Selected Questions and Answers

1. Selected Questions and Answers Supply and Demand

2. Draw graphs to explain the difference between an increase in demand and an increase in quantity demanded. • A shift in the position of a demand curve is a change in demand; a movement from one point to another point along an unchanged demand curve is a change in the quantity demanded.

3. Comment on the following quotation from a business owner: "We lowered our prices so the demand for our goods increased." • A lower price causes an increase in the quantity demanded.  It does not cause an increase in demand.

4. What is a Normal good ? And an Inferior good ? • If a rise in income raises the demand for a good, then it is a Normal good. If a rise in income reduces the demand for a good, then it is an Inferior good.

5. What happens to the demand for a good if the price of a Substitute for it rises ? • Let’s have coffee and tea, substitute goods. Then, when the price of coffee rise, the demand for tea will rise since some people will switch demand from coffee to tea.

6. What happens to the demand for a good if the price of a Complement for it rises ? • Let’s have cars and tires, complement goods. If the price of cars rises, the demand for tires will decrease.

7. Draw graphs to explain the difference between a change in supply and a change in the quantity supplied. • See this change in supply  and this change in the quantity supplied

8. What’s an Equilibrium? • An Equilibrium occurs when the Supply and Demand curves intersect. A market equilibrium is a situation in which the quantity supplied equals the quantity demanded.

9. Why does Excess Demand tend to raise the price of a good while Excess of Supply tend to reduce prices? • Excess Demand is a situation in which the quantity demanded exceeds the quantity supplied. This situation is created when prices are below the equilibrium. Thus, price tends to rise until it reaches the equilibrium where the quantity demanded equals the quantity supplied. • Excess Supply is a situation in which the quantity supplied exceeds the quantity demanded, that happens when prices are above the equilibrium. Therefore, price tends to reduce until it reaches the equilibrium.

10. How does an increase in Demand affect the equilibrium price and the quantity traded ? How does an increase in Supply affect the equilibrium price and quantity traded? • An increase in Demand raises both equilibrium prices and quantity demanded. An increase in Supply lowers the equilibrium price and raises quantity demanded.

11. Translate the following newspaper headlines in to statements about supply and demand:a. Sweets Cost More Due to Sugar Price Rise b. Pork Prices Rise as Farmers Cut Output c. Profits From Popcorn Attract More Farmers • a. Sugar is an input into producing sweets (candy, cakes, cookies, and so on).  When the price of sugar rises, the cost of producing sweets increases, causing a decrease in the supply of sweets.  This raises the price of sweets as in this graph. • b. The cut in output means a decrease in the supply of pork, which raises the price (same graph as part "a") • c. More popcorn farmers means an increase in the supply of popcorn, which will reduce its price as in this graph.(Note that the fall in the price of popcorn will tend to reduce the profits from selling it.)

12. A national newspaper reported: "Increased retail demand for roasted and ground coffee because of lower prices... has contributed to a higher price for coffee." What's wrong with this reasoning? • This confuses a change in demand with a change in the quantity demanded.  Lower coffee prices do not cause "increased retail demand," though an increase in the supply of coffee would reduce its price and cause an increase in the quantity of coffee demanded.   If coffee prices later increased, that must result from some other change, such as a later increase in the price of shipping coffee beans from South America, or a change in consumer tastes that increases the demand for coffee.

13. A change in the price of one good can affect demand and supply of other goods. a. How is an increase in the price of bologna likely to affect the price of peanut butter and the amount of peanut butter that people buy? b. How is an increase in the price of charcoal grills likely to affect the price of charcoal and the amount of charcoal that people buy? • a. Bologna and peanut butter are substitutes, so an increase in the price of bologna increases the demand for peanut butter, raising the equilibrium quantity (which is the amount that people buy) and price of peanut butter. • b. Charcoal grills and charcoal are complements, so an increase in the price of grills decreases the demand for charcoal, reducing the equilibrium quantity and price of charcoal.

14. Discuss this statement: "They're building too many hotels in this city. They think this town will become a big convention city. If they're wrong, we will have too many hotels and loads of empty rooms. It'll cost more to spend a night in a hotel here because the hotels will charge more to make up for all the empty rooms." • The increase in supply of hotel rooms will cause prices of hotel rooms to fall, not to rise (as in this graph).  If there are empty hotel rooms, the hotels with those empty rooms will lose money on the.  If the hotels tried to charge more for the rooms, there would be a surplus and the price would fall toward its equilibrium

15. Suppose that a genetically engineered hormone were to raise the milk output of cows by 40 percent. How would this affect the price of milk, the quantity of milk produced, and the number of dairy farmers. • This change in technology would increase the supply of milk, which would reduce the price of milk and raise the equilibrium quantity.  If the price of milk falls by a lot, then profits of dairy farmers would fall, so some would leave the business, reducing the number of dairy farmers.   If the price of milk falls only by a small amount, then profits of dairy farmers would increase (because each farmer produces 40 percent more milk with the same number of cows); these higher profits would induce more people to become dairy farmers.

16. Read the following news headlines and excerpts and interpret them in terms of supply and demand: a. "Prices Soar as Everyone wants Beanie Babies." b. "Crude Oil, Petroleum Product prices Rise after Explosion at Large Shell Refinery..." c. "Digital Camera Prices Fall as More People Buy, Contradicting the Law of Supply and Demand" d. "Computer Prices Fall Again as Chip technology Improves" e. "Tuition Rises and College Enrollments Fall" f.  "Demand is increasing moderately, but with yields per acre rising, farmers have seen little change in prices." • See next slide for answers …

17. a.  Demand for Beanie Babies increases, raising their prices. see graphb.  The explosion (which really happened -- these headlines are real) decreases the supply of crude oil and petroleum products, raising their prices.  see graphc.  Supply of digital cameras increases, lowering their prices.  see graphd.  Supply of computers increases, lowering their prices.  see graphe.  Supply of college services decreases, raising the price. see graphf.  Demand and supply both increase, with little change in price.

19. Increase in Quantity Demanded Price Quantity

20. Change in Quantity Demanded Price Quantity

21. Decrease in Quantity Demanded Price Quantity

22. Increase in Quantity Supplied Price Quantity

23. Decrease in Quantity Supplied Price Quantity

24. Change in Quantity Supplied Price Quantity

25. Increase in Demand Price Quantity

26. Decrease in Demand Price Quantity

27. Increase in Supply Price Quantity

28. Decrease in Supply Price Quantity

29. Decrease in Supply  new equilibrium Price Quantity

30. Increase in Supply  new equilibrium Price Quantity

31. Increase in Demand  new equilibrium Price Quantity

32. Decrease in Demand  new equilibrium Price Quantity

33. Change in Demand Price Quantity

34. Change in Supply Price Quantity