Macroeconomics Campbell McConnell 21st Edition- Test Bank

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CHAPTER 3

Demand, Supply, and Market Equilibrium

1. Short-Answer, Essays, and Problems

1. Explain what is meant by a competitive market.

2. Define “demand.”

3. State the law of demand and explain why the other-things-equal assumption is critical to it.

4. Give three explanations for the law of demand.

5. Sue’s Shoe Shop is having a sale on shoes. The first pair of shoes is full price, the second is 25% off, and the third is 50% off. Describe how this sale relates to individual demand and marginal utility.

6. Suppose a producer sells 1000 units of a product at $5 per unit one year, 2000 units at $8 the next year, and 3000 units at $10 the third year. Is this evidence that the law of demand is violated? Explain.

7. Suppose the price of beef fell dramatically as the price of feed grain decreased. Use the income effect and the substitution effect to explain why there was an increase in the quantity of beef purchased.

8. The demand schedules of three individuals (Tom, Dick, and Harry) are shown. If they are the only three buyers of DVDs, complete the market demand schedule for DVDs. Graphically, is the market demand for a product the horizontal or vertical sum of the individual demand schedules?

	Quantity demanded, DVDs
Price	Tom	Dick	Harry	Total
$15.00	1	4	0	_____
13.00	3	5	1	_____
11.00	6	6	5	_____
9.00	10	7	10	_____
7.00	15	8	16	_____

9. List five basic determinants of market demand that could cause demand to decrease.

10. List five basic determinants of market demand that could cause demand to increase.

11. Differentiate between a normal (superior) and an inferior good.

12. Explain how the prices of related goods also affect demand.

13. Give examples of two substitute goods and two complementary goods. In each case explain why the goods are substitutes or complements.

14. What effect should each of the following have upon the demand for DVDs in a competitive market? Explain your reasoning in each case.

(a) the development of Blue-Ray Discs that compete with DVDs

(b) an increase in population and incomes

(d) consumer expectations of substantial price increases in DVDs

15. Evaluate how the following situations will affect the demand curve for iPods.

(a) Income statistics show that income of 18–25-year-olds have increased by 10 percent over the last year.

(b) Efforts of music artists wanting greater protection of their music result in more stringent enforcement of copyrights and the shutdown of numerous illegal downloading sites.

(c) Believing that it has significant control of the market for portable digital music players, Apple decides to raise the price of iPods with the goal of increasing profits.

(d) The price of movie tickets decreases.

16. What effect should each of the following have on the demand for gasoline in a competitive market? State what happens to demand. Explain your reasoning in each case and relate it to a demand determinant.

(a) an increase in the number of cars

(b) the economy moves into a recession

(d) consumer expectations of substantial price increases in gasoline

17. What is the difference between a change in demand and a change in quantity demanded?

18. Define “supply.”

19. Describe and give a reason for the law of supply.

20. List six basic determinants of market supply.

21. Newspaper item: “Due to lower grain prices, consumers can expect retail prices of choice beef to begin dropping slightly this spring with pork becoming cheaper after midsummer,” the Agriculture Department predicted. “This reflects increasing supply,” the department said. Does the statement use the term “supply” correctly? What effects might this announcement have on consumer demand? Explain.

22. Suppose the U.S. Congress is considering passing an excise tax that would increase the price of a pack of cigarettes by $1.00. What would be the likely effect of this change on the demand and supply of cigarettes? What is likely to happen to cigarette prices and the quantity consumed if the tax bill is enacted?

23. What is the difference between a change in supply and a change in quantity supplied?

24. What effect will each of the following have upon the supply of television sets in a competitive market? Explain your reasoning in each case.

(a) an increase in the price of electronic equipment used in producing television sets

(b) a decline in the number of firms producing television sets

(d) new inexpensive satellite dishes which make televisions more popular among consumers

25. What effect will each of the following most likely have on the supply of corn in a competitive market? State what happens to supply. Explain your reasoning in each case and relate it to a supply determinant.

(a) the development of an improved corn seed that resists drought conditions

(b) an increase in the price of soybeans which can also be planted on land used for growing corn

(d) an increase in the price of fertilizer

26. Economist Jones defines an increase in supply as a decrease in the prices needed to ensure various amounts of a good being offered for sale. Economist Brown defines an increase in supply as an increase in the amounts that producers will offer at various possible prices. Economist Cole defines an increase in supply as an increase in the amount firms will offer in the market which is caused by an increase in the price of the product. Which, if any, of these is defining an increase in supply correctly? Explain.

27. Assuming no government intervention, describe the market behavior that should result if the price of a product is below its equilibrium price; then describe the behavior that should occur if the price is above its equilibrium price.

28. Describe in words how one can recognize the market equilibrium point in a graph of a demand schedule and a supply schedule.

29. Using the schedules given, plot the demand curve and the supply curve on the below graph. Label the axes and indicate for each axis the units being used to measure price and quantity. Then answer the questions.

Price	Quantity demanded (bushels of oats)	Price	Quantity supplied (bushels of oats)
$1.50	10,000	$4.40	40,000
1.40	15,000	4.20	35,000
1.30	20,000	4.00	30,000
1.20	25,000	3.80	25,000
1.10	30,000	3.60	20,000
1.00	35,000	3.20	15,000

(a) Give the equilibrium price and quantity for oats.

(b) Indicate the equilibrium price and quantity on the graph by drawing lines from the intersection of the supply and demand curves to the price and quantity axes.

(c) If the Federal government decided to support the price of oats at $1.40 per bushel, tell whether there would be a surplus or shortage and how much it would be.

(d) Demonstrate your answer to part (c) on your graph being sure to label the quantity you designated as the shortage or surplus.

30. Using the schedules given, plot the demand curve and the supply curve on the below graph. Label the axes and indicate for each axis the units being used to measure price and quantity. Then answer the questions.

Price	Quantity demanded (bushels of wheat)	Price	Quantity supplied (bushels of wheat)
$4.20	125,000	$4.20	230,000
4.00	150,000	4.00	220,000
3.80	175,000	3.80	210,000
3.60	200,000	3.60	200,000
3.40	225,000	3.40	190,000
3.20	250,000	3.20	180,000
3.00	275,000	3.00	170,000

(a) Give the equilibrium price and quantity for wheat.

(b) Indicate the equilibrium price and quantity on the graph by drawing lines from the intersection of the supply and demand curves to the price and quantity axes.

(c) If the Federal government decided to support the price of wheat at $4.00 per bushel, tell whether there would be a surplus or shortage and how much it would be.

(d) Demonstrate your answer to part (c) on your graph being sure to label the quantity you designated as the shortage or surplus.

31. Is demand more important than supply in determining equilibrium price and quantity in a competitive market? Explain.

32. (Consider This) Depict graphically, then discuss the change in equilibrium for the following situation: Uber experiences increased demand for ride-sharing services during New York’s New Year’s Eve Celebration.

33. (Consider This) Graphically analyze the effect of Uber entering into the market for taxi services. In most cities taxi drivers face fixed fares and are unable to adjust their price. Discuss the effect this will have on demand for traditional taxi drivers.

34. What is productive efficiency and how does it differ from allocative efficiency?

35. What are the conditions necessary to produce neither an “underallocation” nor “overallocation” of resources?

36. In the space below each of the following, indicate the effect [increase (+), decrease (−)] on equilibrium price (P) and equilibrium quantity (Q) of each of these changes in demand and/or supply.

P Q

(a) Increase in demand, supply constant ________ ________

(b) Increase in supply, demand constant ________ ________

(d) Decrease in supply, demand constant ________ ________

37. In the spaces below each of the following, indicate the [increase (+), decrease (−), or indeterminant (?)] on equilibrium price (P) and equilibrium quantity (Q) of each of these changes in demand and/or supply.

P Q

(a) Increase in demand, increase in supply ________ ________

(b) Increase in demand, decrease in supply ________ ________

(d) Decrease in demand, increase in supply ________ ________.

38. In each case below, indicate the effect [increase (+); decrease (-); indeterminant (ind)] upon equilibrium price (P) and equilibrium quantity (Q) and illustrate the change graphically. Where you believe the effect is indeterminant, two graphical illustrations may be necessary to demonstrate your point.

P Q

(a) Increase in demand, supply constant ________ ________

(b) Decrease in supply, demand constant ________ ________

(d) Decrease in demand, increase in supply ________ ________

39. Given the products below and the events that affect them, indicate what happens to demand or supply, and the equilibrium price and quantity in a competitive market. Identify the determinant of demand or supply that causes the shift.

(a) Blue jeans. The wearing of blue jeans becomes less fashionable among consumers.

(b) Computers. Parts for making computers fall in price because of improvements in technology.

(d) Chicken. Beef prices rise because severe winter weather reduces cattle herds.

40. Given the products below and the events that affect them, indicate what happens to demand or supply, and the equilibrium price and quantity in a competitive market. Identify the determinant of demand or supply that causes the shift.

(a) Digital cameras. There are improvements in the technology that increase the economic efficiency of production.

(b) Automobiles. Consumer incomes rise as the economy moves out of recession.

(d) Fast-food meals. The government imposes a significant tax on fast-food meals.

41. Given the products below and the events that affect them, indicate what happens to demand, supply, equilibrium quantity, and equilibrium price in a competitive market. Identify the determinant of demand and supply that causes the shifts.

(a) Calculators. More schools require students to buy and use calculators; improved productivity shortens the time it takes to make calculators.

(b) Gasoline. Oil production declines due to a crisis in the Middle East; people take more car vacations and drive more.

(c) New homes. The average incomes fall as the economy moves into recession; the productivity of home construction workers and builders increases.

(d) Tobacco. The government cut its subsidy to tobacco farmers; more people quit smoking.

42. Given the products below and the events that affect them, indicate what happens to demand, supply, equilibrium quantity, and equilibrium price in a competitive market. Identify the determinant of demand and supply that causes the shifts.

(a) Home heating oil. There is a severe winter in the regions using the oil; the cost of a barrel of oil rises for producers of home heating oil.

(b) Organic foods. People become more concerned about chemical additives in food; traditional farms are switching to more organic methods.

(c) Film cameras. The price of digital cameras falls for consumers; there is a decline in the number of stores selling film cameras.

(d) Bread. Many consumers adopt a low carbohydrate diet and avoid bread products; the price of flour falls for bread producers.

43. (Consider This) Suppose a salsa manufacturers sells 1 million bottles of salsa at $4 a bottle in year 1; 2 million bottles at $5 in year 2; and 3 million bottles at $6 in year 3. Do these data show that the law of demand does not hold? Explain.

44. What is a price ceiling and what are its economic effects?

45. Use data in the table below to explain the economic effects of a price ceiling at $6, at $5, and at $4.

Price	Quantity demanded	Quantity supplied
$7.00	4500	4500
6.00	5000	3500
5.00	5500	2500
4.00	6000	1500

46. Use economic analysis to explain why tenants in New York City who are covered by rent-controlled laws do not want to move.

47. The city government recently implemented a price ceiling on the amount landlords can charge for rent. Your friend then complains “This will decrease the quantity of apartments supplied.” Evaluate this statement.

48. What is a price floor and what are its economic effects?

49. In the debate over passing a bill providing a minimum guaranteed price for corn, a congressman argued, “Minimum guaranteed prices always cause a disruption of the natural equilibrium of a market, ultimately costing taxpayers money.” Evaluate this statement.

50. Use data in the following table to explain the economic effects of a price floor at $8, at $9, and at $10. Explain the economic effects.

Price	Quantity demanded	Quantity supplied
$10.00	3000	7500
9.00	3500	6500
8.00	4000	5500
7.00	4500	4500

51. “Government-set prices undermine the rationing function of competitive prices.” Explain carefully in terms of both price ceilings and price floors.

52. Answer the following questions based on the supply and demand diagram below.

(a) What is the equilibrium price and quantity in the market?

(b) Discuss the market outcome if the government were to enforce a price floor of $3.00 in the market.

(d) How might the market respond to a binding price ceiling in this market?

53. (Last Word) Currently the federal U.S. government aims to make college more affordable by offering federal student loans at low interest rates. Discuss the effect this has had on tuition costs.

54. (Last Word) Rather than subsidizing federal student loans for students, how might the U.S. government use the supply of higher education to reduce the cost of attending college?

1. B. Answers to Short-Answer, Essays, and Problems

1. Explain what is meant by a competitive market.

A competitive market is an institution or mechanism which brings together large numbers of independently acting buyers and sellers who want to exchange some standardized product. If the product is not standardized, then the market is not “purely competitive,” although it may be very competitive. Examples of purely competitive markets are a central grain exchange, a stock market or a market for foreign currencies where there are many buyers and sellers acting independently.

2. Define “demand.”

Demand is a schedule which shows the various amounts of a product buyers are willing and able to purchase at each price in a series of possible prices during a specified period of time. Demand portrays alternative price/quantity possibilities which can be set down in a table. The key point to be recognized is that demand is more than a statement of quantity purchased at a certain price; it is a schedule of quantities which will be demanded at various prices, other things being equal, for a specified period of time.

3. State the law of demand and explain why the other-things-equal assumption is critical to it.

The law states that, other things being equal, as price increases, the corresponding quantity demanded falls. Restated, there is an inverse relationship between price and quantity demanded with everything else held constant. The other-things-equal assumption refers to constant prices of related goods, income, tastes, and other things that affect demand besides price. The law of demand only looks at the relationship between price and quantity demanded.

4. Give three explanations for the law of demand:

First, it is explained by common sense. People tend to buy more of a product at a lower price than at a higher price. Second, there is diminishing marginal utility: a decrease in satisfaction that results with an increase in the amounts of a good or service. The second unit of a good yields less satisfaction (or utility) than the first. Third, there are income and substitution effects. With an income effect, a lower price increases the purchasing power of money income, enabling you to buy more at lower price. With a substitution effect a lower price gives an incentive to substitute the lower-priced good for a now relatively high-priced good.

Diminishing marginal utility specifies that in a given time period, the buyer of a product will derive less satisfaction from each additional unit of consumed. Sue’s Shoe Shop is taking advantage of this knowledge by offering a lower price for each additional shoe purchased. An individual may only demand one pair of shoes at full price and decide not to buy the second or third pairs, but as the price of those falls individuals are willing and able to purchase additional shoes.

No. The law of demand shows the relationship between price and quantity demanded. In general, as price falls the quantity demanded will increase. One of the assumptions, however, is that all other things are equal or held constant. In this case, this assumption may have been violated and that is why it seems there is a positive relationship between price and quantity. The most likely explanation for the set of events is that demand for the product increased from one year to the next. IF that was true, then price would rise and the equilibrium quantity would increase.

The income effect predicts that the quantity of beef purchased will rise when beef prices fall because people will now be able to afford more. The purchasing power of their income rises when prices fall, assuming other things remain the same.

The substitution effect predicts that the lower price of beef will lead consumers of substitute foods such as chicken and pork to buy more of the relatively less expensive beef and to buy less chicken or pork or other beef substitutes whose prices have not fallen.

	Quantity demanded, DVDs
Price	Tom	Dick	Harry	Total
$15.00	1	4	0	_____
13.00	3	5	1	_____
11.00	6	6	5	_____
9.00	10	7	10	_____
7.00	15	8	16	_____

The market demand is the horizontal sum of the individual schedules.

	Quantity demanded, DVDs
Price	Tom	Dick	Harry	Total
$15.00	1	4	0	5
13.00	3	5	1	9
11.00	6	6	5	17
9.00	10	7	10	27
7.00	15	8	16	39

9. List five basic determinants of market demand that could cause demand to decrease.

(a) Consumers’ tastes become less favorable toward the item.

(b) The number of buyers decreases.

(d) A decrease in the price of a substitute product or an increase in the price of a complementary product.

(e) Consumers expect lower prices in the future.

10. List five basic determinants of market demand that could cause demand to increase.

(a) Consumers’ tastes become more favorable toward the item.

(b) The number of buyers increases.

(d) An increase in the price of a substitute product or a decrease in the price of a complementary product.

(e) Consumers expect higher prices in the future.

11. Differentiate between a normal (superior) and an inferior good.

A normal (superior) good is one whose demand varies directly with income as is true for most goods and services the more income one earns, the more one is willing and able to buy. However, there are exceptions, called inferior goods, whose demand varies inversely with income. Inferior goods are those whose demand increases when incomes fall and vice versa.

12. Explain how the prices of related goods also affect demand.

Substitute goods are those that can be used in place of each other. The price of the substitute and demand for the other good are directly related. If the price of Coke rises, demand for Pepsi should increase. Complementary goods are those that are used together like tennis balls and rackets. When goods are complements, there is an inverse relationship between the price of one and the demand for the other. Some goods are not related to each other and are independent goods. In these cases, a change in price of one will not affect the demand for the other.

13. Give examples of two substitute goods and two complementary goods. In each case explain why the goods are substitutes or complements.

The pair of substitute goods given should correspond to the explanation that they are substitutes because when the price of one changes, the demand for the other changes in the same direction. When the price of butter rises, one expects the demand for margarine to increase; when the price of butter falls, one expects the demand for margarine to fall as butter lovers switch back to butter consumption.

The pair of complementary goods should fit the explanation that they are complements because when the price of one changes, the demand for the other is inversely related. When the price of tennis equipment rises, the demand for tennis-club memberships should fall (if tennis playing is a normal good).

14. What effect should each of the following have upon the demand for DVDs in a competitive market? Explain your reasoning in each case.

(a) the development of Blue-Ray Discs that compete with DVDs

(b) an increase in population and incomes

(d) consumer expectations of substantial price increases in DVDs

(a) Would cause a decrease in demand for DVDs, Blue-Ray Discs are a substitute for DVDs.

(b) Would cause an increase in demand because there are more consumers and they have more income to spend. This assumes that DVDs are a normal good and more would be bought with higher incomes.

(d) Should increase current demand because consumer expectations about the future have changed and may prompt them to “buy now” to beat the future price increase.

15. Evaluate how the following situations will affect the demand curve for iPods.

(a) Income statistics show that income of 18–25-year-olds have increased by 10 percent over the last year.

(b) Efforts of music artists wanting greater protection of their music result in more stringent enforcement of copyrights and the shutdown of numerous illegal downloading sites.

(c) Believing that it has significant control of the market for portable digital music players, Apple decides to raise the price of iPods with the goal of increasing profits.

(d) The price of movie tickets decreases.

(a) Since 18–25-year-olds are the main users of portable digital music players, this will increase the demand for iPods (assuming iPods are a normal good). This will cause the demand curve to shift outward.

(b) These efforts raise the price of MP3s for music users that used to get their music for free from downloading services because they are now forced to purchase music through legal downloading sites. Since MP3s are a complementary good to iPods, the demand for iPods will decrease as a result of the artists’ lobbying efforts.

(c) A raise in price will not shift the demand curve for iPods. Rather, the higher price will simply discourage some consumers from purchasing one and demand for iPods will decrease along the demand curve to a lower quantity at the new price.

(d) Since movie tickets are unrelated to iPods, the decrease in the price of movie tickets will have no effect on the demand for iPods and the demand curve will remain the same.

(a) an increase in the number of cars

(b) the economy moves into a recession

(d) consumer expectations of substantial price increases in gasoline

(a) Demand would increase because there would be more buyers of gasoline. The additional buyers would come from the additional cars and trucks.

(b) Demand would decrease because consumer and business incomes would fall. Consumer and businesses would have less money to spend on gasoline.

(c) Demand would decrease because of increase in the price of complementary goods. Car insurance, car taxes, and car maintenance expenses are complements to gasoline.

(d) Current demand for gasoline would increase because consumer expectations about the future have changed and may prompt consumers to “buy now” to beat the future price increases.

17. What is the difference between a change in demand and a change in quantity demanded?

A change in demand is a shift in the entire demand curve either to the left (a decrease in demand) or to the right (an increase in demand). “Demand” refers to the entire schedule or curve. By contrast, a change in quantity demanded is a movement along an existing demand curve or schedule from one price-quantity combination to another. A change in product price causes the change in quantity demanded.

18. Define “supply.”

The definition of supply is very similar to that of demand. Supply is a schedule which shows the various amounts of a product sellers are willing and able to produce and offer for sale at each price in a series of possible prices during a specified period, other things being equal.

19. Describe and give a reason for the law of supply.

The law of supply indicates that producers will produce and sell more of their product at a high price than at a low price. This means that there is a direct relationship between price and quantity supplied. The basic explanation is that, given product costs, a higher price means greater profits and thus more incentive for business to increase the quantity supplied.

20. List six basic determinants of market supply.

Resource prices; (b) Changes in technology; (c) Taxes and subsidies; (d) Prices of other related goods; (e) Producer expectations; (f) Number of sellers

The announcement does use the term “supply” correctly because the drop in price predicted is a result of lower resource (grain) prices. This means that producers of beef and pork will lower prices for each quantity on the existing supply schedule assuming “all other things remain equal.”

Consumer demand at present might decrease as consumers wait to make big purchases of beef and pork in the future when prices are predicted to drop. By spring, if beef prices drop, there should be an increase in the quantity of beef demanded and probably a decrease in the demand for pork, which is a substitute for beef. By midsummer, if pork prices drop, there will be an increase in the quantity of pork demanded, and depending on what is then happening with beef prices, a decline in the demand for beef. If beef prices had continued to fall, it is hard to say whether there would be much of a change in demand due to the price of the substitute pork falling. More likely, there would be only a movement along the curve for beef if the price continued to fall.

In the short run, the excise tax would decrease the supply of cigarettes because in essence it increases the cost of production. The decrease in supply would increase the price of cigarettes and decrease the quantity of cigarettes consumed. The demand for cigarettes would not change, but the quantity demanded would decrease.

23. What is the difference between a change in supply and a change in quantity supplied?

A change in supply is a shift in the entire supply curve either to the left (a decrease in supply) or to the right (an increase in supply). A change in supply, therefore, is a change in the entire supply schedule or curve. In contrast, a change in quantity supplied is a movement along an existing supply curve or schedule from one price-quantity combination to another. A change in product price causes the change in quantity supplied.

24. What effect will each of the following have upon the supply of television sets in a competitive market? Explain your reasoning in each case.

(a) an increase in the price of electronic equipment used in producing television sets

(b) a decline in the number of firms producing television sets

(d) new inexpensive satellite dishes which make televisions more popular among consumers

(a) This should decrease the supply because a higher price must be charged for each quantity due to the rising price of resources. The supply curve will shift to the left.

(b) The outcome is indeterminant because we don’t know why the firms left the industry. Perhaps remaining firms are more efficient and will produce more. On the other hand, there may be just a few firms remaining and the resulting decline in competition could lead to higher prices for each quantity, or a decrease in supply.

(c) A higher tariff will cause a decrease in the supply of imported television sets because costs, i.e., taxes, have risen. Because the supply of imported TV sets is part of the total market supply, the effect is to decrease the market supply.

(d) New inexpensive satellite dishes should have no effect on the supply schedule. However, demand should increase resulting in a higher equilibrium price and greater quantity supplied. Note that supply does not shift, but that the quantity supplied changes.

(a) the development of an improved corn seed that resists drought conditions

(b) an increase in the price of soybeans which can also be planted on land used for growing corn

(d) an increase in the price of fertilizer

(a) The supply of corn will increase because of an improvement in the technology of corn production. More bushels of corn will be produced at each and every price.

(b) The supply of corn will decrease because of a change in the price of another good that can be produced. Some farmers will no longer use their land to grow corn, but instead will grow soybeans.

(c) The supply of corn will increase because of a government subsidy. The government payment reduces the costs of corn production at each and every price.

(d) The supply curve for corn will decrease because of a change in the price of a resource. Fertilizer is used to grow corn and it is now more costly to grow corn at each and every price.

Economists Brown and Jones are both correct. Brown recognizes that a shift in supply means greater quantities will be supplied at each of the various prices given for the original supply schedule. In other words, more will be supplied at each of the prices on the original schedule. Jones is correct if a decrease in prices would actually ensure the various amounts of a good being offered for sale at lower prices than the original. It is an equivalent statement to Brown’s. Cole is not correct. Cole is defining a change in the quantity supplied, or a movement along the supply curve, not an increase in supply.

If the price of a product is below its equilibrium price, the quantity demanded will be greater than the quantity supplied and the price will be bid up as buyers compete to obtain the product and sellers realize that they can raise the price. As the price rises, the quantity supplied will increase and the quantity demanded decrease until the two are equal at the so-called equilibrium or market-clearing price.

If the price of a product is above its equilibrium price, the quantity supplied will be greater than the quantity demanded and a temporary surplus exists. As sellers compete, the price will fall and the quantity demanded will increase and the quantity supplied will decrease until the two are equal at the equilibrium or market-clearing price.

28. Describe in words how one can recognize the market equilibrium point in a graph of a demand schedule and a supply schedule.

The market equilibrium point is the point where the demand curve intersects the supply curve. The quantity vertically below this point is the equilibrium quantity and the price horizontally opposite this point is the equilibrium price.

Price	Quantity demanded (bushels of oats)	Price	Quantity supplied (bushels of oats)
$1.50	10,000	$4.40	40,000
1.40	15,000	4.20	35,000
1.30	20,000	4.00	30,000
1.20	25,000	3.80	25,000
1.10	30,000	3.60	20,000
1.00	35,000	3.20	15,000

(a) Give the equilibrium price and quantity for oats.

(b) Indicate the equilibrium price and quantity on the graph by drawing lines from the intersection of the supply and demand curves to the price and quantity axes.

(c) If the Federal government decided to support the price of oats at $1.40 per bushel, tell whether there would be a surplus or shortage and how much it would be.

(d) Demonstrate your answer to part (c) on your graph being sure to label the quantity you designated as the shortage or surplus.

(a) The equilibrium price and quantity for oats will be $1.20 and 25,000 bushels.

(b) The equilibrium price and quantity on the graph are labeled P_e and Q_e.

(c) If the Federal government decided to support the price of oats at $1.40 per bushel, there would be a surplus of 35,000 − 15,000 = 20,000 bushels.

$1.00

$1.50

Q_e

P_e

Quantity (1000s)

Surplus

(d) See surplus labeled on figure.

Price	Quantity demanded (bushels of wheat)	Price	Quantity supplied (bushels of wheat)
$4.20	125,000	$4.20	230,000
4.00	150,000	4.00	220,000
3.80	175,000	3.80	210,000
3.60	200,000	3.60	200,000
3.40	225,000	3.40	190,000
3.20	250,000	3.20	180,000
3.00	275,000	3.00	170,000

(a) Give the equilibrium price and quantity for wheat.

(b) Indicate the equilibrium price and quantity on the graph by drawing lines from the intersection of the supply and demand curves to the price and quantity axes.

(c) If the Federal government decided to support the price of wheat at $4.00 per bushel, tell whether there would be a surplus or shortage and how much it would be.

(d) Demonstrate your answer to part (c) on your graph being sure to label the quantity you designated as the shortage or surplus.

(a) The equilibrium price and quantity for wheat will be $3.60 and 200,000 bushels.

(b) The equilibrium price and quantity on the graph are labeled Pe and Qe.

(c) If the Federal government decided to support the price of wheat at $4.00 per bushel, there would be a surplus of 220,000 − 150,000 = 70,000 bushels.

(d) See surplus labeled on figure.

31. Is demand more important than supply in determining equilibrium price and quantity in a competitive market? Explain.

Demand and supply are equally important. It is the intersection of the demand and supply curve that determines equilibrium price and quantity. Without demand or without supply there would be no intersection and no price determination.

During an event such as New York’s New Year’s Eve Celebration there is an increase in demand for ride-sharing services. This will shift the demand curve to the right at all price levels. The equilibrium price will rise, as will the equilibrium quantity. Uber increases their prices during periods of high demand to incentivize more drivers (the quantity supplied) to enter into the market.

The introduction of Uber drivers into the market for taxi services increases the number of sellers in the market, shifting the supply curve to the right. This drives down the equilibrium price in the market. Taxi fares are fixed and drivers are unable to respond to the decrease in equilibrium price. As a result, fewer people will demand the services of the taxi drivers, since their prices are high relative to those of the Uber drivers.

34. What is productive efficiency and how does it differ from allocative efficiency?

Productive efficiency is the production of a good in the least costly way. It includes using the best, most effective technology and mix of productive resources. Allocative efficiency deals with the mix of products produced, rather than the resources used to produce them. To achieve allocative efficiency, the particular mix of products produced should be those most highly valued by society.

35. What are the conditions necessary to produce neither an “underallocation” nor “overallocation” of resources?

To achieve the proper allocation of resources, the marginal benefit of producing a good must equal the marginal cost of producing the good. If the MB is greater than the MC, society could gain in utility by producing more of the good. If MC is greater than MB, society could gain in utility by producing less of the good. Thus, utility is maximized when MB = MC.

P Q

(a) Increase in demand, supply constant ________ ________

(b) Increase in supply, demand constant ________ ________

(d) Decrease in supply, demand constant ________ ________

(a) +, +; (b) −, +; (c) −, −; (d) +, −

P Q

(a) Increase in demand, increase in supply ________ ________

(b) Increase in demand, decrease in supply ________ ________

(d) Decrease in demand, increase in supply ________ ________

(a) ?, +; (b) +, ?; (c) ?, −; (d) −, ?

P Q

(a) Increase in demand, supply constant ________ ________

(b) Decrease in supply, demand constant ________ ________

(d) Decrease in demand, increase in supply ________ ________

(a) +, −; (b) +, −; (c) ind, −; (d) −, ind

(a) Blue jeans. The wearing of blue jeans becomes less fashionable among consumers.

(b) Computers. Parts for making computers fall in price because of improvements in technology.

(d) Chicken. Beef prices rise because severe winter weather reduces cattle herds.

(a) Demand for blue jeans decreased because of a decline in buyer tastes for blue jeans, thus decreasing the equilibrium price and quantity.

(b) Supply of computers increases because of an improvement in technology, thus decreasing the equilibrium price and increasing the equilibrium quantity.

(c) Supply of lettuce decreases because of a fall in the number of suppliers, thus increasing the equilibrium price and decreasing the equilibrium quantity.

(d) Demand for chicken increases because of an increase in the price of a substitute food (beef prices rose because of a supply decrease), thus increasing the equilibrium price and quantity.

(a) Digital cameras. There are improvements in the technology that increase the economic efficiency of production.

(b) Automobiles. Consumer incomes rise as the economy moves out of recession.

(d) Fast-food meals. The government imposes a significant tax on fast-food meals.

(a) The supply of digital cameras will increase because this change in technology lowers production costs, thus decreasing the equilibrium price and increasing equilibrium quantity.

(b) The demand for automobiles will increase because of an increase in consumer incomes, thus increasing the equilibrium price and quantity.

(c) The demand for beef will decrease because chicken and beef are substitutes. A fall in the price of chicken encourages more consumers to buy chicken, and thus buy less beef. The change decreases the equilibrium price and quantity of beef.

(d) The supply will decrease because the tax increases the cost of producing the meals, thus increasing the equilibrium price and decreasing the equilibrium quantity.

(a) Calculators. More schools require students to buy and use calculators; improved productivity shortens the time it takes to make calculators.

(b) Gasoline. Oil production declines due to a crisis in the Middle East; people take more car vacations and drive more.

(c) New homes. The average incomes fall as the economy moves into recession; the productivity of home construction workers and builders increases.

(d) Tobacco. The government cut its subsidy to tobacco farmers; more people quit smoking.

(a) The demand for calculators increases because of an increase in the number of buyers. The supply of calculators increases because of a fall in resource prices (productivity reduces resource costs). The equilibrium quantity increases, but what happens to the equilibrium price is indeterminant and depends on the magnitudes of the shifts.

(b) The supply of gasoline increases because of a rise in resource price (oil prices increase due to a cutback in production). The demand for gasoline increases due to an increase in the taste for taking driving vacations. The equilibrium price increases, but what happens to the equilibrium quantity is indeterminant and depends on the magnitudes of the shifts.

(c) The demand for new homes decreases because of a decline in consumer incomes. The supply of new homes increases because of a fall in the price of labor resources (productivity increases reduce resource costs). The equilibrium price decreases, but what happens to the equilibrium quantity is indeterminant and depends on the magnitudes of the shifts.

(d) The supply of tobacco decreases because of a cut in government subsidies for tobacco. The demand for tobacco decreases due to a decline in the taste for smoking tobacco. The equilibrium quantity decreases, but what happens to the equilibrium price is indeterminant and depends on the magnitudes of the shifts.

(a) Home heating oil. There is a severe winter in the regions using the oil; the cost of a barrel of oil rises for producers of home heating oil.

(b) Organic foods. People become more concerned about chemical additives in food; traditional farms are switching to more organic methods.

(c) Film cameras. The price of digital cameras falls for consumers; there is a decline in the number of stores selling film cameras.

(d) Bread. Many consumers adopt a low carbohydrate diet and avoid bread products; the price of flour falls for bread producers.

(a) The demand for home heating oil increases because of an increase in the number of buyers. The supply of home heating oil decreases because of an increase in resource prices. The equilibrium price increases, but what happens to the equilibrium quantity is indeterminant and depends on the magnitudes of the shifts.

(b) The demand for organic food increases because of an increase in consumer taste or preference for organic food. The supply of organic food increases because of an increase in the number of producers or sellers. The equilibrium quantity increases, but what happens to the equilibrium price is indeterminant and depends on the magnitudes of the shifts.

(c) The demand for film cameras decreases because of a decrease in the price of a substitute (digital cameras). The supply of film cameras decreases because of a decrease in the number of sellers. The equilibrium quantity decreases, but what happens to the equilibrium price is indeterminant and depends on the magnitudes of the shifts.

(d) The demand decreases because of a change in consumer tastes or preferences for bread. The supply of bread increases because of a fall in a resource price (flour). The equilibrium price decreases, but what happens to the equilibrium quantity is indeterminant and depends on the magnitudes of the shifts.

The law of demand says that as price rises, the quantity consumed should decline assuming that all other things remain constant. In the case of salsa, the reason that quantity consumed increases with price over time is that there has been a change in tastes and preference for salsa over time. As people desire and use more salsa, this change in tastes and preferences increases the demand for salsa, which in turn increases the quantity of salsa consumed and the price of a bottle of salsa. The law of demand is not violated, but what has changed is there has been an increase in the demand for salsa.

44. What is a price ceiling and what are its economic effects?

A price ceiling means that the price is not allowed to rise above the maximum price set by government. If the price ceiling is set below the equilibrium price in a market, then there will be a shortage of the product at the government-set price. A price ceiling interferes with the rationing function of price that serves to balance the decisions of suppliers and demanders. The shortage indicates that resources are being underallocated to the production of this product and that there is economic inefficiency. Less output is being produced than consumers want. This output is not being produced because some producers cannot make a profit at the price ceiling level.

45. Use data in the table below to explain the economic effects of a price ceiling at $6, at $5, and at $4.

Price	Quantity demanded	Quantity supplied
$7.00	4500	4500
6.00	5000	3500
5.00	5500	2500
4.00	6000	1500

A price ceiling means that the price will not be permitted to rise above a maximum price. If the price ceiling is below the competitive equilibrium price of $7, it would produce a shortage of the product. For example, if the price ceiling was set at $6, the quantity demanded would be 5000 units and the quantity supplied would be 3500 for a shortage of 1500 units. With a price ceiling set at $5, the shortage would be 3000 units, and with a price ceiling of $4, the shortage would be 4500 units. A price ceiling interferes with the rationing function of price that serves to balance the decisions of demanders and suppliers. The price ceiling produces a shortage that indicates that resources are being underallocated; output is not being produced because some producers cannot make a profit at the price ceiling level.

46. Use economic analysis to explain why tenants in New York City who are covered by rent-controlled laws do not want to move.

The tenants obtain the rights to the apartment at the rent-controlled price. The rent-controlled price is far below the market price for such an apartment. If they move out, they will have to pay market rates for an apartment that can be thousands of dollars higher per month.

When responding to your friend you should first explain that the price ceiling will only influence the market if it is binding, or set below the equilibrium price. If the price ceiling is set above the equilibrium price the market will remain in equilibrium. If the price ceiling be binding, you should explain that the decreased price will not only result in a decrease in the quantity supplied, but an increase in the quantity demanded. The result will be a shortage in the market for apartments.

48. What is a price floor and what are its economic effects?

A price floor means that the price is not allowed to fall below a minimum price set by government. If the price floor is set above the equilibrium price in a market, then there will a surplus of the product. A price floor interferes with the rationing function of price that serves to balance the decisions of suppliers and demanders. The surplus indicates that resources are being overallocated to the production of this product and that there is economic inefficiency; output is being produced which consumers do not want to purchase at the price floor.

The congressman’s statement is not completely correct. If a price floor is set above the equilibrium price, then the market equilibrium will be disrupted. This disruption will cost consumers money, forcing them to pay higher prices for goods and resulting in a misallocation of resources.

However, should the price floor be set below or at the equilibrium price, the market will be able to reach its natural equilibrium, resources will be properly used and inefficiency will not result. Thus, the congressman is only in part correct.

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