Module 4
Supply and Demand
Markets Money and Relative Prices The Law of Demand The Demand Curve Shifts in the Demand Curve The Law of Supply Shifts in the Supply Curve
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M a rk e t s MODULE 2
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REVIEW
III
A ______ is a set of rules or an arrangement that helps buy-
1. Which of the following is not an example of a market? A) a drugstore B) the New York Stock Exchange C) a factory D) a barbershop
ers and sellers make exchanges. Someone who brings buyers and sellers together is called a ______________. Middlepersons help to reduce _________ costs, the costs of
2. The transactions costs of making exchanges in the market are reduced by A) middlepersons. B) podiatrists. C) economists. D) diplomats.
making exchanges or transactions in a market. Market is a term that is hard to define because there are an incredible variety of _________ arrangements in the world.
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3. Transaction costs are A) the costs that banks pay for clearing checks. B) the costs of making exchanges in a market. C) the costs you pay for transportation to and from school. D) the lowest cost at which a seller is willing to put a good or service up for sale.
T R U E / FA L S E
_____1. A bookstore is an example of a market. _____2. A doctor’s office is an example of a market.
4. Ceteris paribus, when transportation costs are high relative to the selling price, markets are _____________ and _____________. A) numerous; geographically isolated B) numerous; concentrated in a few areas C) few; geographically isolated D) few;concentrated in a few areas
_____3. A market is always a place. _____4. A baker is an example of a middleperson. _____5. A person selling his or her home is a middleperson.
5. The market for automobiles is A) local. B) national. C) global. D) intergalactic.
_____6. Middlepersons increase the costs of making trades. _____7. Middlepersons are parasites. They charge for their services but don’t actually produce anything.
Co ncep t A
M U LTIP LE CHOI CE
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2. Is the market for laptop computers local, national, or global?
A P P L I CATI ON AND DISCUSS ION
1. All entering freshmen at Malibu State University are required to buy laptop computers. Identify at least two examples of transactions costs students might face in buying the computers and identify at least one kind of middleperson whose services reduces these costs.
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Money and Relative Prices
MODULE 2
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2. If the price of Big Macs doubles while the price of Whoppers goes up by a third, then A) the relative price of Whoppers has risen. B) the relative price of Big Macs has fallen. C) the relative price of Whoppers has fallen. D) the nominal prices of Big Macs and Whoppers have risen, but their relative prices remain the same.
REVIEW
The money price of a good or service is sometimes referred to as the _________ or _________price. Over the past 50 years, the money price of most goods have ________.
3. Since 1960 the relative price of gasoline has A) risen. B) fallen. C) stayed the same. D) risen relative to other prices.
The price of one good compared to others is called its _________ price. If the price of a good rises relative to that of other goods, people will buy ______ of that good. IV II
A P P L I CATI ON AND DISC USS ION
T R U E / FA L S E 1. Over the past decade the average price of comic books has risen from $1.25 to $1.50, while the price of CDs has gone from $15 to $16. What has happened to the price of comics relative to the price of CDs?
_____1. A good’s nominal price is sometimes called its relative price. _____2. A sales tax on expensive luxury items reduces their relative prices.
2. Given the information in question 1 above, what has happened to the nominal price of CDs? What about the relative price?
_____3. When the relative price of yo-yos falls, we would expect people to buy more yo-yos.
III.
M U LTIP LE CHOICE
1. If the price of a can of tuna fish rises from $1 to $2 and a can of salmon increases in price from $3 to $4, then A) the relative price of salmon has risen. B) the nominal price ofö tuna has fallen. C) the relative price of tuna has risen. D) the relative price of tuna has fallen.
Con ce pt B
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The Law of Demand
MODULE 4
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_____4. Stiffer penalties for drunk driving will reduce the number of drunk drivers on the road.
REVIEW
According to the law of demand, other things being equal,
_____5. When Cynthia buys more Coca-Cola because the price of Pepsi rises, it is an example of the substitution effect.
when the price of a good or service falls, the quantity demanded _______. The number of units of a good that
_____6. The concept of demand is really just an imaginary notion based on what people might want but really can’t afford.
customers are willing to buy at a given price is called the ________ ____________.
_____7. Economists believe that the concept of need is extremely powerful in helping them understand human behavior.
The law of demand describes a __________ relationship between price and quantity demanded. The main reason
III
M U LTIPLE CHOICE
for the inverse relationship between price and quantity 1. The law of demand says that A) as the price of a good rises, people will buy more of it. B) as the price of a good rises, people will buy less of it. C) as the price of a good falls, people will buy less of it. D) demand is related to human needs and has nothing to do with price.
demanded is the ______________ effect. When deciding whether or not we really “need” something, we must weigh its benefits against its _______. To say you absolutely “need” something implies that you would give up __________ for it.
II.
2. Which of the following is an example of the law of demand? A) As the opportunity cost of robbing a bank rises due to stiffer penalties for bank robbery, more bank robberies occur. B) As the penalties for drunk driving are increased, more people take taxis to parties and nightclubs. C) More murders take place in states that have the death penalty than in states without it. D) More students apply to colleges that charge high annual tuition rates than to those with low tuition.
T R U E / FA L S E
_____ 1.According to the law of demand, the quantity of a good that people will buy rises as the price of that item rises. _____ 2.If the price of bananas falls, we would expect banana consumption to go up. _____ 3.According to the law of demand, students are likely to study more as the opportunity cost of studying rises. M odule 4 harcourt brace & company
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3. The difference between demand and need is that A) need involves consideration of opportunity cost, while demand does not. B) a need is something a person must have at any cost, while demand involves the comparison of the costs and benefits of obtaining something. C) need reflects an actual willingness to pay, while demand is an imaginary notion. D) need involves a consideration of opportunity cost, while demand is concerned only with money cost.
8. According to the substitution effect, an increase in the price of apples will have what effect? A) Consumers will consume fewer oranges because more money is spent on apples. B) Consumers will spend more on apples because apples must be better goods. C) Consumers will replace some apples with other fruit that is now relatively cheaper than apples. D) Consumers will have less money to spend on all things. 9. The primary reason for the law of demand is A) legislative action. B) ceteris paribus. C) people’s needs. D) the substitution effect.
4. According to the law of demand, the relationship between the price of a good and the quantity purchased is a(n) __________ relationship. A) positive B) unnatural C) inverse D) legal
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5. For 1998, Nike has slashed the price of Air Jordan basketball shoes. If nothing else changes, what do you predict would happen to the quantity of shoes people will want to buy? A) It would stay the same because everyone likes Air Jordans. B) It would fall because no one likes cheap shoes. C) It would increase because price and quantity are inversely related. D) There would never be a reason to reduce the price of Air Jordans.
A P P L I CATION AND DISCUSSION
1. Sid E. Slicker moves from New York City, where he lived in a small condominium, to rural Minnesota, where he buys a big house on five acres of land. Using the law of demand, what do you think is true of land prices in New York relative to those in rural Minnesota? 2. Sid E. Slicker’s family is confused. When he lived in New York City he spent most of his time at Yankee Stadium watching baseball games and never even mentioned the word “boat.” However, after moving to Minnesota, the “Land of a Thousand Lakes,” Sid bought a boat and started water skiing. Given these facts, what has happened to the opportunity cost of boating for Sid? What has happened to the cost of attending baseball games? How does this explain the change in Sid’s behavior?
6. When discussing the law of demand, what do we mean when we say ceteris paribus? A) It is a Latin term that means the other non-price factors that affect the amount we consume do not change. B) It is a Latin term that means “gnarly dude.” C) It is a Latin term that means there is an inverse relationship. D) It is a Latin term that means goods are for sale. 7. According to the law of demand, replacing the old narrow and winding road to the Mt. Sexton ski resort with a new, four-lane, straighter road should have what effect on the number of skiers using the resort? A) It should have no effect. B) It should reduce the number. C) It should increase the number. D) It should reduce the number but increase their size.
Con cept C
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The Demand Curve
MODULE 4
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REVIEW
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An individual’s demand schedule reveals the different
M U LTIP LE CHOI CE
1. An individual’s demand curve for a good A) shows the amounts of a good that a person will buy at various prices. B) indicates the market price of an individual good. C) is determined by the cost of producing an individual good. D) reveals the amounts of a good an individual needs to survive.
amounts of a product that a person will buy at various possible _________ in a particular interval ˜of ___________. A graphical representation of a demand schedule is called a(n) __________ curve.
2. A market demand curve is A) a graphical representation of the actual demand for markets. B) a line that shows the positive relationship between the price of a product and the amount people will buy. C) the result of the horizontal summing of many individual demand curves. D) a line that shows the amount of a good that will be produced in a given market in a given period of time.
When you sum up the demand curves of all the individuals in the market you get the _____________ demand curve.
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T R U E / FA L S E
_____1. An individual’s demand schedule shows the amount of a good that a person would like to buy whether or not he or she can afford it.
3. A demand curve slopes A) up and to the right. B) up and to the left. C) down and to the left. D) down and to the right.
_____2. An individual’s demand curve is a graphical representation of that person’s demand schedule. _____3. A market demand curve is constructed by the horizontal summing of many individuals’ demand curves. _____4. If there really were a demand for road kill, as the book implies, the demand curve for road kill would slope up and to the right.
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2. Below are Cherry Blossom Makeup demand schedules for Hillary’s friends, Barbara and Nancy. If Hillary, Barbara, and Nancy constitute the whole market for Cherry Blossom Makeup, complete the market demand schedule and draw the market demand curve.
A P P L I CATION AND DISCUSSION
1. Shown below is Hillary’s demand schedule for Cherry Blossom Makeup. Plot Hillary’s demand curve on the chart below. Price
Quantity Demanded
(dollars per ounce)
(ounces per week)
$15
Quantity Demanded (ounces per week)
Price
5 oz.
(dollars per ounce) Hillary Barbara Nancy Market
12
10
9
15
$15
5
0
15
6
20
12
10
5
20
3
25
9
15
10
25
6
20
15
30
3
25
20
35
Con ce pt D
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Shifts in the Demand Curve
MODULE 4
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consumers to demand more of a good, the good is called a
REVIEW
________ good, but when higher incomes lead consumers A change in a good’s own-price leads to a change in to buy less of a good, the good is called a(n) __________ __________ demanded of that good, while a change in one good. of the variables that shift the demand curve, such as the price of closely related goods or the incomes of consumers,
The vital statistics of the potential consumer population,
leads to a change in _________ .
including size and age characteristics, are referred to as the _________________ of a product.
The variables that shift the demand curve can be recalled by using the memory device _________ .
When demand changes with changes in fashion, the cause of the change is referred to as a change in ________ .
Goods that can be used in place of one another are called ____________ goods. An increase in the price of a substitute
________________ about the future, such as fear of war or
will __________ the demand for the primary good in ques-
anticipated changes in tax laws, may affect consumer
tion, whereas a decrease in the price of a good will
_________ .
__________ the demand for the primary good in question. II
T R U E / FA L S E
Coca-Cola is a ______ substitute for Pepsi, while shoes are _____1. A change in a good’s own-price will lead to a change in demand for that good.
_______ substitutes for hammers. Goods that are consumed together, like
hot
dogs
and mustard, are called
_____2. Ceteris paribus, a fall in the price of a good will result in a decrease in demand for its substitutes.
_______________ goods. _____3. A fall in the price of CDs will result in a reduction in the demand for tapes. As their incomes rise, consumers generally buy _______ of _____4. An increase in the price of a complementary good will increase the demand for the product in question.
most goods and services. When higher incomes lead
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_____5. If the price of tennis racquets falls, the demand for tennis balls is likely to increase.
4. News that eating jelly beans makes you better looking will likely cause A) the demand curve for jelly beans to shift to the left. B) the demand curve for jelly beans to shift to the right. C) a decrease in the quantity of jelly beans demanded. D) a decrease in the quantity of jelly beans supplied.
_____6. If watermelons and mangos are normal goods, demand for them will fall as consumers’ incomes rise. _____7. If duct tape is an inferior good, demand for it will fall as consumers’ incomes rise. _____8. As the U.S. population becomes older on average, we are likely to see an increase in the demand for items like playpens and stuffed animals.
III
5. If an increase in consumers’ incomes causes a decrease in the demand for video rentals, then video rentals are A) a luxury. B) a normal good. C) a necessity. D) an inferior good.
M U LTIP LE CHOI CE
1. The difference between a change in quantity demanded and a change in demand is that A) a change in quantity demanded is caused by a change in a good’s own-price, while a change in demand is caused by a change in a variable such as income, tastes, or expectations. B) a change in demand is caused by a change in a good’s own-price, while a change in quantity demanded is caused by a change in a variable such as income, tastes, or expectations. C) a change in quantity demanded is a change in the amount people actually buy, while a change in demand is a change in the amount they want to buy. D) This is a trick question. A change in demand and a change in quantity demanded are the same thing!
6. Suppose the demand for fish tacos increases as the result of an increase in consumers’ incomes. Fish tacos must be A) a luxury. B) a normal good. C) an inferior good. D) an incredible good. 7. Which of the following is most likely to cause an increase in the demand for disposable diapers? A) a decrease in peoples’ incomes B) a decrease in the price of cloth diapers C) an increase in the number of newborn babies D) a decrease in the price of disposable diapers 8. If fewer people get tattoos as a result of an increase in tattoo prices, then there has been A) an increase in the demand for tattoos. B) a decrease in the demand for tattoos. C) an increase in the quantity of tattoos demanded. D) a decrease in the quantity of tattoos demanded.
2. Which of the following will not cause a change in the demand for a product? A) a change in consumers’ income B) a change in consumers’ tastes C) a change in the price of the product D) a change in the price of a substitute for the product 3.
9. In the three months before a new $1 per pack cigarette tax took effect in Alaska, smokers in the 49th state bought 175 million more cigarettes than they had during the same period a year earlier. This represents an increase A) in the quantity of cigarettes demanded due to an increase in price. B) in demand caused by a change in consumers’ expectations about the future. C) in demand due to a change in consumers’ tastes. D) in demand due to a change in the number of demanders.
“PYNTE” is a memory device that stands for: A) price of the good, yearning for the good, need for the good, taste for the good, and excellence of the good B) prices of similar goods, interest rates, natural disasters, tons of output produced, and earnings C) prices of related goods, income, number of demanders, tastes, and expectations D) People, Yes, Need, Time, and Energy
Co nc ept E
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D. The population of Hilo doubles.
DISCUSSION AND AP PL ICAT I O N
PYNTE variable: ______________ 1. On the graphs below, show the effects of each of the following on the demand for hamburger in Hilo, Hawaii. Identify the responsible PYNTE variable in the space provided. A. The price of chicken falls. PYNTE variable: ___________
2. On the graphs below, show the effects of each of the following on the demand for Chevrolets in the United States. A. The price of Fords plummets. PYNTE variable: ______________ B. The price of hamburger buns doubles. PYNTE variable: ____________
B. Consumers believe that the price of Chevrolets will rise next year. C. Scientists find that eating hamburger prolongs life.
PYNTE variable: ________________
PYNTE variable: _____________
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C. The incomes of Americans rise.
3. Below are three market demand curves for cantaloupe. Starting at point A,
PYNTE variable: __________________ A. which point represents an increase in quantity demanded? B. which point represents an increase in demand? C. which point represents a decrease in demand? D. which point represents a decrease in quantity demanded? D. The price of gasoline falls dramatically. PYNTE variable: ______________
Conc ept E
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The Law of Supply
MODULE 4
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REVIEW
III
The answer to the questions, “What do we produce and in
M U LTIPLE CHOICE
1. In a market economy, the amount of a good that is produced is decided by the interaction of A) buyers and sellers. B) all consumers. C) producers and input suppliers. D) all producers.
what quantities?” depends on the interaction of _________ and ___________ . The law of supply states that, other things being equal,
2. According to the law of supply, when the price of a good increases, we would predict that A) more will be consumed. B) less will be produced. C) more will be produced. D) less will be consumed.
quantity supplied varies ___________ with price. A producer requires a higher price to produce additional units of the good because of the law of ____________
3. When the price people are willing to pay for oil decreases, what would we predict would happen to the amount of oil produced in any oil field? A) It would decline. B) It would stay the same. C) It would increase. D) It would fluctuate up and¯ down.
opportunity costs. Adding the amount each individual producer would supply at each price will give us the _________ supply curve.
II
4. To produce more wheat, Farmer Jones has to use fields that are on a mountain slope, where it costs $500 more to grow each ton of wheat. Farmer Jones would only produce from these fields when A) the price of wheat increases. B) the price of wheat decreases. C) the cost of wheat increases. D) the cost of wheat decreases.
T R U E / FA L S E
_____1. Once we know the demand for a product we can predict how much will be produced. _____2. A direct relationship between two variables means they move in opposite directions.
5. When we add up all of the individual firm supply curves, what do we have? A) nothing important B) the market supply curve C) the individual supply curve D) the amount produced
_____3. Without a change in technology or input prices, opportunity costs of production increase as more is produced. _____4. Individual supply curves usually slope upward and to the right.
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6. John and Kate decide that coffee would be a good business to be in, so they form J & K Coffee Co. What will happen to the market supply of coffee as a result? A) It will decrease. B) It won’t change. C) It will increase. D) It only changes the price.
IV
A P P L I CATION AND DISCUSS ION
1. Felix is a wheat farmer who has two fields he can use to grow wheat. The first field is right next to his house and the topsoil is rich and thick. The second field is 10 miles away in the mountains and the soil is rocky. On which field do you think the opportunity cost of producing wheat is the highest? Why? 4. Below are the supply schedules for Rolling Rock and two other petroleum companies, Armadillo Oil and Pecos Petroleum. Assuming these three companies make up the entire supply side of the oil market, complete the market supply schedule and draw the market supply curve.
2. At current wheat prices, Felix just produces from the field next to his house, because the market price for wheat is just high enough to cover his costs of production including a reasonable profit. What would have to happen to the market price of wheat for Felix to have the incentive to produce from the second field?
Price (dollars per
Quantity Supplied (barrels per month) Rolling Rock
Armadillo
Pecos
10,000
8,000
2,000
Market
barrel)
3. Below is the supply schedule for Rolling Rock Oil Co. Plot Rolling Rock’s supply curve on the chart below.
$5 10
15,000
10,000
5,000
20,000
12,000
8,000
Price
Quantity Supplied
15
(dollars per barrel)
(barrels per month)
20
25,000
14,000
11,000
$5
10,000
25
30,000
16,000
14,000
10
15,000
15
20,000
20
25,000
25
30,000
C once pt F
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Shifts in the Supply Curve
MODULE 4
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in the price of corn will result in a(n) _____________ in the
REVIEW
supply of soybeans. When other factors remain the same, price change results in a movement along the supply curve; this is called a(n)
If suppliers expect the price of a good will be higher in the
change in ______ supplied. When the other important fac-
future, they will sell _______ now so that they will have
tors that affect supplier behavior change, the entire supply
________ to sell in the future. Moving goods to time peri-
curve shifts; this is called a change in ______________ .
ods when they are more valuable is sometimes called ________________.
The variables that shift the supply curve can be recalled by using the memory device ___________.
Throughout the 1990s, we have seen a number of new firms enter the personal computer business. This has had the effect
Labor, materials, energy, and natural resources are examof _________________ the supply of personal computers. ples of supplier __________. An increase in supplier input prices, other things being equal, will make each unit of the
The T in SPENT reflects the impact of innovation, govern-
good more costly to produce. Such a change will cause each
ment, and nature on supply. The four componentıs of T are
supplier to offer _______ goods for sale at any price; as a
______, _________, _________, and ____________. The
result, the supply curve will to shift to the __________.
introduction of new technology in the steel industry lowered the cost of producing steel and shifted the supply
Like consumers, producers tend to substitute in production curve to the _________. when prices of the goods they produce change. When two goods share inputs, and a change in the price of one good
A change in any of the SPENT factors will cause suppliers
affects the supply of the other, the goods are called
to change the amount they produce at any price; this is
____________ in production. When both corn and
called a change in ________ .
soybeans can be grown on the same farmland, an increase
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2. Which of the following will not cause a change in the supply of a product? A) a change in the price of suppliers’ inputs B) a change in the price of related products C) a change in the price of the product D) a change in the expected future price of the product
TRU E OR FA L S E
_____1. Ceteris paribus, a change in a good’s own-price will result in a change in the quantity supplied of the good. _____2. Ceteris paribus, if the price of timber increases, we would expect an increase in the supply of lumber.
3. SPENT is a memory device that stands for A) shifting, prices, earnings, natural resources, taxes. B) suppliers input prices, prices of related goods, expectations, number of suppliers, and four Ts. C) supply, prices, equal, normal, tastes. D) silly putty equals a nice time.
_____3. When the price of cotton falls, the supply of barley, which can be grown using the same land, will increase. _____4. Midge Point sells Persian carpets in the United States. If she expects the price of these carpets will rise next year, she will increase this year’s supply and sell more now rather than waiting to sell her stock next year.
4. El Niño has caused both drought and flood-producing rains in various wheat-growing regions. What would be the likely affect of El Niño on the wheat market? A) an increase in supply B) a decrease in supply C) El Niño will not affect supply. D) a decrease in demand
_____5. An increase in the number of suppliers selling a product will result in a decrease in the supply of the product. _____6. Improving technology in an industry usually lowers the cost of producing the product and results in a leftward shift in the supply curve.
5. Which of the following actions of government would not result in a decrease in the supply of fastfood meals? A) an increase in the minimum wage that raises the wages of most workers in the fast-food industry B) increased health standards governing fast-food kitchens C) decreased property taxes on fast-food outlets D) worker safety regulations requiring that lettuce be chopped with a dull knife
_____7. Government can decrease the supply of a product by imposing taxes or regulations that increase the cost of production.
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M U LTIP LE CHOICE
1. The difference between a change in quantity supplied and a change in supply is that a change in A) the quantity supplied is caused by a change in a good’s own-price, while a change in supply is caused by a change in a variable such as input prices, prices of related goods, expectations, or taxes. B) supply is caused by a change in a good’s ownprice, while a change in the quantity supplied is caused by a change in a variable such as input prices, prices of related goods, expectations, or taxes. C) the quantity supplied is a change in the amount people want to sell. A change in supply is a change in the amount they actually sell. D) supply and a change in the quantity supplied are the same thing.
Con ce pt G
6. Pan Am Airlines went bankrupt in 1998 and left the airline industry. What is the likely effect of this change on the airline market? A) an increase in supply B) a decrease in supply C) no change in supply D) an increase in demand 7. Steel producers offer to sell sheet steel to U.S. auto producers for a lower price than in the past. With all other factors remaining constant, what would you expect to happen in the auto market? A) an increase in supply B) a decrease in supply C) no change in supply D) an increase in demand
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8. Nike can use its factories to produce either running shoes or basketball shoes. If the price of basketball shoes rises, what will happen to the supply of running shoes? A) an increase in supply B) a decrease in supply C) no change in supply. D) rightward shift of supply
IV
C. Ed Scissorshand introduces a new, faster vegetable chopper. SPENT variable: ____________
A P P L I CATION AND DI SC USSI ON
1. On the graphs below, show the effects of each of the following on the supply of salsa in the United States. Identify the responsible SPENT variable in the space provided. A. Tomato prices skyrocket! SPENT variable: ____________
D. Elton John, Madonna, and Paul Newman each introduce a new brand of salsa. SPENT variable: ____________
B. Congress places a 26 percent tax on salsa. SPENT variable: ____________
E. Ketchup prices rise. SPENT variable: ____________
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2. On the graphs below, show the effects of each of the following on the supply of coffee worldwide. Identify the responsible SPENT variable in the space provided.
C. Indonesia offers big subsidies to its coffee producers. SPENT variable: ____________
A. Freezing temperatures wipe out half of Brazil’s coffee crop. SPENT variable: ____________
D. Genetic engineering produces a super coffee bean that grows faster and needs less care. SPENT variable: ____________ B. Wages of coffee workers in Latin America rise as unionization efforts succeed. SPENT variable: ____________
E. Coffee suppliers expect prices to be higher in the future. SPENT variable: ____________
Con ce pt G
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3. To the right are three market supply curves for cantaloupe. Compared to point A, which point represents A) an increase in quantity supplied? B) an increase in supply? C) a decrease in quantity supplied? D) a decrease in supply?
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“The Lowells” story by Lee Huskey and Steve Jackstadt Art by John D. Dawson
Questions 1. Why did Mr. Lowell choose chicken rather than steak for his barbecue? 2. In the comic strip, the price of chicken has fallen. Cite two things that could have made the price of chicken fall.
Concept
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