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Chapter 3 Market Supply and Demand. Key Concepts Summary Practice Quiz Internet Exercises. ©2000 South-Western College Publishing. In this chapter, you will learn to solve these economic puzzles:. What is the difference between a “change in quantity demanded” and a “change in demand”?.

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Chapter 3 market supply and demand l.jpg
Chapter 3Market Supply and Demand

  • Key Concepts

  • Summary

  • Practice Quiz

  • Internet Exercises

©2000 South-Western College Publishing


In this chapter you will learn to solve these economic puzzles l.jpg
In this chapter, you will learn to solve these economic puzzles:

What is the difference between a “change in quantity demanded” and a “change in demand”?

Can Congress repeal the law of supply in order to control oil prices?

Does the price system eliminate scarcity?


What is the law of demand l.jpg
What is the puzzles:Law of Demand?

The principle that there is an inverse relationship between the price of a good and the quantity buyers are willing to purchase in a defined time period, ceteris paribus

* Return to previous slide while in slide show


What does ceteris paribus mean l.jpg
What does “Ceteris Paribus” mean? puzzles:

All else remains the same


What is a demand curve l.jpg
What is a Demand Curve? puzzles:

Depicts the relationship between price and quantity demanded


Slide6 l.jpg

Individual’s Demand Curve for Compact Discs puzzles:

P

A

$20

B

$15

C

$10

D

$5

Demand Curve

Q

4

8

16

20


Why do demand curves have a negative slope l.jpg
Why do Demand Curves have a Negative Slope? puzzles:

At a higher price consumers will buy fewer units, and at a lower price they will buy more units


What is a demand schedule l.jpg
What is a puzzles:Demand Schedule?

Shows the specific quantity of a good or service that people are willing and able to buy at different prices


What is market demand l.jpg
What is Market Demand? puzzles:

The summation of the individual demand schedules


Slide10 l.jpg

IMPORTANT puzzles: - KNOW THE DIFFERENCE BETWEEN A CHANGE IN THE QUANTITY DEMANDED AND A CHANGE IN DEMAND


When price changes what happens l.jpg
When price changes, what happens? puzzles:

The curve does not shift - there is a change in the quantity demanded


Slide12 l.jpg

Increase in Quantity Demanded puzzles:

Decrease in

Price


Slide13 l.jpg

P puzzles:

Fred’s Demand Curve

$20

$15

$10

$5

D1

Q

1

2

3

4

5

6

7

8

9


Slide14 l.jpg

P puzzles:

Mary’s Demand Curve

$20

$15

$10

D2

$5

Q

1

2

3

4

5

6

7

8

9


Slide15 l.jpg

P puzzles:

Market Demand Curve

$20

$15

$10

D3

$5

Q

3

4

5

6

7

8

9

10

11

12


Slide17 l.jpg

Market Demand Schedule for Compact Discs puzzles:

Price Fred Mary Total Demanded

$25 1 + 0 = 1

$20 2 1 3

$15 3 3 6

$10 4 5 9

$5 5 7 12


Slide18 l.jpg

P puzzles:

A change in price causes a change in the quantity demanded

$20

A

$15

B

$10

D

$5

Q

10

20

30

40

50


When something changes other than price what happens l.jpg
When something changes other than price, what happens? puzzles:

The whole curve shifts - there is a change in demand


Slide20 l.jpg

P puzzles:

When the ceteris paribus assumption is relaxed, the whole curve can shift

$20

A

B

$15

$10

D2

D1

$5

Q

10

20

30

40

50


Slide21 l.jpg

Increase in demand puzzles:

Change innonpricedeterminant


What can cause a shift in a demand curve l.jpg
What can cause a shift in a Demand Curve? puzzles:

1. Number of buyers in the market

2. Tastes and preferences

3. Income

4. Expectations of consumers

5. Prices of related goods


Slide23 l.jpg

Decrease in quantity demanded puzzles:

Upward movement along the demand curve

Price increases


Slide24 l.jpg

Increase in quantity demanded puzzles:

Downward movement along the demand curve

Price decreases


Slide25 l.jpg

Decrease or increase in demand puzzles:

Leftward or rightward shift in the demand curve

Nonprice determinant


What is a normal good l.jpg
What is a Normal Good? puzzles:

Any good for which there is a direct relationship between changes in income and its demand curve


What is an inferior good l.jpg
What is an puzzles:Inferior Good?

Any good for which there is an inverse relationship between changes in income and its demand curve


What are substitute goods l.jpg
What are puzzles:Substitute Goods?

Goods that compete with one another for consumer purchases


What happens when the price increases for a good that has a substitute l.jpg
What happens when the price increases for a good that has a substitute?

The demand curve for the substitute good increases


What happens when the price decreases for a good that has a substitute l.jpg
What happens when the price decreases for a good that has a substitute?

The demand curve for the substitute good decreases


What does a direct relationship between price and quantity mean l.jpg
What does a Direct Relationship between price and quantity mean?

It means that the two move in the same direction


What are complementary goods l.jpg
What are Complementary Goods? mean?

Goods that are jointly consumed with another good


What happens when the price increases for a good that has a complement l.jpg
What happens when the price increases for a good that has a complement?

The demand curve for the substitute good decreases


What happens when the price decreases for a good that has a complement l.jpg
What happens when the price decreases for a good that has a complement?

The demand curve for the substitute good increases


What does an inverse relationship between price and quantity mean l.jpg
What does an Inverse Relationship between price and quantity mean?

It means that the two move in opposite directions


What is the law of supply l.jpg
What is the mean? Law of Supply?

The principle that there is a direct relationship between the price of a good and the quantity sellers are willing to offer for sale in a defined time period, ceteris paribus


Why do supply curves have a positive slope l.jpg
Why do Supply Curves have a Positive Slope? mean?

Only at a higher price will it be profitable for sellers to incur the higher opportunity cost associated with supplying a larger quantity


Slide38 l.jpg

P mean?

A company’s Supply Curve for Compact Discs

SupplyCurve

A

$20

$15

B

$10

C

$5

Q

10

20

30

40


Slide39 l.jpg

An Individual Seller’s Supply for Compact Discs mean?

Point Price Quantity

A $20 40

B 10 30

C 6 20


Slide40 l.jpg

P mean?

Super Sound Supply Curve

S1

$25

$20

$15

$10

Q

10

15

20

25


Slide41 l.jpg

P mean?

High Vibes Supply Curve

S2

$25

$20

$15

$10

Q

20

25

30

35


What is a market l.jpg
What is a Market? mean?

Any arrangement in which buyers and sellers interact to determine the price and quantity of goods and services exchanged


What is market supply l.jpg
What is Market Supply? mean?

The horizontal summation of all the quantities supplied at various prices that might prevail in the market


Slide44 l.jpg

P mean?

Market Supply Curve

$25

$20

S total

$15

$10

Q

40

45

55

60


Slide45 l.jpg

Market Supply Schedule for Compact Discs mean?

Price Super Sound High Vibes Total Supplied

$25 25 + 35 = 60

$20 20 30 50

$15 15 25 40

$10 10 20 30

$5 5 15 20


Slide46 l.jpg

IMPORTANT mean? - KNOW THE DIFFERENCE BETWEEN A CHANGE IN THE QUANTITY SUPPLIED AND A CHANGE IN SUPPLY


When price changes what happens47 l.jpg
When price changes, what happens? mean?

The curve does not shift - there is a change in the quantity supplied


Slide48 l.jpg

P mean?

A change in price causes a change in the quantity supplied

SupplyCurve

A

$20

$15

B

$10

C

$5

Q

10

20

30

40


Slide49 l.jpg

Increase in Quantity Supplied mean?

Increase in

Price


When something changes other than price what happens50 l.jpg
When something changes other than price, what happens? mean?

The whole curve shifts - there is a change in supply


Slide51 l.jpg

P mean?

When the ceteris paribus assumption is relaxed, the whole curve can shift

S2

S1

$20

$15

$10

$5

Q

10

20

30

40


Slide52 l.jpg

Increase in supply mean?

Change innonpricedeterminant


What can cause a shift in a supply curve l.jpg
What can cause a shift in a Supply Curve? mean?

1. Number of sellers in the market

2. Technology

3. Resource prices

4. Taxes and subsidies

5. Expectations of producers

6. Prices of other goods the firm could produce


Slide54 l.jpg

P mean?

The Supply & Demand for Tennis Shoes

$120

S

$90

Surplus

$60

Shortage

$30

D

Q

1,000

2,000

3,000

4,000


What is an equilibrium l.jpg
What is an Equilibrium? mean?

A market condition that occurs at any price for which the quantity demanded and the quantity supplied are equal


What is the price system l.jpg
What is the Price System? mean?

A mechanism that uses the forces of supply and demand to create an equilibrium through rising and falling prices



Key concepts58 l.jpg
Key Concepts mean?

  • What is the Law of Demand?

  • What is a Demand Curve?

  • Why do Demand Curves have a Negative Slope?

  • When price changes, what happens?

  • When something changes other than price, what happens?

  • What can cause a shift in a Demand Curve?


Key concepts cont l.jpg
Key Concepts cont. mean?

  • What is the Law of Supply?

  • Why do Supply Curves have a Positive Slope?

  • When price changes, what happens?

  • When something changes other than price, what happens?

  • What can cause a shift in a Supply Curve?

  • What is a Market?

  • What is an Equilibrium?


Summary l.jpg
Summary mean?


Slide61 l.jpg

The law of demand states there is an inverse relationship between the price and the quantity demanded, ceteris paribus. A market demand curve is the horizontal summation of individual demand curves.


Slide62 l.jpg

Individual’s Demand Curve for Compact Discs between the price and the quantity demanded, ceteris paribus. A market demand curve is the horizontal summation of individual demand curves.

P

A

$20

B

$15

C

$10

D

$5

Demand Curve

Q

4

8

12

16


Slide63 l.jpg

A change in quantity demanded is a movement along a stationary demand curve caused by a change in price. When any of the nonprice determinants of demand changes, the demand curve responds by shifting. An increase in demand (rightward shift) or a decrease in demand (leftward shift) is caused by a change in one of the nonprice determinants.


Slide64 l.jpg

P stationary demand curve caused by a change in price. When any of the nonprice determinants of demand changes, the demand curve responds by shifting. An

When the ceteris paribus assumption is relaxed, the whole curve can shift

$20

A

B

$15

$10

D2

D1

$5

Q

10

20

30

40

50


Slide65 l.jpg

Nonprice determinants of demand are stationary demand curve caused by a change in price. When any of the nonprice determinants of demand changes, the demand curve responds by shifting. An

a. the number of buyers,

b. tastes and preferences.

c. income (normal and inferior).

d. expectations of future p;rice and income changes, and

e. prices of related goods (substitutes and complements).


Slide66 l.jpg

The law of supply states there is a direst relationship between the price and the quantity supplied, ceteris paribus. The market supply curve is the horizontal summation of individual supply curves.


Slide67 l.jpg

A change in quantity supplied is a movement along a stationary supply curve caused by a change in price. When any of the nonprice determinants of supply changes, the supply curve responds by shifting. An increase in supply (rightward shift) or a decrease in supply (leftward shift) is caused by a change in one of the nonprice determinants.


Slide68 l.jpg

P stationary supply curve caused by a change in price. When any of the nonprice determinants of supply changes, the supply curve responds by shifting. An

A company’s Supply Curve for Compact Discs

SupplyCurve

A

$20

$15

B

$10

C

$5

Q

10

20

30

40


Slide69 l.jpg

P stationary supply curve caused by a change in price. When any of the nonprice determinants of supply changes, the supply curve responds by shifting. An

When the ceteris paribus assumption is relaxed, the whole curve can shift

S2

S1

$20

$15

$10

$5

Q

10

20

30

40


Slide70 l.jpg

Nonprice determinants of supply stationary supply curve caused by a change in price. When any of the nonprice determinants of supply changes, the supply curve responds by shifting. An

a. the number of sellers.

b. technology

c. resource prices.

d. taxes and subsidies.

e. expectations of future price changes,

f. prices of other goods.


Slide71 l.jpg

A surplus or shortage exists at any price where the quantity demanded and the quantity supplied are not equal. When the price of a good is greater than the equilibrium price, there is an excess quantity supplied called a surplus. When the price is less than the equilibrium price, there is an excess quantity demanded called a shortage.


Slide72 l.jpg

Equilibrium is the unique price and quantity established at the intersection of the supply and the demand curves. Only at equilibrium does quantity demanded equal quantity supplied.


Slide73 l.jpg

P the intersection of the supply and the demand curves. Only at equilibrium does quantity demanded equal quantity supplied.

The Supply & Demand for Tennis Shoes

$120

S

$90

Surplus

$60

Shortage

$30

D

Q

1,000

2,000

3,000

4,000


Slide74 l.jpg

The price system is the supply and demand mechanism that establishes equilibrium through the ability of prices to rise or fall.


Chapter 3 quiz l.jpg
Chapter 3 Quiz establishes equilibrium through the ability of prices to rise or fall.

©2000 South-Western College Publishing


Slide76 l.jpg

1. If the demand curve for good X is downward-sloping, this means that an increase in the price will result in

a. an increase in the demand for good X.

b. a decrease in the demand for good X.

c. no change in the quantity demanded for good X.

d. a larger quantity demanded for good X.

e. a smaller quantity demanded for good X.

E. When price changes there is a opposite change in the quantity demanded as measured on the horizontal axis.


Slide77 l.jpg

2. The law of demand states that the quantity demanded of a good changes, other things being equal, when

a. the price of the good changes.

b. consumer income changes.

c. the prices of other goods change.

d. a change occurs in the quantities of other goods purchased.

A. A “change in demand” means that the whole curve shifts, but a “change in the quantity demanded” means that there is movement along a stationary curve.


Slide78 l.jpg

3. Which of the following is the result of a decrease in the price tea, other things being equal?

a. A leftward shift in the demand curve for tea.

b. A downward movement along the demand curve for tea.

c. A rightward shift in the demand curve for tea.

d. An upward movement along the demand curve for tea.

B. Because demand curves have a negative slope, as the price declines, the quantity demanded will increase.


Slide79 l.jpg

4. Which of the following will cause a movement along the demand curve for X?

a. A change in the price of a close substitute.

b. A change in the price of good X.

c. A change in consumer tastes and preferences for good X.

d. A change in consumer income.

B. Movement along a given demand curve always occurs when the price changes, if anything other than price changes, then the whole curve will shift.


Slide80 l.jpg

5. Assuming that beef and pork are substitutes, a decrease in the price of pork will cause the demand curve for beef to

a. shift to the left as consumers switch from beef to pork.

b. shift to the right as consumers switch from beef to pork.

c. remain unchanged, since beef and pork are sold in separate markets.

d. none of the above.

A. With a decrease in the price of pork people will want to buy more pork; because beef and pork are substitutes, they will buy less at possible prices for beef.


Slide81 l.jpg

6. Assuming that coffee and tea are substitutes, a decrease in the price of coffee, other things being equal, results in a (an)

a. downward movement along the demand curve for tea.

b. leftward shift in the demand curve for tea.

c. upward movement along the demand curve for tea.

d. rightward shift in the demand curve for tea.

B. With a decrease in the price of coffee people will want to buy more coffee; because coffee and tea are substitutes, they will buy less at possible prices for tea.


Slide82 l.jpg

7. Assuming steak and potatoes are complements, a decrease in the price of steak will

a. decrease the demand for steak.

b. increase the demand for steak.

c. increase the demand for potatoes.

d. decrease the demand for potatoes.

C. With a decrease in the price of steak people will want to buy more steak; because steak and potatoes are complements, they will buy more potatoes as well.


Slide83 l.jpg

8. Assuming that steak is a normal good, a decrease in consumer income, other things being equal, will

a. cause a downward movement along the demand curve for steak.

b. shift the demand curve for steak to the left.

c. cause an upward movement along the demand curve for steak.

d. shift the demand curve for steak to the right.

B. Normal goods are goods that people will buy more of as their incomes increase and less of as their income decreases.


Slide84 l.jpg

9. An increase in consumer income, other things being equal, will

a. shift the supply curve for a normal good to the right.

b. cause an upward movement along the demand curve for an inferior good.

c. shift the demand curve for an inferior good to the left.

d. cause a downward movement along the supply curve for a normal good.

C. Inferior goods are goods that people will buy less of at possible prices as their income increases.


Slide85 l.jpg

10. Yesterday, seller A supplied 400 units of a good X at $10 per unit. Today, seller A supplies the same quantity of units at $5 per unit. Based on this evidence, seller A has experienced a (an)

a. decrease in supply.

b. increase in supply.

c. increase in the quantity supplied.

d. decrease in the quantity supplied.

e. increase in demand.

B. A shift to the right of a supply curve along a stationary demand curve will result in a lower price as illustrated on the next page.


Slide86 l.jpg

P $10 per unit. Today, seller A supplies the same quantity of units at $5 per unit. Based on this evidence, seller A has experienced a (an)

When the ceteris paribus assumption is relaxed, the whole curve can shift

S2

S1

$20

$15

$10

$5

Q

10

20

30

40


Slide87 l.jpg

11. An improvement technology causes a (an) $10 per unit. Today, seller A supplies the same quantity of units at $5 per unit. Based on this evidence, seller A has experienced a (an)

a. leftward shift of the supply curve.

b. upward movement along the supply curve.

c. firm to supply a larger quantity at any given price.

d. downward movement along the supply curve.

C. When price changes, the supply curve itself does not change, but when other things change, the whole curve will shift. A change in technology is an example of what can cause the supply curve to shift.


Slide88 l.jpg

12. Suppose auto workers receive a substantial wage increase. Other things being equal, the price of autos will rise because of a (an)

a. increase in the demand for autos.

b. rightward shift of the supply curve for autos.

c. leftward shift of the supply curve for autos.

d. reduction in the demand for autos.

C. A change in costs for a business is a factor that will shift the supply curve. If costs go up, as in the case of having to pay higher wages, the supplier has less of an ability to supply cars.


Slide89 l.jpg

13. Assuming that soybeans and tobacco can both be grown on the same land, an increase in the price of tobacco, other things being equal, causes a (an)

a. upward movement along the supply curve for soybeans.

b. downward movement along the supply curve for soybeans.

c. rightward shift in the supply for soybeans.

d. leftward shift in the supply for soybeans.

D. With an increase in the price of tobacco farmers will want to grow more tobacco to take advantage of the higher price. Farmers will therefore plant soybeans on land they used to use for tobacco.


Slide90 l.jpg

14. If Q the same land, an increase in the price of tobacco, other things being equal, causes a (an)d = quantity demanded and Qs = quantity supplied at a given price, a shortage in the market results when

a. Qs is greater than Qd.

b. Qs equals Qd.

c. Qs is less than or equal to Qd.

d. Qs is greater than or equal to Qd.

D. When there are more units of something being demanded than being supplied, a shortage will result.


Slide91 l.jpg

15. Assume that the equilibrium price for a good is $10. If the market price is $5, a

a. shortage will cause the price to remain at $5.

b. surplus will cause the price to remain at $5.

c. shortage will cause the price to rise toward $10.

d. surplus will cause the price to rise toward $10.

C. When the price of a good is below the market price, there are more units being supplied than being demanded. The result is a shortage and consumers will bid the price up toward the equilibrium price.


Slide92 l.jpg

P the market price is $5, a

Supply & Demand Exhibit

$2.00

S

$1.50

$1.00

D

$.50

Q

100

200

300

400


Slide93 l.jpg

16. In the market shown in the previous graph, the equilibrium price and quantity of good X are

a. $0.50, 200.

b. $1.50, 300.

c. $2.00, 100.

d. $1.00, 200.

Previous graph

D. The equilibrium price and equilibrium quantity are at the point where the quantity demanded equals the quantity supplied. This is the price toward which the economy tends.


Slide94 l.jpg

17. In the previous graph, at a price of $2.00, the market for good X will experience a

a. shortage of 150 units.

b. surplus of 100 units.

c. shortage of 100 units.

d. surplus of 200 units.

Previous graph

D. At a price of $2.00 the quantity demanded is 100 and the quantity supplied is 300; 300 units minus 100 equals 200 units.


Slide95 l.jpg

18. In the previous graph, if the price of good X moves from $1.00 to $2.00, the new market condition will put

a. upward pressure on price.

b. no pressure on price to change.

c. downward pressure on price.

d. no pressure on quantity to change.

Previous graph

C. Anytime the price is above the equilibrium price a surplus will result. Suppliers will therefore lower price to get rid of the surplus.


Internet exercises l.jpg
Internet Exercises $1.00 to $2.00, the new market condition will put

Click on the picture of the book, choose updates by chapter for the latest internet exercises


Slide97 l.jpg
END $1.00 to $2.00, the new market condition will put


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