Demand and Supply

4 Demand and Supply CHECKPOINTS

Checkpoint 4.1 Checkpoint 4.2 Checkpoint 4.3 Clicker version Clicker version Problem 1 Problem 1 Problem 1 Problem 2 Problem 2 Problem 2 Clicker version Problem 3 Problem 3 Problem 3 Clicker version Clicker version Problem 4 Problem 4 Problem 4 Clicker version Problem 5

Practice Problem 1 Explain the effects on the demand for cell phones of the following events that occur one at a time: The price of a cell phone falls. The price of a cell phone is expected to fall next month. The price of a call from a cell phone falls. The price of a call from a land-line phone increases The introduction of camera phones makes cell phones more popular. CHECKPOINT 4.1

Solution A fall in the price of a cell phone increases the quantity of cell phones demanded but has no effect on the demand for cell phones. An expected fall in the price of a cell phone next month decreases the demand for cell phones today as people wait for the lower price. A fall in the price of a call from a cell phone increases the demand for cell phones because a cell phone call and a cell phone are complements. CHECKPOINT 4.1

A rise in the price of a call from a land-line phone increases the demand for cell phones because a land-line phone and a cell phone are substitutes. An increase in the popularity of a cell phone increases the demand for cell phones. CHECKPOINT 4.1

Study Plan Problem 1 In the market for cell phones, when the price of a cell phone falls, the quantity of cell phones demanded ________ and the demand for cell phone ______. A. is unchanged; increases B. decreases; is unchanged C. decrease; decreases D. increases; is unchanged E. increases; increases CHECKPOINT 4.1

In the market for cell phones, when the price of a cell phone is expected to fall next year, ________. A. the demand for cell phones today decreases B. the quantity of cell phones demanded today increases C. the demand for cell phones today increases D. the quantity of cell phones demanded today decreases E. the quantity of cell phones demanded today increases and the demand for cell phones today increases CHECKPOINT 4.1

Practice Problem 2 Use a graph to illustrate the effect of each of the following events: The price of a cell phone falls The price of a cell phone is expected to fall next month. The price of a call from a cell phone falls. The price of a call from a land-line phone increases The introduction of camera phones makes cell phones more popular CHECKPOINT 4.1

Solution The fall in the price of a cell phone creates a movement along the demand curve D. CHECKPOINT 4.1

An increase in the demand for cell phones is shown by the shift of the demand curve rightward from D0 to D1. A decrease in the demand for cell phones is shown by the shift of the demand curve leftward from D0 to D2. CHECKPOINT 4.1

Practice Problem 3 Do the following events illustrate the law of demand? The price of a cell phone falls The price of a cell phone is expected to fall next month. The price of a call from a cell phone falls. The price of a call from a land-line phone increases The introduction of camera phones makes cell phones more popular CHECKPOINT 4.1

Solution A fall in the price of a cell phone (other things remaining the same), illustrates the law of demand. The figure illustrates the law of demand. The other events change demand and do not illustrate the law of demand. CHECKPOINT 4.1

Study Plan Problem Which events illustrate the law of demand? The price of a cell phone falls The price of a cell phone is expected to fall next month. The price of a call from a cell phone falls. The price of a call from a land-line phone increases A. Event 1 B. Events 2, 3, and 4 C. Event 2 D. Events 1, 2, 3, and 4 E. Events 1, 3, and 4 CHECKPOINT 4.1

Practice Problem 4 Passenger numbers down International Air Transport Association reported that passenger numbers fell by 11 percent last month. What will be the impact of swine flu? Recovery of passenger numbers depends on a rise in consumer confidence and a return to increased consumer spending. In response to the fall in passenger numbers, airlines cut capacity. Source: The Nation, April 29, 2009 Explain the effect of each event on the demand for air travel. CHECKPOINT 4.1

Solution If people are worried about coming into contact with swine flu, they will cancel their travel plans. The demand for air travel will decrease. In the recovery, when consumer confidence and consumer spending increase, the demand for air travel will increase. The airlines’ response to cut capacity does not influence the demand for air travel. CHECKPOINT 4.1

Practice Problem 1 What is the effect of each of the following events on the supply of timber beams: The wage rate of sawmill workers rises. The price of sawdust rises. The price of a timber beam rises. The price of a timber beam is expected to rise next year. Congress to introduce a new law that reduces the amount of forest that can be cut for timber products. A new technology lowers the cost of producing a beam. CHECKPOINT 4.2

Solution A rise in sawmill workers’ wage rates decreases the supply of timber beams. A rise in the price of sawdust increases the supply of timber beams because sawdust and timber beams are complements in production. A rise in the price of a timber beam increases the quantity of timber beams supplied but has no effect on the supply of timber beams. CHECKPOINT 4.2

An expected rise in the price of a timber beam decreases the supply of timber beams as producers hold back and wait for the higher price. The new law that reduces the amount of forest that can be cut for timber products decreases the supply of timber beams. A new technology that lowers the cost of producing timber beams increases the supply of timber beams. CHECKPOINT 4.2

Study Plan Problem In the market for timber beams, when the wage rate paid to sawmill workers rises, ______. A. the quantity of timber beams supplied decreases B. the supply of timber beams increases C. the quantity of timber beams supplied increases D. the supply of timber beams decreases E. the quantity of timber beams supplied increases and the supply of timber beams also increases CHECKPOINT 4.2

Congress introduces a new law that reduces the amount of forest that can be cut for timber products. In the market for timber beams, A. the supply of timber beams decreases. B. the quantity of timber beams supplied increases and the supply of timber beams also increases C. the quantity of timber beams supplied decreases D. the supply of timber beams increases. E. the quantity of timber beams supplied increases CHECKPOINT 4.2

Practice Problem 2 Use a graph to illustrate the effect of each of the following events: The wage rate of sawmill workers rises. The price of sawdust rises. The price of a timber beam rises. The price of a timber beam is expected to rise next year. Congress to introduce a new law that reduces the amount of forest that can be cut for timber products. A new technology lowers the cost of producing a beam. CHECKPOINT 4.2

Solution An increase in the supply of timber beams as the shift of the supply curve rightward from S0 to S1 . A decrease in the supplyas the shift of the supply curve leftward from S0 to S2. CHECKPOINT 4.2

A rise in the price of a timber beam increases the quantity supplied and creates a movement along the supply curve S. CHECKPOINT 4.2

Practice Problem 3 Which events illustrate the law of supply? The wage rate of sawmill workers rises. The price of sawdust rises. The price of a timber beam rises. The price of a timber beam is expected to rise next year. Congress introduces a new law that reduces the amount of forest that can be cut for timber products. A new technology lowers the cost of producing a beam. CHECKPOINT 4.2

Solution A rise in the price of a timber beam(other things remaining the same), illustrates the law of supply. The figure illustrates the law of supply. The other events change supply and do not illustrate the law of supply. CHECKPOINT 4.2

Practice Problem 4 GM, UAW reach crucial cost-cutting pact General Motors has made a deal with the United Auto Workers to restructure the tasks that any worker can perform. This restructuring, with no change in the wage rate, will save GM $1 billion in labor costs a year. Source: TheWall Street Journal, May 22, 2009 Will this reduction of labor costs, with no change in the wage rate, change GM’s supply of vehicles? Explain your answer. CHECKPOINT 4.2

Solution The cut in labor costs with no change in the wage rate is an increase in productivity. An increase in productivity will increase GM’s supply of vehicles. CHECKPOINT 4.2

Practice Problem 1 The table shows the demand and supply schedules for milk. What is the equilibrium price and equilibrium quantity of milk? CHECKPOINT 4.3

Solution The equilibrium price is the price at which the quantity demanded equals the quantity supplied. The equilibrium price is $1.50 a carton. The equilibrium quantity is 150 cartons a day. CHECKPOINT 4.3

Practice Problem 2 The table shows the demand and supply schedules for milk. Describe the situation in the milk market if the price were $1.75 a carton and explain how the market reaches its new equilibrium. CHECKPOINT 4.3

Solution At $1.75 a carton, the quantity demanded (125 cartons) is less than the quantity supplied (170 cartons), so there is a surplus of 45 cartons a day. The price begins to fall, and as it does, the quantity demanded increases, the quantity supplied decreases, and the surplus decreases. CHECKPOINT 4.3 • The price will fall until the surplus is eliminated. The price falls to $1.50 a carton.

Study Plan Problem At $1.75 a carton, a _____exists. As the price _____, the quantity demanded _____ and the quantity supplied ____ . A. shortage; rises; decreases; increases B. shortage; rises; increases; decreases CHECKPOINT 4.3 C. surplus; falls; decreases; increases D. surplus; falls; increases; decreases

Practice Problem 3 The table shows the demand and supply schedules for milk. A drought decreases the quantity supplied by 45 cartons a day at each price. What is the new market equilibrium and how does the market adjust to it? CHECKPOINT 4.3

Solution The supply decreases by 45 cartons a day. At $1.50 a carton, the quantity demanded exceeds the quantity supplied, so there is a shortage of milk. As the price begins to rise, the quantity demanded decreases, the quantity supplied increases, and the shortage decreases. CHECKPOINT 4.3 • The price will rise until the shortage is eliminated. The price rises to $1.75 a carton.

Study Plan Problem The quantity supplied decreases by 45 cartons a day at each price. At the initial equilibrium price, there is a ________ of milk. The price _______ and the quantity demanded _______ as the market moves to its new equilibrium. A. surplus; rises; decreases B. surplus; falls; increases C. shortage; falls; decreases D. shortage; falls; increases E. shortage; rises; decreases CHECKPOINT 4.3

Practice Problem 4 The table shows the demand and supply schedules for milk. Milk becomes more popular and better feeds increase milk production. How do these events influence demand and supply? What is the new market equilibrium and how does the market adjust to it? CHECKPOINT 4.3

Solution When milk becomes more popular, demand increases. With better feeds, supply increases. If supply increases by more than demand, a surplus arises at $1.50. The price falls, and the quantity increases. CHECKPOINT 4.3

If demand increases by more than supply, a shortage arises. The price rises, and the quantity increases. If demand and supply increase by the same amount, there is no shortage or surplus and the price does not change but the quantity increases. CHECKPOINT 4.3

Study Plan Problem Milk becomes more popular and better feeds increase milk production. If supply changes by more demand changes, the equilibrium price of milk _____ and the equilibrium quantity of milk _____. A. falls; decreases B. falls; increases C. does not change; does not change D. rises; increases E. rises; decreases CHECKPOINT 4.3

Practice Problem 5 Summer’s here. So are higher gas prices The price of gasoline increased 15 percent in the past three weeks, mainly because of refinery shutdowns in the United States. As motorists increase their driving in the coming months, the price is predicted to rise further. Source: CNN Money, May 21, 2009 Explain why the price rose in the past 3 weeks and why it is expected to rise in the coming months. CHECKPOINT 4.3

Solution The shutdown of the refineries decreased the supply of gasoline. With no change in the demand, the price rose. When motorists increase their driving in the summer, the demand for gasoline increases. With no change in supply, the equilibrium price will rise further. CHECKPOINT 4.3

Demand and Supply