SUPPLY AND DEMAND, Study notes of French

Download SUPPLY AND DEMAND and more Study notes French in PDF only on Docsity! Chapter 4 – Supply and Demand 1 Chapter 4 SUPPLY AND DEMAND Macroeconomics In Context (Goodwin, et al.) Chapter Overview In this chapter, you’ll find the basics of supply and demand analysis. As you work through this chapter, you will start learning how to manipulate supply and demand curves as a way to analyze the relationships among prices, volume of production, and other factors. You will learn about the various factors that can shift a supply or demand curve up or down, the concepts of equilibrium and market adjustment and the concept of elasticity. You will also be asked to consider how supply and demand analysis may or may not be useful in explaining macroeconomic phenomena. Objectives After reading and reviewing this chapter, you should be able to: 1. Understand the characteristics of the market theorized in the Classical model. 2. Interpret supply and demand curves. 3. Understand the difference between a change in supply (demand) and a change in the quantity supplied (demanded). 4. Describe some changes that would cause a shift in a supply curve, or a demand curve. 5. Explain how price adjusts due to changes in supply and demand. 6. Identify what is meant by the “price elasticity” of demand (supply). 7. Appreciate the usefulness and limitations of the theory of supply and demand in the real world, and its relevance to macroeconomics. Key Terms perfectly competitive markets self-correcting market supply curve change in quantity supplied change in supply demand curve change in quantity demanded change in demand substitute good complementary good surplus equilibrium market-clearing equilibrium shortage theory of market adjustment market disequilibrium price elasticity price elasticity of demand price elasticity of supply quantity adjustments menu costs speculation speculative bubble Chapter 4 – Supply and Demand 2 Active Review Fill in the Blank 1. Assume that in the market for tulips, there are hundreds of buyers and sellers of tulips, all of the tulips are identical, and it is extremely easy for anyone to become a tulip farmer and sell tulips. This market would most likely be characterized as a market. 2. You go to your local farmer’s market to buy some fresh bread, which you plan to go home and eat right away. This market would be characterized as a market. 3. A curve indicating the quantities that buyers are willing to purchase at various prices is known as a(n) curve. 4. You notice that when the price of gasoline goes up in your town, people buy less gasoline. Assuming that nothing else has changed, this would be described by economists as a change in . 5. Tabitha needs furniture for her room. She is deciding between a medium-sized couch and a large armchair. Either the couch or the armchair could fulfill her need for sitting space in the room. The couch and the armchair can be referred to as goods. 6. When people eat french fries, they like to put ketchup on them. Due to an increase in the price of french fries, total sales of french fries decrease. At the same time, ketchup sales also decrease. This phenomenon can be explained by noting that french fries and ketchup are goods. 7. Surplus and shortage are both instances of . 8. A curve indicating the quantities that sellers are willing to offer at various prices is known as a(n) curve. 9. In general, in a basic model showing supply and demand, if the supply curve shifts to the right, equilibrium price will ____________ and equilibrium quantity will ___________. 10. Henry notices that when the price of bread goes up by 10%, the quantity demanded falls only slightly. To measure by how much quantity demanded falls, Henry should use the of demand. 11. When people rush to buy an asset because they expect the price to continue to rise and thereby expect to profit from the asset’s appreciation in value, this can cause the emergence of a . Chapter 4 – Supply and Demand 5 P ri c e o f H a rd c o v e r D ic ti o n a ri e s 2. The following graph shows supply and demand for hardcover unabridged English dictionaries. Suppose that a new dictionary resource is created on the Internet, decreasing people’s interest in buying large dictionaries in book form. For the questions below, state the answer in words and, where relevant, diagram your answer. S D Quantity of Hardcover Dictionaries a. What happens to the demand curve for hardcover dictionaries, as a result of this Internet innovation? (Answer in words and diagram.) b. What happens to the supply curve as a result of the Internet innovation? (Answer in words and diagram.) c. What happens to the price of hardcover dictionaries as a result of the innovation? Show the new price level on the graph you drew for part (b). 3. Refer again to the graph above, showing the market for hardcover dictionaries. What are the two types of change in this market that would lead the equilibrium price to rise? 4. In a popular new movie, a central character spends much of his time sitting on a white deck chair. Suddenly, white deck chairs come into fashion and everybody wants one. The graph below shows the market for deck chairs before the movie came out. Chapter 4 – Supply and Demand 6 P ri c e o f d e c k c h a ir s S D Quantity of deck chairs a. On the diagram above, show what happens to the market for deck chairs as a result of the movie. b. Show the size of the shortage that exists in the short term, before the market adjusts to equilibrium. c. Label the new equilibrium point as E2. 5. Using the same example of the market in white deck chairs, describe and, on separate graphs, show the changes in equilibrium price and quantity that would occur in response to the following events. a. A key input for making deck chairs becomes more expensive (ceteris paribus). b. In a highly publicized event, someone falls off a poorly constructed deck chair and sustains a serious head injury (ceteris paribus). Chapter 4 – Supply and Demand 7 P ri ce o f A p ar tm en ts ( in $ 1 0 0 0 s) Self Test 1. Which of the following is a characteristic of the sort of market imagined by classical macroeconomists? a. A market with speculation b. A market with only one seller c. A market with long-term contracts d. A double auction market e. A long supply-chain market 2. Which of the following is true for a “self-correcting” market? a. The government sets the price and the market respects that decision. b. Imbalances between buyers and sellers are automatically reduced through changes in prices c. Sellers use their market power to set prices high and persistent surpluses are the result. d. Buyers use their market power to set prices low and persistent shortages are the result. e. Sellers use their market power to set prices high and persistent shortages are the result. Questions 3 to 5 refer to the following graph: The Supply Curve for Apartments 101 100 99 98 97 96 95 94 93 92 91 90 89 S 0 1 2 3 4 5 6 7 8 9 10 11 Quantity of Apartments Chapter 4 – Supply and Demand 10 P ri ce o f S o fa s ($ ) Question #9 refers to the following graph: 50 45 40 35 30 D1 25 D2 20 0 5 10 15 20 25 Quantity of Sofas 9. Assume that sofas and arm chairs are substitute goods. The graph shown above illustrates the demand curve for sofas. Which of the following events could have triggered the shift in demand from D1 to D2, as shown above? a. The price of sofas increased. b. The price of armchairs increased. c. The price of labor for making sofas increased. d. The price of sofas decreased. e. The price of armchairs decreased. 10. A bike shop in a small town has received a shipment of 10 new bicycles. The shop offers the bikes for sale at a price of $300 each. At this price, however, there are only two people in town who are willing to buy a bicycle. This situation can be described as a. disequilibrium b. shortage c. surplus d. equilibrium e. both a and c are correct Chapter 4 – Supply and Demand 11 Questions 11 to 13 refer to the following graph. 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0 S D 0 1 2 3 4 5 6 7 8 9 10 Quantity of Cars 11. When the price of cars is $5000, which of the following terms is not an accurate description of the situation? a. Quantity demanded exceeds quantity supplied. b. A shortage exists. c. The market is in disequilibrium. d. Fewer than five cars are available for sale. e. The market is in equilibrium. 12. Beginning from the price of $5000, which of the following events would be predicted by the theory of market adjustment? a. Some buyers who are willing to pay more will bid the price of cars up. b. The market will remain in disequilibrium. c. Prices will fall. d. All buyers will remain in the market. e. The supply and demand curves will shift to achieve equilibrium. 13. Now suppose that the local government invests in a new, very efficient fleet of buses. Now, it is easy and affordable to get from one place to another without having your own car. What change in the graph shown above is most likely to result from the new bus service? a. The supply curve shifts to the right. b. The supply curve shifts to the left. c. The demand curve shifts to the right. d. The demand curve shifts to the left. e. None of the above. Chapter 4 – Supply and Demand 12 14. Suppose the demand curve for gasoline shifts to the right, as global demand from India and China increases. Suppose also that new discoveries of oil enable an increase in the supply of gasoline to be sold on the market. Assuming that nothing else changes, what is the likely effect on the equilibrium price of gasoline? a. The equilibrium price rises. b. The equilibrium price falls. c. The equilibrium price remains the same. d. The effect on the equilibrium price is uncertain, as it depends of the extent of the shifts in supply and demand. e. None of the above. 15. Suppose we observe an increase in the world price of corn. Which of the following could have caused the price increase? a. An increase in the demand for corn by households in China and India. b. An increase in the demand for corn for use in ethanol production in the U.S. c. A fall in the supply of corn due to a drought in Australia. d. A rise in the price of fertilizer, a key input in the production of corn. e. All of the above. 16. Suppose the price elasticity of demand for oil is found to be very inelastic. Which of the following factors could account for its inelasticity? a. Oil is a greatly needed item, as it is a key ingredient for gasoline and many other industrial products and processes. b. There are few substitutes available for oil. c. Oil accounts for a very small part of consumers’ budgets, so an increase in the price of oil is barely noticed by consumers. d. Oil accounts for a very large part of consumers’ budgets, so an increase in the price of oil is quickly noticed and consumers greatly reduce the amount of oil they purchase. e. Both a and b. 17. Which of the following markets do not operate like the Classical’s perfectly competitive spot market with smoothly functioning double-auction mechanisms? a. Markets with long-term contracts b. Retail markets, such as for clothing, with prices posted on tags and long supply chains c. Restaurants with high menu costs d. The market for computer operating systems e. All of the above Chapter 4 – Supply and Demand 15 P ri c e o f C a rs P ri c e o f C a rs P ri c e o f C a rs 1. b. S1 S2 E1 D1 Quantity of Cars 1. c. The shift in the supply curve creates a temporary surplus. S1 S2 E1 Surplus D1 Quantity of Cars 1. d. S1 S2 E1 P2 E2 D1 Q2 Quantity of Cars 1. e. The supply curve has shifted to the right. The equilibrium price has fallen, and equilibrium quantity has risen. Chapter 4 – Supply and Demand 16 P ri c e o f d e c k c h a ir s P ri c e o f H a rd c o v e r D ic ti o n a ri e s P ri c e o f H a rd c o v e r D ic ti o n a ri e s P P 2. a. The demand curve shifts to the left. S D 2 D1 Quantity of Hardcover Dictionaries 2. b. The supply curve does not shift. 2. c. The price of hardcover dictionaries at the new equilibrium, E2, is lower. S E 1 1 E 2 2 D 2 D1 Quantity of Hardcover Dictionaries 3. The equilibrium price could rise as a result of the supply curve shifting to the left (i.e. a decrease in supply), or as a result of the demand curve shifting to the right (i.e. an increase in demand). 4. a.. The demand curve shifts to the right, as shown below. S D2 D1 Quantity of deck chairs Chapter 4 – Supply and Demand 17 P ri c e o f d e c k c h a ir s P ri c e o f d e c k c h a ir s P ri c e o f d e c k c h a ir s 4. b. S shortage D2 D1 Quantity of deck chairs 4. c. S E2 E1 shortage D2 D1 Quantity of deck chairs 5. a. The supply curve shifts to the left, leading to a higher equilibrium price and lower equilibrium quantity. S2 S1 E2 E1 D1 Quantity of deck chairs