A n s w e r s t o t h e R e v i e w Q u i z z e s
Page 56
1. What is the distinction between a money price and a relative price?
2. Explain why a relative price is an opportunity cost.
3. Think of examples of goods whose relative price has risen or fallen by a large amount.
Some examples of items where both the money price and the relative price have risen over time are
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1. Define the quantity demanded of a good or service.
2. What is the law of demand and how do we illustrate it?
The law of demand states: “Other things remaining the same, the higher the price of a good, the smaller
3. What does the demand curve tell us about the price that consumers are willing to pay?
4. List all the influences on buying plans that change demand, and for each influence, say whether it
increases or decreases demand.
Influences that change the demand for a good include:
The prices of related goods. A rise (fall) in the price of a substitute increases (decreases) the
3
DEMAND AND
SUPPLY
C h a p t e r
38 C H A P T E R 3
The expected future price of the good. A rise (fall) in the expected future price of a good increases
(decreases) the demand in the current period.
5. Why does demand not change when the price of a good changes with no change in the other
influences on buying plans?
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1. Define the quantity supplied of a good or service.
2. What is the law of supply and how do we illustrate it?
The law of supply states that “other things remaining the same, the higher the price of a good, the
3. What does the supply curve tell us about the producer’s minimum supply price?
4. List all the influences on selling plans, and for each influence, say whether it changes supply.
Changes in the price of the good change the quantity supplied. They do not change the supply of the
good.
Influences that change the supply of a good include:
Prices of factor of production. A rise (fall) in the price of a factor of production increases firms’
costs of production and decreases (increases) the supply of the good.
5. What happens to the quantity of cell phones supplied and the supply of cell phones if the price of
a cell phone falls?
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1. What is the equilibrium price of a good or service?
2. Over what range of prices does a shortage arise? What happens to the price when there is a
shortage?
3. Over what range of prices does a surplus arise? What happens to the price when there is a
surplus?
4. Why is the price at which the quantity demanded equals the quantity supplied the equilibrium
price?
5. Why is the equilibrium price the best deal available for both buyers and sellers?
The equilibrium price reflects that the highest price consumers are willing to pay for that amount of the
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What is the effect on the price and quantity of MP3 players (such as the iPod) if
1. The price of a PC falls or the price of an MP3 download rises? (Draw the diagrams!)
2. More firms produce MP3 players or electronics workers’ wages rise? (Draw the diagrams!)
An increase in the number of firms that produce MP3 players increases the supply of MP3 players. The
supply curve of MP3 players shifts rightward. Demand remains unchanged. The price of an MP3 player
/
3. Any two of these events in questions 1 and 2 occur together? (Draw the diagrams!)
There are six combinations:
(2) If the price of a PC falls and more firms produce MP3 players, demand decreases and supply
increases so the price falls and the quantity might increase, decrease, or not change.
(4) If the price of an MP3 download rises and more firms produce MP3 players, demand
(5) If the price of an MP3 download falls and the wages paid electronic workers rise, demand
D E M A N D A N D S U P P L Y 41
A n s w e r s t o t h e S t u d y P l a n Pr o b l e m s a n d A p p l i c a t i o ns
1. In April 2014, the money price of a carton of milk was $2.01 and the money price of gallon of
2. The price of food increased during the past year.
a. Explain why the law of demand applies to food just as it does to other goods and services.
The law of demand applies to food because there is both a substitution and an income effect that
b. Explain how the substitution effect influences food purchases when the price of food rises and
other things remain the same.
diets for food.
c. Explain how the income effect influences food purchases and provide some examples of the
income effect.
Food is a normal good so a rise in the price, which decreases people’s real incomes, decreases the
3. Which of the following goods are likely substitutes and which are likely complements? (You may
use an item in more than once.):
coal, oil, natural gas, wheat, corn, pasta, pizza, sausage, skateboard, roller blades,
4. As the average income in China continues to increase, explain how the following would change:
a. The demand for beef
5. In 2013, the price of corn fell and some corn farmers will switch from growing corn in 2014 to
growing soybeans.
a. Does this fact illustrate the law of demand or the law of supply? Explain your answer.
b. Why would a corn farmer grow soybeans?
100
140
180
6. Dairies make low-fat milk from full-cream milk, and in the process they produce cream, which is
made into ice cream. The following events occur one at a time:
(i) The wage rate of dairy workers rises.
(ii) The price of cream rises.
(iii) The price of low-fat milk rises.
(iv) With a drought forecasted, dairies raise their expected price of low-fat milk next year.
(v) New technology lowers the cost of producing ice cream.
Explain the effect of each event on the supply of low-fat milk.
(i) Dairy workers are a factor used to produce low–fat milk. The price of a factor of production rises,
7. The demand and supply schedules for gum are
in the table.
a. Suppose that the price of gum is 70¢ a pack.
Describe the situation in the gum market and
explain how the price adjusts.
At 70 cents a pack, there is a surplus of gum
b. Suppose that the price of gum is 30¢ a pack. Describe the situation in the gum market and
explain how the price adjusts.
8. The following events occur one at a time:
(i) The price of crude oil rises.
(ii) The price of a car rises.
(iii) All speed limits on highways are abolished.
(iv) Robots cut car production costs.
Explain the effect of each of these events on the market for gasoline.
(ii) and (iii) and (iv) change the demand for gasoline. The demand for gasoline will change if the price of
Quantity
demanded
Quantity
supplied
(millions of packs a week)
180
60
140
100
9. In Problem 7, a fire destroys some factories
that produce gum and the quantity of gum
supplied decreases by 40 million packs a week
at each price.
a. Explain what happens in the market for gum
and draw a graph to illustrate the changes.
As the number of gum-producing factories
decreases, the supply of gum decreases. There is
b. If, at the time as the fire the teenage
population increases and the quantity of gum
demanded increases 40 million packs a week
at each price. What is the new market
equilibrium? Show the changes on your graph.
The new price is 70 cents a pack, and the
quantity is 120 million packs a week. The
10. Frigid Florida Winter is Bad News for Tomato Lovers
An unusually cold January in Florida destroyed entire fields of tomatoes. Florida’s growers are
25-pound box a year ago to $30 now.
Source: USA Today, March 3, 2010
a. Make a graph to illustrate the market for tomatoes before the unusually cold January and show
how the events in the news clip influence the market for tomatoes.
Figure 3.3 shows the tomato market in January
2009 and January 2010. In both years the demand
curve is labeled D. The supply curve for 2009 is
labeled S0 and the supply curve for 2010 is labeled
b. Why is the news “bad for tomato lovers”?
The news is bad for tomato lovers because the
D E M A N D A N D S U P P L Y 45
Answers to Additional Problems and Applications
11. What features of the world market for crude oil make it a competitive market?
12. The money price of a textbook is $90 and the money price of the Wii game Super Mario Galaxy is
$45.
a. What is the opportunity cost of a textbook in terms of the Wii game?
b. What is the relative price of the Wii game in terms of textbooks?
13. The price of gasoline has increased during the past year.
a. Explain why the law of demand applies to gasoline just as it does to all other goods and services.
b. Explain how the substitution effect influences gasoline purchases and provide some examples of
substitutions that people might make when the price of gasoline rises and other things remain
the same.
c. Explain how the income effect influences gasoline purchases and provide some examples of the
income effects that might occur when the price of gasoline rises and other things remain the
same.
When the price of gasoline rises, people’s real incomes fall. People respond by decreasing their demand
14. Think about the demand for the three game consoles: Xbox One, PlayStation 4, and Wii U.
Explain the effect of the following events on the demand for Xbox One games and the quantity of
Xbox One games demanded, other things remaining the same. The events are:
a. The price of an Xbox One falls.
An Xbox One and an Xbox One game are complements. When the price of an Xbox One falls,
console is useless without Xbox One games.
b. The prices of a PlayStation 4 and a Wii U fall.
A PlayStation 4 and a Wii U are substitutes for an Xbox One. When these game consoles fall in price,
c. The number of people writing and producing Xbox One games increases.
The increase in the number of people writing Xbox One games increases the supply of Xbox One
46 C H A P T E R 3
d. Consumers’ incomes increase.
Xbox One games are surely a normal good. So an increase in consumers’ incomes increases the
e. Programmers who write code for Xbox One games become more costly to hire.
The increase in the cost of programmers decreases the supply of Xbox One games. When the supply of
f. The expected future price of an Xbox One game falls.
When the price of an Xbox One game is expected to fall, the (current) demand for Xbox One games
decreases.
g. A new game console that is a close substitute for Xbox One comes onto the market.
The new game console decreases the demand for Xbox One consoles. As a result, the equilibrium
15. Classify the following pairs of goods and services as substitutes in production, complements in
production, or neither.
a. Bottled water and health club memberships
Bottled water and health club memberships are neither substitutes in production nor complements in
b. French fries and baked potatoes
c. Leather boots and leather shoes
Leather boots and leather shoes are substitutes in production.
d. Hybrids and SUVs
e. Diet coke and regular coke
16. When a timber mill makes logs from trees it also produces sawdust, which is used to make
plywood.
a. Explain how a rise in the price of sawdust influences the supply of logs.
The rise in the price of sawdust motivates timber mills to make more sawdust, which thereby increases
b. Explain how a rise in the price of sawdust influences the supply of plywood.
17. New Maple Syrup Sap Method
With the new way to tap maple trees, farmers could produce 10 times as much maple syrup per
acre.
Source: cbc.ca, February 5, 2014
Will the new method change the supply of maple syrup or the quantity supplied of maple syrup,
Use Figure 3.4 to work Problems 18 and 19.
18. a. Label the curves. Which curve shows the
willingness to pay for a pizza?
The demand curve is the downward sloping curve
b. If the price of a pizza is $16, is there a shortage
or a surplus and does the price rise or fall?
c. Sellers want to receive the highest possible
price, so why would they be willing to accept
less than $16 a pizza?
Sellers are willing to accept less than $16 because
19. a. If the price of a pizza is $12, is there a shortage or a surplus and does the price rise or fall?
b. Buyers want to pay the lowest possible price, so why would they be willing to pay more than
$12 for a pizza?
48 C H A P T E R 3
80
130
160
90
120
170
110
180
20. The demand and supply schedules for
potato chips are in the table.
a. Draw a graph of the potato chip market
and mark in the equilibrium price and
quantity.
Figure 3.5 draws the supply and demand
b. If the price is 60¢ a bag, is there a
shortage or a surplus, and how does the price
adjust?
At 60¢ a bag, there is a shortage of potato chips
21. In Problem 20, a new dip increases the quantity
of potato chips that people want to buy by 30
million bags per week at each price.
a. Does the demand for chips change? Does the
supply of chips change? Describe the change.
b. How do the equilibrium price and equilibrium
quantity of chips change?
Demand increases by 30 million bags a week.
The demand curve shifts rightward as shown in
Price
Quantity
demanded
Quantity
supplied
(cents per bag)
(millions of bags a week)
50
160
130
60
150
140
70
140
150
22. In Problem 20, if a virus destroys potato crops and the quantity of potato chips produced
decreases by 40 million bags a week at each price, how does the supply of chips change?
23. If the virus in Problem 22 hits just as the new dip in Problem 21 comes onto the market, how do
the equilibrium price and equilibrium quantity of chips change?
24. Strawberry Prices Drop as Late Harvest Hits Market
Shoppers bought strawberries in March for $1.25 a pound rather than the $3.49 a pound they
paid last year. With the price so low, some growers plowed over their strawberry plants to make
way for spring melons; others froze their harvests and sold them to juice and jam makers.
Source: USA Today, April 5, 2010
a. Explain how the market for strawberries would have changed if growers had not plowed in their
plants but offered locals “you pick for free.”
If the growers had offered “you pick for free” deals, the supply of strawberries increases. The demand
b. Describe the changes in demand and supply in the market for strawberry jam.
Growers increased the quantity of strawberries they sold to jam makers. The increased supply of
25. “Popcorn Movie” Experience Gets Pricier
Cinemas are raising the price of popcorn.
Demand for field corn, which is used for animal
Explain and illustrate graphically the events
described in the news clip in the market for
a. Popcorn
As illustrated in Figure 3.7, the farmers’ actions
50 C H A P T E R 3
b. Movie tickets
In the market for movie tickets—essentially the
market for viewing movies in the theater—
26. Watch Out for Rising Dry-Cleaning Bills
In the past year, the price of dry-cleaning solvent doubled. More than 4,000 dry cleaners across
the United States disappeared as budget-conscious consumers cut back. This year the price of
hangers used by dry cleaners is expected to double.
Source: CNN Money, June 4, 2012
a. Explain the effect of rising solvent prices on the market for dry cleaning.
Solvents are used to produce dry cleaning, so a rise in the price of solvents increases the cost of dry
b. Explain the effect of consumers becoming more budget conscious along with the rising price of
solvent on the price of dry cleaning.
Consumers becoming more budget conscious means that the demand for dry cleaning decreases and
the demand curve for dry cleaning shifts leftward. Combined with the decrease in supply from rising
c. If the price of hangers does rise this year, do you expect additional dry cleaners to disappear?
Explain why or why not.
The increase in the price of hangers raises the costs of dry cleaners but the cost increase is much
D E M A N D A N D S U P P L Y 51
Economics in the News
27. After you have studied Economics in the news on pp. 74–75, answer the following questions:
a. What would happen to the price of bananas if TR4 spread to Central America?
The price of bananas would rise.
b. What are some of the substitutes for bananas and what would happen to demand, supply, price,
and quantity in the markets for these items if TR4 were to come to America?
c. What are some of the complements of bananas and what would happen to demand, supply,
price, and quantity in the markets for these items if TR4 were to come to America?
d. When the price of bananas increased in 2008, did it rise by as much as the rise in the rise in the
price of oil? Why or why not?
In 2008 the price of oil rose by about 70 percent, so the 20 percent price hike in the price of bananas
e. Why would the expectation of the future arrival of TR4 in the Americas have little or no effect
on today’s price of bananas?
If TR4 arrives in the Americas, the supply of bananas will decrease, thereby raising the price. The rise in