highlight the di2erence between shifts in demand

and supply and movements along the demand and supply curves.

1. Ask students how they think the introduction of prohibition impacted

demand, supply, and price.

2. Ask students if other things remained constant.

3. Ask students to consider what occurred when prohibition was repealed.

This can be extended to consider any prohibited goods or services. Students

generally *nd this conversation interesting. There are numerous examples in

popular media that can be paired with this discussion. For example, consider

showing a clip from an episode of The Simpsons, Homer vs. the Eighteenth

Amendment (Season 8, Episode 18), from 8:50 to 12:40.

Class Discussion: Supply, Demand, and Equilibrium (LO 3.7)

Show students a brief clip from the television show The OEce to highlight

supply and demand. In this episode, there is a doll that is a very popular gift

item during the holiday season. Dwight buys all of the dolls in the area and

resells them to parents, charging a price above the retail price, but one

which parents are gladly willing to pay. A short video of this is hosted at the

“Economics of the OEce” website, authored by Dan Kuester of Kansas State

University. The video link is here.

Class Activity: Building a Demand Curve (LO 3.2)

A great activity to do in class is to have an auction to build a demand curve.

The day before the auction, tell students to bring their money to class next

time. You can create a “bundle” of goods (candy, soda, chips, popcorn) and

auction of the one lot to the highest bidder. Start by taking a show of hands

for people who would pay a super low price, such as 25 cents or $1 for your

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Chapter 03 – Markets

bundle. Then, when the price gets to $5, auction o2 the good. You can

collect data as you go along. Some notes:

1. You actually need to have the winner pay real money. They are getting

real goods in exchange. We need to reveal the real demand curve for

your class.

2. A link to a video example of this is here, provided by Dave Brown of

Pennsylvania State University.

3. Additionally, you may get students asking you how much you paid for

the bundle. It is most likely that the winning bid is far above the price

you paid for the goods. You can use this to illustrate consumer and

producer surplus as well.

Class Discussion/Class Activity: Supply, Demand, and Equilibrium

(LO 3.7)

Ask students to think about the price of tickets to popular athletic events,

concerts, etc. Have them think about the sticker price of the ticket relative to

the price that they might have to pay to acquire the ticket. Consider showing

them Stubhub, a popular online ticket resale website.

1. How much do tickets for really popular events tend to sell for online,

relative to the retail price of the ticket?

2. Why don’t the original sellers of the tickets just charge a higher price?

3. How do ticket resellers impact the market? Are resellers helping or

harming buyers?

Clicker Questions

There are three main purposes to clicker questions. First, they are a great

way to do a quick and instant “on demand” test of student understanding of

the material. You can cover material, and instantly get feedback on student

comprehension. You can see whether you need to explain certain topics

again, or move on to the next subject. Second, they are a great method to

break up the class and take a moment away from lecture. It gets the

students actively involved. Finally, certain clicker questions can be framed in

a “discussion” manner, in which you can invite students to talk about the

possible right answer with their peers. You can instruct students to convince

their classmate of a right or wrong answer. Clickers may be especially

important with this chapter, as understanding demand and supply is one of

the key objectives taught in basic economics. This is especially true

regarding the di2erence between a movement along a demand (supply)

curve and a shift in demand (supply).

1. A competitive market generally means that [LO 3.1]

A. the sellers solely determine price.

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2. The law of demand states that [LO 3.2]

of a good.

D. consumers’ preferences will be similar.

Feedback: While answer [C] may be true for normal goods, this is not what

the law of demand states. The law of demand just illustrates the downward

sloping nature of the demand function.

3. Which of the following will cause an increase in demand (rightward shift)?

[LO 3.3]

A. A decrease in the price of the good

Feedback: Careful! Many people may incorrectly choose [A] for their

answer. A change in the price causes a movement along a demand curve.

Changes in other factors cause a shift. Answer choice [D] results in a

leftward shift.

4. Prices below equilibrium will result in [LO 3.6]

A. more government regulations on the market.

5. Suppose a market is in equilibrium. If there is a decrease in demand, we

expect [LO 3.7]

A. that the equilibrium will not change.

Feedback: The rightward demand shift leads to a new equilibrium point

with a higher price and quantity.

Solutions to End-of-Chapter Questions and Problems

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Review Questions

1. Think about a competitive market in which you participate regularly.

For each of the characteristics of a competitive market, explain how your

market meets these requirements. [LO 3.1]

Answer: The market for eggs is competitive. There are many grocery

stores where eggs can be purchased. Standardized good: Eggs are a

standardized good. There are di2erent kinds of eggs, of course, but each

2. Think about a noncompetitive market in which you participate regularly.

Explain which characteristic(s) of competitive markets your market does not

meet. [LO 3.1]

Answer: I take the subway to work every day. Public transportation is not

a competitive market. There is only one subway system, so there is no

competition. The subway is a natural monopoly (students will learn about

3. Explain why a demand curve slopes downward. [LO 3.2]

Answer: The demand curve slopes downward because as prices increase,

quantity demanded decreases. Price and quantity move in opposite

4. In each of the following examples, name the factor that affect

demand and describe its impact on your demand for a new cell phone. [LO

3.2]

a. You hear a rumor that a new and improved model of the phone you

want is coming out next year.

b. Your grandparents give you $500.

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c. A cellular network announces a holiday sale on a data package that

includes the purchase of a new smartphone.

d. A friend tells you how great his new phone is and suggests that you get

one, too.

Answer:

a. Expectations. Your current demand will decrease in the present as

b. Incomes. Your purchasing power has increased due to the money

c. Price of a Related Good. When the price of a data package (a

d. Consumer Preferences. Your friend inOuences your interest in

5. Consider the following events:

a. The price of cell phones goes down by 25 percent during a sale.

b. You get a 25 percent raise at your job.

c. Which event represents a shift in the demand curve? Which represents

a movement along the curve? What is the difference? [LO 3.3]

Answer: The relationship between price and quantity demanded is

a. When the price of cell phones goes down by 25 percent, this is a

b. When your income increases by 25 percent, there is a shift in the

6. What is the difference between a change in demand and a change in

quantity demanded? [LO 3.3]

Answer: When we refer to a change in demand, we are referring to a shift

of the entire curve. This happens when a non-price factor changes–such

7. Explain why a supply curve slopes upward. [LO 3.4]

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Answer: The supply curve slopes upward because as prices increase,

quantity supplied also increases. Price and quantity move in the same

8. In each of the following examples, name the factor that affect supply

and describe its impact on the supply of cell phones. [LO 3.4]

a. Economic forecasts suggest that the demand for cell phones will

increase in the future.

b. The price of plastic goes up.

c. A new screen technology reduces the cost of making cell phones.

Answer:

a. Expectations. If demand for cell phones is expected to increase in

the future, then the price of cell phones is expected to increase in

b. Prices of Inputs. Plastic is an input in the production of cell phones.

c. Technology. If advancement in screen technology reduces the cost

9. Consider the following events:

a. A maggot infestation ruins a large number of apple orchards in

Washington state.

b. Demand for apples goes down, causing the price to fall.

c. Which event represents a shift in the supply curve? Which represents a

movement along the curve? What is the difference? [LO 3.5]

Answer: Factors of supply that are held constant, such as number of

suppliers, cause a shift in the supply curve when they change. The

a. A fruitworm infestation will cause a shift in the supply of apples, as

b. When demand decreases and prices fall, there is a movement along

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10. What is the difference between a change in supply and a change in

quantity supplied? [LO 3.5]

Answer: When we refer to a change in supply, we are referring to a shift

of the entire curve. This happens when a non-price factor changes–such

11. What is the relationship between supply and demand when a market is

in equilibrium? Explain how the incentives facing cell phone companies and

consumers cause the market for cell phones to reach equilibrium. [LO 3.6]

Answer: When a market is in equilibrium, quantity supplied equals

quantity demanded. We say that supply and demand are in agreement at

12. Explain why the equilibrium price is often called the market-clearing

price. [LO 3.6]

Answer: The equilibrium price is often called the market clearing price

because it is the price at which the market “clears” in the sense that

13. Suppose an economic boom causes incomes to increase. Explain what

will happen to the demand and supply of phones, and predict the direction of

the change in the equilibrium price and quantity. [LO 3.7]

Answer: If incomes increase, there will be an increase in demand for cell

14. Suppose an economic boom drives up wages for the sales

representatives who work for cell phone companies. Explain what will happen

to the demand and supply of phones, and predict the direction of the change

in the equilibrium price and quantity. [LO 3.7]

Answer: If an increase in wages causes an increase in production costs

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15. Suppose an economic boom causes incomes to increase and at the same

time drives up wages for the sales representatives who work for cell phone

companies. Explain what will happen to the demand for and supply of

phones and predict the direction of the change in the equilibrium price and

quantity. [LO 3.7]

Answer: When both an increase in demand and a decrease in supply

Problems and Applications

1. Consider shopping for cucumbers in a farmers’ market. For each

statement below, note which characteristic of competitive markets the

statement describes. Choose from: standardized good, full information, no

transaction costs, and participants are price takers. [LO 3.1]

a. All of the farmers have their prices posted prominently in front of their

stalls.

b. Cucumbers are the same price at each stall.

c. There is no diEculty moving around between stalls as you shop and

choosing between farmers.

d. You and the other customers all seem indi2erent about which

cucumbers to buy.

Answer: A standardized good is a good for which any two units have the

same features and are interchangeable. In a competitive market, you

have full information about the price and features of the good being

a. Full information.

2. Suppose two artists are selling paintings for the same price in adjacent

3.1]

a. Standardized good.

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b. Full information.

c. No transaction costs.

d. Participants are price takers.

Answer: A standardized good is a good for which any two units have the

same features and are interchangeable. In a competitive market, you

have full information about the price and features of the good being

3. Using the demand schedule in Table 3P-1, draw the daily demand curve

for slices of pizza in a college town. [LO 3.2]

Answer:

4. Consider the market for cars. Which determinant of demand is affected

by each of the following events? Choose from: consumer preferences, prices

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of related goods, incomes, expectations, and the number of buyers. [LO

3.2]

a. Environmentalists launch a successful One Family, One Car campaign.

b. A baby boom occurred 16 years ago.

c. Layo2s increase as the economy sheds millions of jobs.

d. An oil shortage causes the price of gasoline to soar.

e. The government offer tax rebates in return for the purchase of

commuter rail tickets.

f. The government announces a massive plan to bail out the auto

industry and subsidize production costs.

Answer: The non-price determinants of demand can be divided into *ve

major categories: consumer preferences, the prices of related goods,

Determinant of

Demand Increase in Demand Decrease in Demand

Consumer

preferences

A Buy American ad campaign

appeals to national pride,

increasing the demand for U.S.-

made sneakers.

An outbreak of E.coli decreases

the demand for spinach.

Prices of related

goods

A decrease in the price of hot dogs

increases the demand for relish, a

complementary good.

A decrease in taxi fares

decreases the demand for

subway rides, a substitute good.

An economic downturn lowers

homes and medical care.

a. Consumer preferences.

b. Number of buyers.

5. If a decrease in the price of laptops causes the demand for tablets to

increase, are laptops and tablets substitutes or complements? [LO 3.2]

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Answer: If a decrease in the price of laptops causes the demand for

tablets to increase, laptops and tablets are complements. A decrease in

6. If rising incomes cause the demand for beer to decrease, is beer a

normal or inferior good? [LO 3.2]

Answer: If rising incomes cause the demand for beer to decrease, beer is

7. Consider the market for corn. Say whether each of the following events

will cause a shift in the demand curve or a movement along the curve. If it

will cause a shift, specify the direction. [LO 3.3]

a. A drought hits corn-growing regions, cutting the supply of corn.

b. The government announces a new subsidy for biofuels made from

corn.

c. A global recession reduces the incomes of consumers in poor

countries, who rely on corn as a staple food.

d. A new hybrid variety of corn seed causes a 15 percent increase in the

yield of corn per acre.

e. An advertising campaign by the beef producers’ association highlights

the health benefit of corn-fed beef.

Answer: A change in the price of a good will cause a movement along

the demand curve. A change in a nonprice determinant will cause a shift

of the demand curve.

a. Movement along the curve: There is a decrease in supply, which

causes an increase in price and a decrease in quantity demanded.

8. The demand curve in Figure 3P-1 shows the monthly market for sweaters

at a local clothing store. For each of the following events, draw the new

outcome. [LO 3.3]

a. Sweaters fall out of fashion.

b. There is a shortage of wool.

c. The winter is particularly long and cold this year.

d. Sweater vendors o2er a sale.

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Answer:

a. Point D: This is a change in a nonprice determinant. The demand

curve will shift to the left because people prefer to buy fewer

sweaters.

9. Using the supply schedule found in Table 3P-2, draw the daily supply curve

for slices of pizza in a college town. [LO 3.4]

Answer: The supply schedule shows the quantity of pizza slices that firm

10. Consider the market for cars. Which determinant of supply is affected by

each of the following events? Choose from: prices of related goods,

technology, prices of inputs, expectations, and the number of sellers in the

market. [LO 3.4]

a. A steel tari2 increases the price of steel.

b. Improvements in robotics increase eEciency and reduce costs.

c. Factories close because of an economic downturn.

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d. The government announces a plan to o2er tax rebates for the purchase

of commuter rail tickets.

e. The price of trucks falls, so factories produce more cars.

f. The government announces that it will dramatically rewrite eEciency

standards, making it much harder for automakers to produce their

cars.

Answer: Several non-price factors determine the supply of a good at any

given price: They include the prices of related goods, technology, prices of

inputs, expectations about the future, and the number of sellers in the

market.

Determinant

of Supply Increases in Supply Decreases in Supply

Price of related

goods

The price of gas rises, so an

automaker increases its

production of smaller, more

fuel-eEcient cars.

The price of clean energy

production falls, so the power

company reduces the amount of

power it supplies using coal

power plants.

The installation of robots

New technology allows corn to be

A drop in the price of tomatoes

An increase in the minimum wage

Housing prices are expected to

New research points to the

deleterious effect of eating

Subsidies make the production

New licensing fees make

a. Prices of inputs.

b. Technology.

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11. Consider the market for corn. Say whether each of the following events

will cause a shift in the supply curve or a movement along the curve. If it will

cause a shift, specify the direction. [LO 3.5]

a. A drought hits corn-growing regions.

b. The government announces a new subsidy for biofuels made from

corn.

c. A global recession reduces the incomes of consumers in poor

countries, who rely on corn as a staple food.

d. A new hybrid variety of corn seed causes a 15 percent increase in the

yield of corn per acre.

e. An advertising campaign by the beef producers’ association highlights

the health benefit of corn-fed beef.

Answer: A change in the price of a good will cause a movement along

the supply curve. A change in a non-price determinant will cause a shift of

the supply curve.

a. Shift in the curve: There is a decrease in supply (leftward shift).

b. Movement along the curve: There is an increase in demand.

12. The supply curve in Figure 3P-2 shows the monthly market for sweaters

at a local craft market. For each of the following events, draw the new

outcome. [LO 3.5]

a. The price of wool increases.

b. Demand for sweaters decreases.

c. A particularly cold winter is expected to begin next month.

d. Demand for sweaters increases.

Answer: A change in the price of a good will cause a movement along

the supply curve. A change in a nonprice determinant will cause a shift of

the supply curve.

a. Point C: This is a change in a nonprice determinant. The supply

b. Point E: A decrease in the demand for sweaters will decrease the

c. Point B: This is a change in a nonprice determinant. The supply

d. Point D: An increase in the demand for sweaters will increase the

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13. Refer to the demand and supply schedule shown in Table 3P-3. [LO

3.6]

a. If pizza parlors charge $3.50 per slice, will there be excess supply or

excess demand? What is the amount of excess supply or excess

demand at that price?

b. If pizza parlors charge $1.00 per slice, will there be excess supply or

excess demand? What is the amount of excess supply or excess

demand at that price?

c. What are the equilibrium price and quantity in this market?

Answer:

a. When the price is above the equilibrium price there is an excess

supply. In this case, there is an excess supply of 400 slices.

The graph in Figure 3P-3 shows the weekly market for pizzas in a

small town. Use this graph to answer Problems 14–16.

14. Which of the following events will occur at a price of $20? [LO 3.6]

a. Equilibrium.

b. Excess demand.

c. Excess supply.

d. No pizzas supplied.

e. No pizzas demanded.

Answer: There is an excess supply. $20 is above the equilibrium price,

15. Which of the following events will occur at a price of $10? [LO 3.6]

a. Equilibrium.

b. Excess demand.

c. Excess supply.

d. No pizzas supplied.

e. No pizzas demanded.

Answer: There is an excess demand. $10 is below the equilibrium price,

16. What are the equilibrium price and quantity of pizzas? [LO 3.6]

Answer: Graphically the equilibrium price and quantity are found at the

point where the supply curve intersects the demand curve. At this

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17. The graph in Figure 3P-4 shows supply and demand in the market for

automobiles. For each of the following events, draw the new market

outcome, and say whether the equilibrium price and quantity will increase or

decrease. [LO 3.7]

a. Environmentalists launch a successful One Family, One Car campaign.

b. A steel tari2 increases the price of steel.

c. A baby boom occurred 16 years ago.

d. An oil shortage causes the price of gasoline to soar.

e. Improvements in robotics increase eEciency and reduce costs.

f. The government offer a tax rebate for the purchase of commuter rail

tickets.

Answer:

a. If more families decide to own only one car instead of two or three

cars then there is a decrease in the demand for cars. As a result,

b. The increase in the price of steel will increase the cost of producing

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c. As these children turn 16 they will learn to drive and some of them

d. An increase in the price of gas will make driving more expensive

e. If the cost of production falls, then *rms are willing to sell cars for a

f. A tax rebate on rail tickets will reduce the cost of train travel (a

18. Say whether each of the following changes will increase or decrease the

equilibrium price and quantity, or whether the effect cannot be predicted.

[LO 3.7]

a. Demand increases; supply remains constant.

b. Supply increases; demand remains constant.

c. Demand decreases; supply remains constant.

d. Supply decreases; demand remains constant.

e. Demand increases; supply increases.

f. Demand decreases; supply decreases.

g. Demand increases; supply decreases.

h. Demand decreases; supply increases.

Answer: In the first four parts, only one curve is shifting, so the impact

on equilibrium price and quantity can be predicted. In the last four parts,

two changes are occurring at the same time, so the impact on either

equilibrium price or quantity cannot be predicted. Consider a

a. The equilibrium price increases, and the equilibrium quantity

increases.

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d. The equilibrium price increases, and the equilibrium quantity

decreases.

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