212 ? Chapter 4 /The Market Forces of Supply and Demand 3.
a. Given the table below, graph the demand and supply curves for flashlights. Make certain to
label the equilibrium price and equilibrium quantity. Quantity Demanded Per Month 6,000 8,000 10,000 12,000 14,000 Quantity Supplied Per Month 10,000 8,000 6,000 4,000 2,000 Price $5 $4 $3 $2 $1 b. What is the equilibrium price and the equilibrium quantity?
c. Suppose the price is currently $5. What problem would exist in the market? What would you
expect to happen to price? Show this on your graph.
d. Suppose the price is currently $2. What problem would exist in the market? What would you
expect to happen to price? Show this on your graph.
ANS:
a.
54.5priceSurplus of 4000SPe43.532.521.510.5100020003000400050006000700080009000100001100012000quantityShortage of 8000DQeb. The equilibrium price (Pe) is $4 and the equilibrium quantity (Qe) is 8,000.
c. A surplus of 4,000 flashlights would be the problem in the market, and we would expect the price
to fall.
d. A shortage of 8,000 flashlights would be the problem in the market, and we would expect the price
to rise.
DIF: 2 REF: 4-4 LOC: Supply and demand MSC: Applicative
NAT: Analytic
TOP: Equilibrium | Shortage | Surplus
Chapter 4 /The Market Forces of Supply and Demand ? 213
4.
Fill in the table below, showing whether equilibrium price and equilibrium quantity go up, go down, stay the
same, or change ambiguously.
No Change in Supply An Increase in Supply A Decrease in Supply No Change in Demand An Increase in Demand A Decrease in Demand No Change in Supply P same Q same P up Q up P down Q down An Increase in Supply P down Q up P ambiguous Q up P down Q ambiguous NAT: Analytic
TOP: Demand | Supply
A Decrease in Supply P up Q down P up Q ambiguous P ambiguous Q down ANS: No Change in Demand An Increase in Demand A Decrease in Demand DIF: 2 REF: 4-4 LOC: Supply and demand MSC: Interpretive
214 ? Chapter 4 /The Market Forces of Supply and Demand 5.
Suppose we are analyzing the market for hot chocolate. Graphically illustrate the impact each of the
following would have on demand or supply. Also show how equilibrium price and equilibrium quantity would change.
a. Winter starts and the weather turns sharply colder. b. The price of tea, a substitute for hot chocolate, falls. c. The price of cocoa beans decreases. d. The price of whipped cream falls.
e. A better method of harvesting cocoa beans is introduced.
f. The Surgeon General of the U.S. announces that hot chocolate cures acne.
g. Protesting farmers dump millions of gallons of milk, causing the price of milk to rise.
h. Consumer income falls because of a recession, and hot chocolate is considered a normal good. i. Producers expect the price of hot chocolate to increase next month. j. Currently, the price of hot chocolate is $0.50 per cup above equilibrium.
(a)
priceANS:
price (b)
SSPe'PePePe'DD'quantityD'DquantityQeQe'Qe'Qe
price (c)
price (d)
SS'SPe'PePe'DDquantityD'quantityPeQeQe'QeQe' (e) (f)
Chapter 4 /The Market Forces of Supply and Demand ? 215
pricepriceSS'SPe'PePe'DDquantityD'quantityPeQeQe'QeQe'
price (g)
price (h)
S'SSPePe'PeDD'quantityDquantityPe'Qe'QeQe'Qe
price (i)
price (j)
S'SSPe'PeDPe+$0.50PeSurplusDquantityQe'QeQdQeQsquantity
In (j), a price above equilibrium will affect both quantity demanded and quantity supplied and will cause a surplus in the market. It will not cause either demand or supply to shift.
DIF: 2 REF: 4-4 LOC: Supply and demand MSC: Applicative
NAT: Analytic
TOP: Demand | Supply
216 ? Chapter 4 /The Market Forces of Supply and Demand
Sec00 - The Market Forces of Supply and Demand
MULTIPLE CHOICE1.
The two words most often used by economists are
a. prices and quantities. b. resources and allocation. c. supply and demand. d. efficiency and equity.
DIF: 1 REF: 4-0
LOC: The study of economics and definitions of economics MSC: Definitional
ANS: C
NAT: Analytic TOP: Economists 2.
The forces that make market economies work are a. work and leisure. b. politics and religion. c. supply and demand.
d. taxes and government spending.
ANS: C DIF: 1 REF: 4-0 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Market economies MSC: Definitional
3.
In a market economy, supply and demand determine
a. both the quantity of each good produced and the price at which it is sold. b. the quantity of each good produced, but not the price at which it is sold.
c. the price at which each good is sold, but not the quantity of each good produced. d. neither the quantity of each good produced nor the price at which it is sold.
ANS: A DIF: 1 REF: 4-0 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Market economies MSC: Definitional
4.
In a market economy, supply and demand are important because they
a. play a critical role in the allocation of the economy’s scarce resources. b. determine how much of each good gets produced.
c. can be used to predict the impact on the economy of various events and policies. d. All of the above are correct.
ANS: D DIF: 1 REF: 4-0 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Market economies MSC: Definitional
5.
In a market economy,
a. supply determines demand and demand, in turn, determines prices. b. demand determines supply and supply, in turn, determines prices.
c. the allocation of scarce resources determines prices and prices, in turn, determine supply and
demand.
d. supply and demand determine prices and prices, in turn, allocate the economy’s scarce resources.
ANS: D DIF: 1 REF: 4-0 NAT: Analytic LOC: Markets, market failure, and externalities TOP: Market economies MSC: Definitional
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