market
A o
competitive market with many buyers and sellers trading identical products so that each buyer and seller is a price taker.
o
complements
Two goods for which an increase in the price of one leads to a decrease in the demand for the other.
o
demand curve
A graph of the relationship between the price of a good and the quantity demanded.
o
demand schedule
A table that shows the relationship between the price of a good and the quantity demanded.
o
equilibrium
A situation in which the market price has reached the level at which quantity supplied equals quantity demanded.
o
equilibrium price
The price that balances quantity supplied and quantity demanded.
o
equilibrium quantity
The quantity supplied and the quantity demanded at the equilibrium price.
o
inferior good
A good for which, other things equal, an increase in income leads to a decrease in demand.
o
law of demand
The claim that, other things equal, the quantity demanded of a good falls when the price of the good rises.
o
law of supply
The claim that, other things equal, the quantity supplied of a good rises when the price of the good rises.
o
law of supply and demand
The claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that
good into balance.
o
market
A group of buyers and sellers of a particular good or service.
o
normal good
A good for which, other things equal, an increase in income leads to an increase in demand.
o
quantity demanded
The amount of a good that buyers are willing and able to purchase.
o
quantity supplied
The amount of a good that sellers are willing and able to sell.
o
shortage
A situation in which quantity demanded is greater than quantity supplied.
o
substitutes
Two goods for which an increase in the price of one leads to an increase in the demand for the other.
o
supply curve
A graph of the relationship between the price of a good and the quantity supplied.
o
supply schedule
A table that shows the relationship between the price of a good and the quantity supplied.
o
surplus
A situation in which quantity supplied is greater than quantity demanded.
The Market Forces of Supply and Demand
Chapter Recap: Questions for Review
1.
What is a competitive market? Briefly describe a type of market that is not perfectly competitive.
2.
What are the demand schedule and the demand curve and how are they related? Why does the
demand curve slope downward?
3.
Does a change in consumers' tastes lead to a movement along the demand curve or a shift in the
demand curve? Does a change in price lead to a movement along the demand curve or a shift in the
demand curve?
4.
Popeye's income declines, and as a result, he buys more spinach. Is spinach an inferior or a normal
good? What happens to Popeye's demand curve for spinach?
5.
What are the supply schedule and the supply curve and how are they related? Why does the supply
curve slope upward?
6.
Does a change in producers' technology lead to a movement along the supply curve or a shift in
the supply curve? Does a change in price lead to a movement along the supply curve or a shift in the
supply curve?
7.
Define the equilibrium of a market. Describe the forces that move a market toward its equilibrium.
8.
Beer and pizza are complements because they are often enjoyed together. When the price of beer
rises, what happens to the supply, demand, quantity supplied, quantity demanded, and the price in the
market for pizza?
9.
Describe the role of prices in market economies.
Chapter Recap: Problems and Applications
1.
Explain each of the following statements using supply-and-demand diagrams.
a. "When a cold snap hits Florida, the price of orange juice rises in supermarkets throughout the
country."
b. "When the weather turns warm in New England every summer, the price of hotel rooms in
Caribbean resorts plummets."
c. "When a war breaks out in the Middle East, the price of gasoline rises, and the price of a used
Cadillac falls."
2.
"An increase in the demand for notebooks raises the quantity of notebooks demanded but not the
quantity supplied." Is this statement true or false? Explain.
3.
Consider the market for minivans. For each of the events listed here, identify which of the
determinants of demand or supply are affected. Also indicate whether demand or supply increases or
decreases. Then draw a diagram to show the effect on the price and quantity of minivans.
a. People decide to have more children.
b. A strike by steelworkers raises steel prices.
c. Engineers develop new automated machinery for the production of minivans.
d. The price of sports utility vehicles rises.
e. A stock-market crash lowers people's wealth.
2.
3.
Identify the flaw in this analysis: "If more Americans go on a low-carb diet, the demand for bread
will fall. The decrease in the demand for bread will cause the price of bread to The fall. lower price,
however, will then increase the demand. In the new equilibrium, Americans might end up consuming
more bread than they did initially."
Consider the markets for DVD movies, TV screens, and tickets at movie theaters.
a. For each pair, identify whether they are complements or substitutes:
aADVDs
and TV screens
bA DVDs
and movie tickets
cA TV screens and movie tickets
b. Suppose a technological advance reduces the cost of manufacturing TV screens. Draw a
diagram to show what happens in the market for TV screens.
c. Draw two more diagrams to show how the change in the market for TV screens affects the
markets for DVDs and movie tickets.
2.
Over the past 20 years, technological advances have reduced the cost of computer chips. How do
you think this affected the market for computers? For computer software? For typewriters?
3.
Using supply-and-demand diagrams, show the effect of the following events on the market for
sweatshirts.
a. A hurricane in South Carolina damages the cotton crop.
b. The price of leather jackets falls.
c. All colleges require morning exercise in appropriate attire.
d. New knitting machines are invented.
2.
A survey shows an increase in drug use by young people. In the ensuing debate, two hypotheses
are proposed:
o
Reduced police efforts have increased the availability of drugs on the street.
o
Cutbacks in education efforts have decreased awareness of the dangers of drug addiction.
a.
Use supply-and-demand diagrams to show how each of these hypotheses could lead to an
increase in quantity of drugs consumed.
b.
How could information on what has happened to the price of drugs help us to distinguish
between these explanations?
2.
Suppose that in the year 2010 the number of births is temporarily high. How does this baby boom
affect the price of babysitting services in 2015 and 2025? (Hint: 5-year-olds need babysitters, whereas
15-year-olds can be babysitters.)
3.
Ketchup is a complement (as well as a condiment) for hot dogs. If the price of hot dogs rises, what
happens to the market for ketchup? For tomatoes? For tomato juice? For orange juice?
4.
The market for pizza has the following demand and supply schedules:
Price
Quantity Demanded
Quantity Supplied
$4
135 pizzas
26 pizzas
5
104
53
6
81
81
7
68
98
8
53
110
9
39
121
a.
b.
If the actual price in this market were above the equilibrium price, what would drive the
market toward the equilibrium?
c.
2.
Graph the demand and supply curves. What is the equilibrium price and quantity in this
market?
If the actual price in this market were below the equilibrium price, what would drive the
market toward the equilibrium?
Consider the following events: Scientists reveal that consumption of oranges decreases the risk of
diabetes and, at the same time, farmers use a new fertilizer that makes orange trees more productive.
Illustrate and explain what effect these changes have on the equilibrium price and quantity of oranges.
3.
Because bagels and cream cheese are often eaten together, they are complements.
a.
b.
2.
We observe that both the equilibrium price of cream cheese and the equilibrium quantity of
bagels have risen. What could be responsible for this patterna fall in the price of flour or a fall in
the price of milk? Illustrate and explain your answer.
Suppose instead that the equilibrium price of cream cheese has risen but the equilibrium
quantity of bagels has fallen. What could be responsible for this patterna rise in the price of flour
or a rise in the price of milk? Illustrate and explain your answer.
Suppose that the price of basketball tickets at your college is determined by market forces.
Currently, the demand and supply schedules are as follows:
Price
Quantity Supplied
$4
10,000 tickets
8,000 tickets
8
8,000
8,000
12
6,000
8,000
16
4,000
8,000
20
a.
Quantity Demanded
2,000
8,000
Draw the demand and supply curves. What is unusual about this supply curve? Why might
this be true?
b.
c.
What are the equilibrium price and quantity of tickets?
Your college plans to increase total enrollment next year by 5,000 students. The additional
students will have the following demand schedule:
Price
Quantity Demanded
$4
4,000 tickets
8
3,000
12
2,000
16
1,000
20
0
3.
Now add the old demand schedule and the demand schedule for the new students to calculate the
new demand schedule for the entire college. What will be the new equilibrium price and quantity?
2.
Market research has revealed the following information about the market for chocolate bars: The
demand schedule can be represented by the equation QD = 1,600 300P, where QD is the quantity
demanded and P is the price. The supply schedule can be represented by the equation QS = 1,400 +
700P, where QS is the quantity supplied. Calculate the equilibrium price and quantity in the market for
chocolate bars.