68 ❖ Chapter 4/The Market Forces of Supply and Demand
SOLUTIONS TO TEXT PROBLEMS:
Quick Quizzes
1. A market is a group of buyers (who determine demand) and a group of sellers (who
2. Here is an example of a monthly demand schedule for pizza:
Price of Pizza Slice
Number of Pizza Slices Demanded
$ 0.00
10
0.25
9
0.50
8
0.75
7
1.00
6
1.25
5
1.50
4
1.75
3
2.00
2
2.25
1
2.50
0
The demand curve is graphed in Figure 1.
Figure 1
Chapter 4/The Market Forces of Supply and Demand ❖ 69
3. Here is an example of a monthly supply schedule for pizza:
Price of Pizza Slice
Number of Pizza
Slices Supplied
$ 0.00
0
0.25
100
The supply curve is graphed in Figure 2.
Figure 2 Figure 3
4. If the price of tomatoes rises, the supply curve for pizza shifts to the left because there has
been an increase in the price of an input into pizza production, but there is no shift in
demand. The shift to the left of the supply curve causes the equilibrium price to rise and the
equilibrium quantity to decline, as Figure 3 shows.
0.50
200
0.75
300
1.00
400
1.25
500
1.50
600
1.75
700
2.00
800
2.25
900
2.50
70 ❖ Chapter 4/The Market Forces of Supply and Demand
If the price of hamburgers falls, the demand curve for pizza shifts to the left because the
lower price of hamburgers will lead consumers to buy more hamburgers and fewer pizzas,
Questions for Review
1. A competitive market is a market in which there are many buyers and many sellers of an
2. The demand schedule is a table that shows the relationship between the price of a good and
the quantity demanded. The demand curve is the downward-sloping line relating price and
3. A change in consumers’ tastes leads to a shift of the demand curve. A change in price leads
to a movement along the demand curve.
5. A supply schedule is a table showing the relationship between the price of a good and the
quantity a producer is willing and able to supply. The supply curve is the upward-sloping line
Chapter 4/The Market Forces of Supply and Demand ❖ 71
The supply curve slopes upward because when the price is high, suppliers’ profits increase,
so they supply more output to the market. The result is the law of supply—other things being
equal, when the price of a good rises, the quantity supplied of the good also rises.
6. A change in producers’ technology leads to a shift in the supply curve. A change in price
leads to a movement along the supply curve.
7. The equilibrium of a market is the point at which the quantity demanded is equal to quantity
supplied. If the price is above the equilibrium price, sellers want to sell more than buyers
8. When the price of beer rises, the demand for pizza declines, because beer and pizza are
complements and people want to buy less beer. When we say the demand for pizza declines,
9. Prices play a vital role in market economies because they bring markets into equilibrium. If
the price is different from its equilibrium level, quantity supplied and quantity demanded are
72 ❖ Chapter 4/The Market Forces of Supply and Demand
Problems and Applications
1. a. Cold weather damages the orange crop, reducing the supply of oranges and raising the
Figure 6
b. People often travel to the Caribbean from New England to escape cold weather, so the
demand for Caribbean hotel rooms is high in the winter. In the summer, fewer people
Figure 7
Chapter 4/The Market Forces of Supply and Demand ❖ 73
c. When a war breaks out in the Middle East, many markets are affected. Because a large
proportion of oil production takes place there, the war disrupts oil supplies, shifting the
supply curve for gasoline to the left, as shown in Figure 8. The result is a rise in the
2. The statement, in general, is false. As Figure 10 shows, the increase in demand for
notebooks results in an increased quantity supplied. The only way the statement would be
true is if the supply curve was a vertical line, as shown in Figure 11.
74 ❖ Chapter 4/The Market Forces of Supply and Demand
3. a. If people decide to have more children, they will want larger vehicles for hauling their
kids around, so the demand for minivans will increase. Supply will not be affected. The
result is a rise in both the price and the quantity sold, as Figure 12 shows.
b. If a strike by steelworkers raises steel prices, the cost of producing a minivan rises and
the supply of minivans decreases. Demand will not be affected. The result is a rise in the
price of minivans and a decline in the quantity sold, as Figure 13 shows.
d. The rise in the price of sport utility vehicles affects minivan demand because sport utility
vehicles are substitutes for minivans. The result is an increase in demand for minivans.
Chapter 4/The Market Forces of Supply and Demand ❖ 75
Supply is not affected. The equilibrium price and quantity of minivans both rise, as Figure
12 shows.
e. The reduction in peoples’ wealth caused by a stock-market crash reduces their income,
leading to a reduction in the demand for minivans, because minivans are likely a normal
good. Supply is not affected. As a result, both the equilibrium price and the equilibrium
quantity decline, as Figure 15 shows.
Figure 15
4. a. DVDs and TV screens are likely to be complements because you cannot watch a DVD
without a television. DVDs and movie tickets are likely to be substitutes because a movie
can be watched at a theater or at home. TV screens and movie tickets are likely to be
substitutes for the same reason.
76 ❖ Chapter 4/The Market Forces of Supply and Demand
c. The reduction in the price of TV screens would lead to an increase in the demand for
DVDs because TV screens and DVDs are complements. The effect of this increase in the
demand for DVDs is an increase in both the equilibrium price and quantity, as shown in
Figure 17.
d. The reduction in the price of TV screens would cause a decline in the demand for movie
tickets because TV screens and movie tickets are substitute goods. The decline in the
demand for movie tickets would lead to a decline in the equilibrium price and quantity
sold. This is shown in Figure 18.
Chapter 4/The Market Forces of Supply and Demand ❖ 77
Because computer software is a complement to computers, the lower equilibrium price of
computers increases the demand for software. As Figure 20 shows, the result is a rise in both the
equilibrium price and quantity of software.
Figure 20
78 ❖ Chapter 4/The Market Forces of Supply and Demand
6. a. When a hurricane in South Carolina damages the cotton crop, it raises input prices for
producing sweatshirts. As a result, the supply of sweatshirts shifts to the left, as shown
in Figure 22. The new equilibrium price is higher and the new equilibrium quantity of
sweatshirts is lower.
Figure 22
b. A decline in the price of leather jackets leads more people to buy leather jackets,
Chapter 4/The Market Forces of Supply and Demand ❖ 79
c. The effects of colleges requiring students to engage in morning exercise in appropriate
attire raises the demand for sweatshirts, as shown in Figure 24. The result is an increase
in both the equilibrium price and quantity of sweatshirts.
80 ❖ Chapter 4/The Market Forces of Supply and Demand
d. The invention of new knitting machines increases the supply of sweatshirts. As Figure 25
shows, the result is a reduction in the equilibrium price and an increase in the equilibrium
quantity of sweatshirts.
7. a. Reduced police efforts would lead to an increase in the supply of drugs. As Figure 26
shows, this would cause the equilibrium price of drugs to fall and the equilibrium quantity
of drugs to rise.
Chapter 4/The Market Forces of Supply and Demand ❖ 81
8. A temporarily high birthrate in the year 2015 leads to opposite effects on the price of baby–
sitting services in the years 2020 and 2030. In the year 2020, there are more five-year-olds
who need sitters, so the demand for baby-sitting services rises, as shown in Figure 28. The
result is a higher price for baby-sitting services in 2020. However, in the year 2030, the
increased number of 15-year-olds shifts the supply of baby-sitting services to the right, as
shown in Figure 29. The result is a decline in the price of baby-sitting services.
9. Ketchup is a complement for hot dogs. Therefore, when the price of hot dogs rises, the
quantity demanded of hot dogs falls and this lowers the demand for ketchup. The end result
is that both the equilibrium price and quantity of ketchup fall. Because the quantity of
ketchup falls, the demand for tomatoes by ketchup producers falls, so the equilibrium price
82 ❖ Chapter 4/The Market Forces of Supply and Demand
10. Quantity supplied equals quantity demanded at a price of $6 and quantity of 81 pizzas
(Figure 30). If the price were greater than $6, quantity supplied would exceed quantity
11. The news of the increased health benefits from consuming oranges will increase the demand
for oranges, increasing both the equilibrium price and quantity. If farmers use a new fertilizer
that makes orange trees more productive, the supply of oranges will increase, leading to a
fall in the equilibrium price but a rise in the equilibrium quantity. If both occur at the same
time, the equilibrium quantity will definitely rise, but the effect on equilibrium price will be
ambiguous.
Chapter 4/The Market Forces of Supply and Demand ❖ 83
Because cream cheese is a complement to bagels, the fall in the equilibrium price of
bagels increases the demand for cream cheese, as shown in Figure 32. The result is a
rise in both the equilibrium price and quantity of cream cheese. So, a fall in the price of
flour indeed raises both the equilibrium price of cream cheese and the equilibrium
quantity of bagels.
b. In part (a), we found that a fall in the price of flour led to a rise in the price of cream
cheese and a rise in the equilibrium quantity of bagels. If the price of flour rose, the
opposite would be true; it would lead to a fall in the price of cream cheese and a fall in
the equilibrium quantity of bagels. Because the question says the equilibrium price of
cream cheese has risen, it could not have been caused by a rise in the price of flour.
What happens if the price of milk rises? From part (a), we found that a fall in the price of
84 ❖ Chapter 4/The Market Forces of Supply and Demand
Figure 34 Figure 35
13. a. As Figure 35 shows, the supply curve is vertical. The constant quantity supplied makes
sense because the basketball arena has a fixed number of seats at any price.
b. Quantity supplied equals quantity demanded at a price of $8. The equilibrium quantity is
8,000 tickets.
c.
Price
Quantity Demanded
Quantity Supplied
$4
14,000
8,000
$8
11,000
8,000
8,000
8,000
2,000
8,000
14. Equilibrium occurs where quantity demanded is equal to quantity supplied. Thus:
Qd
=
Qs
1,600 – 300
P
= 1,400 + 700P