A shift in the position of a demand curve is a change in demand; a movement from one point to another point along an unchanged demand curve is a change in the quantity demanded.
4.4 Draw a graph of your demand for leisure time. How can you buy leisure time?
You can buy an hour of leisure time by working an hour less -- the cost is your wage rate for that hour.
4.5 Comment on the following quotation from a business owner: "We lowered our prices so the demand for our goods increased."
A lower price causes an increase in the quantity demanded. It does not cause an increase in demand.
4.6 - What is a Normal good ? And an Inferior good ?
If a rise in income raises the demand for a good, then it is a Normal good. If a rise in income reduces the demand for a good, then it is an Inferior good.
4.7 - What happens to the demand for a good if the price of a Substitute for it rises ?
Let’s have coffee and tea, substitute goods. Then, when the price of coffee rise, the demand for tea will rise since some people will switch demand from coffee to tea.
4.8 - What happens to the demand for a good if the price of a Complement for it rises ?
Let’s have cars and tires, complement goods. If the price of cars rises, the demand for tires will decrease.
4.9 Draw a graph of your demand curve for vacation days on a beach in the Caribbean. What other conditions would affect your demand? How?
Tastes for warm, sunny beach vacations versus other kinds of vacations (mountain climbing, skiing, going to museums, riding a tour bus); prices of other types of vacations, prices of other beach vacation options; my wealth; the time costs of a vacation (see chapter 6 for more on time costs), which includes what I could have earned if I had worked instead of taken a vacation (the higher my daily wage, the higher my opportunity cost of sitting at the beach!); and the prices of new swimsuits and other goods that are "complements" to my vacation.
4.12 Draw graphs to explain the difference between a change in supply and a change in the quantity supplied.
See this change in supply and this change in the quantity supplied.
4.13 - What’s an Equilibrium?
An Equilibrium occurs when the Supply and Demand curves intersect. A market equilibrium is a situation in which the quantity supplied equals the quantity demanded.
4.14 - Why does Excess Demand tend to raise the price of a good while Excess of Supply tend to reduce prices?
Excess Demand is a situation in which the quantity demanded exceeds the quantity supplied. This situation is created when prices are below the equilibrium. Thus, price tends to rise until it reaches the equilibrium where the quantity demanded equals the quantity supplied.
Excess Supply is a situation in which the quantity supplied exceeds the quantity demanded, that happens when prices are above the equilibrium. Therefore, price tends to reduce until it reaches the equilibrium.
4.15 - How does an increase in Demand affect the equilibrium price and the quantity traded ? How does an increase in Supply affect the equilibrium price and quantity traded?
An increase in Demand raises both equilibrium prices and quantity demanded. An increase in Supply lowers the equilibrium price and raises quantity demanded.
4.17 Translate the following newspaper headlines
in to statements about supply and demand.
a. Sweets Cost More Due to Sugar Price Rise
b. Pork Prices Rise as Farmers Cut Output
c. Profits From Popcorn Attract More Farmers
a. Sugar is an input into producing sweets (candy, cakes, cookies, and so on). When the price of sugar rises, the cost of producing sweets increases, causing a decrease in the supply of sweets. This raises the price of sweets as in this graph.
b. The cut in output means a decrease in the supply of pork, which raises the price (same graph as part "a")
c. More popcorn farmers means an increase in the supply of popcorn,
which will reduce its price as in this
graph.
(Note that the fall in the price of popcorn will tend
to reduce the profits from selling it.)
4.18 - Which kind of price - nominal or relative - appears on the vertical axis in a Supply-and-Demand graph ?
It is the good’s relative price.
4.19 How is the relative price of tacos in terms of frisbees related to the nominal prices of tacos and frisbee?
The relative price of tacos in terms of frisbees is the nominal price of tacos divided by the nominal price of frisbees.
4.20 If sneakers cost $30 and a hamburger costs $3, what is the relative price of sneakers in terms of hamburgers? What is the relative price of hamburgers in terms of sneakers?
The relative price of sneakers in terms of hamburgers is 30/3 = 10 hamburgers
per sweater. The relative price of hamburgers in terms of sneakers is 3/30
= 1/10 of a sweater per hamburger.
4.21 A national newspaper reported: "Increased retail demand for roasted and ground coffee because of lower prices... has contributed to a higher price for coffee." What's wrong with this reasoning?
This confuses a change in demand with a change in the quantity demanded. Lower coffee prices do not cause "increased retail demand," though an increase in the supply of coffee would reduce its price and cause an increase in the quantity of coffee demanded. If coffee prices later increased, that must result from some other change, such as a later increase in the price of shipping coffee beans from South America, or a change in consumer tastes that increases the demand for coffee.
4.22 Suppose that three companies sell lawnmowers
with supply schedules as in the text (on page 105).
a. Make a table of the market supply schedule.
b. Draw the supply curve of each company and
the market supply curve.
a. Market Supply Schedule
| price | quantity supplied |
| $400 | 138 |
| $350 | 132 |
| $300 | 118 |
| $250 | 93 |
| $200 | 57 |
| $150 | 26 |
| $100 | 15 |
| $50 | 5 |
b. (Draw a graph as on pages 88-89 of the text).
4.23 A change in the price of one good can affect
demand and supply of other goods.
a. How is an increase in the price of bologna
likely to affect the price of peanut butter and the amount of peanut butter
that people buy?
b. How is an increase in the price of charcoal
grills likely to affect the price of charcoal and the amount of charcoal
that people buy?
a. Bologna and peanut butter are substitutes, so an increase in the price of bologna increases the demand for peanut butter, raising the equilibrium quantity (which is the amount that people buy) and price of peanut butter.
b. Charcoal grills and charcoal are complements, so an increase in the price of grills decreases the demand for charcoal, reducing the equilibrium quantity and price of charcoal.
4.24 Discuss this statement: "They're building too many hotels in this city. They think this town will become a big convention city. if they're wrong, we will have too many hotels and loads of empty rooms. It'll cost more to spend a night in a hotel here because the hotels will charge more to make up for all the empty rooms."
The increase in supply of hotel rooms will cause prices of hotel rooms to fall, not to rise (as in this graph). If there are empty hotel rooms, the hotels with those empty rooms will lose money on the. If the hotels tried to charge more for the rooms, there would be a surplus and the price would fall toward its equilibrium (see pages 88-89).
4.26 Suppose that a genetically engineered hormone were to raise the milk output of cows by 40 percent. How would this affect the price of milk, the quantity of milk produced, and the number of dairy farmers.
This change in technology would increase the supply of milk, which would reduce the price of milk and raise the equilibrium quantity. If the price of milk falls by a lot, then profits of dairy farmers would fall, so some would leave the business, reducing the number of dairy farmers. If the price of milk falls only by a small amount, then profits of dairy farmers would increase (because each farmer produces 40 percent more milk with the same number of cows); these higher profits would induce more people to become dairy farmers.
4.27 Read the following news headlines and excerpts and interpret them in terms of supply and demand:
a. "Prices Soar as Everyone wants Beanie Babies."
b. "Crude Oil, Petroleum Product prices Rise
after Explosion at Large Shell Refinery..."
c. "Digital Camera Prices Fall as More People
Buy, Contradicting the Law of Supply and Demand"
d. "Computer Prices Fall Again as Chip technology
Improves"
e. "Tuition Rises and College Enrollments Fall"
f. "Demand is increasing moderately, but
with yields per acre rising, farmers have seen little change in prices."
a. Demand for Beanie Babies increases, raising their prices. see graph
b. The explosion (which really happened -- these headlines are real) decreases the supply of crude oil and petroleum products, raising their prices. see graph
c. Supply of digital cameras increases, lowering their prices. see graph
d. Supply of computers increases, lowering their prices. see graph
e. Supply of college services decreases, raising the price. see graph
f. Demand and supply both increase, with little change in price.
4.28 If the average price of goods rises 5 percent and the price of tortillas rises 8 percent, what happens to the relative price of tortillas?
The relative price of tortillas rises by about 3 percent.
4A.1 Suppose that the demand curve for rental cars is
Qd = 500 - 2P
and the supply curve is
Qs = 100 + 6P
where Qd is the quantity demanded (in cars per
day), Qs is the quantity supplied, and P is the rental price per day. Find
the equilibrium price and quantity.
In equilibrium, quantity demanded equals quantity supplied:
500-2P = 100 + 6P
We can now solve for the equilibrium price:
500=100 + 8P
or
400=8P
or
P=50
To find the equilibrium quantity, we substitute the solution for P into the demand curve.
Q = 500-2P
or
Q = 400.
Check the answer by substituting the solution for P into the supply curve to make sure that we get the same answer for the equilibrium quantity:
Q = 100 + 6P
or
Q = 400.
4A.2 Suppose that the demand curve for movie tickets is:
Qd = 250-20P
and the supply curve is:
Qs = 50 + 30P
where Qd is the quantity demand, Qs is the quantity supplied and P is the price. Find the equilibrium price and quantity.
In equilibrium, quantity demanded equals quantity supplied:
250-20P = 50+30P
We can now solve for the equilibrium price:
250 = 50 + 50P
200 = 50P
P = 4
To find the equilibrium quantity, we substitute the solution for P into the demand curve.
Q= 250- 20P
Q = 170
Check the answer by substituting the solution for P into the supply curve to make sure that we get the same answer for the equilibrium quantity:
Q = 50 + 30P
or
Q = 170.
Copyright 1998, Alan C. Stockman. All rights reserved on all text and graphics, except those already in the public domain. You may copy any or all of this page in electronic or print form for your own use in learning economics. Others may copy any and all of this page provided that they provide credit, in a clearly visible manner, to any and all readers, in the form: "Taken from Alan C. Stockman's Introduction to Economics Web Site, University of Rochester, and used with permission of Alan C. Stockman."