48 CHAPTER 3

Now come two more difficult parts that you must Questions
practice. Suppose that you are dealing with a
situation in which one influence changes. First,
determine whether the influence shifts the demand „ True/False and Explain
or the supply curve. Aside from the effect of the Markets and Prices
expected future price, most factors shift only one
1. A good with a high relative price must have a
curve, and you must decide which one. Second, low opportunity cost.
determine whether the curve that is affected shifts
rightward (increases) or shifts leftward 2. A product’s relative price can fall even though
(decreases). From here on, it is straighter forward: its money price rises.
Take the figure you have already drawn, shift the Demand
appropriate curve, and read off the answer! 3. The law of demand states that, if nothing else
changes, as the price of a good rises, the
quantity demanded decreases.
4. A decrease in income decreases the demand for
all products.
5. “An increase in demand” means a movement
down and rightward along a demand curve.
6. New technology for manufacturing computer
chips shifts the demand curve for computer chips.
Supply
7. A supply curve shows the maximum price
required in order to have the last unit of output
produced.
8. A rise in the price of chicken feed decreases
the supply of chickens.
9. A rise in the price of orange juice shifts the
supply curve of orange juice rightward.
5. CHANGES IN DEMAND DO NOT CAUSE
CHANGES IN SUPPLY; CHANGES IN Market Equilibrium
SUPPLY DO 10. Once a market is at its equilibrium price,
NOT CAUSE CHANGES IN DEMAND: Do unless something changes, the price will not
not make the common error of believing that an change.
increase in demand, that is, a rightward shift in the
demand curve, causes an increase in supply, a 11. If there is a surplus of a good, its price falls.
rightward shift in the supply curve. Use Figure Predicting Changes in Price and Quantity
3.4, which illustrates the market for television 12. If the expected future price of a good rises, its
sets, as an example. An increase in demand shifts cur-rent price rises.
the demand curve rightward, as shown. This shift
means the equilibrium price of a television rises 13. A rise in the price of a product decreases the
(from $300 for a set to $400) and the equilibrium quan-tity demanded, so there can never be a
quantity increases (from 3,000 sets per day to situation with both the product’s equilibrium
price rising and equilibrium quantity increasing.
4,000). But the shift in the demand curve does not
cause the supply curve to shift. Instead, there is a 14. If both the demand and supply curves shift right-
movement along the unchanging supply curve. ward, the equilibrium quantity definitely
increases.
15. If both the demand and supply
curves shift right-ward, the
equilibrium price definitely rises.

Shar ni false
Nogoon ni true
DEMAND AND SUPPLY 49

„ Multiple Choice 6. Some sales managers are talking shop. Which of

the following quotations refers to a movement
Markets and Prices along the demand curve?
1. The opportunity cost of a good is the same as its a. “Since our competitors raised their prices
a. money price. our sales have doubled.”
b. relative price. b. “It has been an unusually mild winter; our
c. price index. sales of wool scarves are down from last
d. None of the above. year.”
c. “We decided to cut our prices, and the
2. The money price of a pizza is $12 per pizza and increase in our sales has been remarkable.”
the money price of a taco is $2 per taco. The d. None of the above.
relative price of a pizza is
a. $12 per pizza.
b. $24 per pizza.
c. 6 tacos per pizza.
d. 1 6 pizza.

Demand
3. The law of demand concludes that a rise in the price
of a golf ball ____ the quantity demanded and
____.
a. increases; shifts the demand curve for golf
balls rightward.
b. decreases; shifts the demand curve for golf
balls leftward.
c. decreases; creates a movement up along the
de-mand curve for golf balls.
d. increases; creates a movement down along
the demand curve for golf balls.

4. If a rise in the price of gasoline decreases the

demand for large cars, 7. Which of the following could lead to the shift in
a. gasoline and large cars are substitutes in the demand curve illustrated in Figure 3.5?
consumption. a. An increase in the quantity demanded
b. gasoline and large cars are complements in b. A rise in the price of a substitute good
con-sumption. c. A rise in the price of a complement
c. gasoline is an inferior good. d. A fall in the price of the product
d. large cars are an inferior good.
Supply
5. A normal good is one 8. A fall in the price of a good leads to producers
a. with a downward sloping demand curve. decreasing the quantity of the good supplied.
b. for which demand increases when the price of This statement reflects.
a substitute rises. a. the law of supply.
c. for which demand increases when income b. the law of demand.
increases. c. a change in supply.
d. None of the above. d. the nature of an inferior good.
50 CHAPTER 3

9. Which of the following influences does NOT Market Equilibrium

shift the supply curve? 15. If the market for Twinkies is in equilibrium, then.
a. A rise in the wages paid workers. a. Twinkies must be a normal good.
b. Development of new technology b. producers would like to sell more at the
c. People deciding that they want to buy more of current price.
the product. c. consumers would like to buy more at the current
d. A decrease in the number of suppliers price.
d. The quantity supplied equals the quantity
10. The price of jet fuel rises, so the
de-manded.
a. demand for airplane trips increases.
b. demand for airplane trips decreases. 16. If there is a shortage of a good, the quantity
c. supply of airplane trips increases. demanded is ____ than the quantity supplied, and
d. supply of airplane trips decreases. the price will ____.
a. less, rise.
11. In addition to showing the quantity that will be
b. less, fall.
supplied at different prices, a supply curve can
c. greater; rise
be viewed as the
d. greater; fall
a. willingness-and-ability-to-pay curve.
b. marginal benefit curve.
c. minimum-supply price curve.
d. maximum-supply price curve.

12. An increase in the number of producers of gruel

____ the supply of gruel and shifts the supply
curve of gruel ____.
a. increases; rightward
b. increases; leftward
c. decreases; rightward
d. decreases; leftward

13. An increase in the price of the cheese used to

produce pizza shifts the supply curve of pizza ____
and shifts the demand curve for pizza ____.
a. rightward; leftward
b. leftward; leftward
c. leftward; not at all
d. not at all; leftward

14. To say that “supply increases” for any reason, 17. In Figure 3.6 at the price of $8 there is a
means there is a a. shortage and the price will rise.
a. movement rightward along a supply curve. b. shortage and the price will fall.
b. movement leftward along a supply curve. c. surplus and the price will rise.
c. shift rightward in the supply curve. d. surplus and the price will fall.
d. shift leftward in the supply curve.
DEMAND AND SUPPLY 51

18. In a market, at the equilibrium price, 23. The number of firms producing computer memory
a. Neither buyers nor sellers can do business at chips decreases. As a result, the price of a memory
a better price. chip ____ and the quantity of memory chips ____.
b. buyers are willing to pay a higher price, but a. rises, increases.
sellers do not ask for a higher price. b. rises, decreases.
c. Buyers are paying the minimum price they are c. falls; increases
willing to pay for any amount of output and d. falls; decreases
sellers are charging the maximum price they are
willing to charge for any amount of production. For the next five questions, suppose that the price of
d. None of the above is true. paper used in books rises and simultaneously (and
independently) more people decide they want to
Predicting Changes in Price and Quantity read books.
19. For consumers, pizza and hamburgers are 24. The rise in the price of paper shifts the
substitutes. A rise in the price of pizza ____ the a. demand curve rightward.
price of a hamburger and ____ in the quantity of b. demand curve leftward.
hamburgers. c. supply curve rightward.
d. supply curve leftward.
a. raises, increases.
b. raises, decreases.
25. The fact that more people want to read books shift
c. lowers; increases the
d. lowers; decreases
a. demand curve rightward.
20. How does an unusually cold winter affect the b. demand curve leftward.
equilibrium price and quantity of anti-freeze? c. supply curve rightward.
a. It raises the price and increases the quantity. d. supply curve leftward.
b. It raises the price and decreases the quantity.
26. The equilibrium quantity of books
c. It lowers the price and increases the quantity.
d. It lowers the price and decreases the quantity. a. definitely increases.
b. definitely does not change.
21. You notice that the price of wheat rises and the c. definitely decreases.
quantity of wheat increases. This set of d. might increase, not change, or decrease.
observations can be the result of the
27. The equilibrium price of a book
a. demand for wheat curve shifting rightward.
a. definitely rises.
b. demand for wheat curve shifting leftward.
b. definitely does not change.
c. supply of wheat curve shifting rightward.
c. definitely falls.
d. supply of wheat curve shifting leftward.
d. might rise, not change, or fall.
22. Technological improvement lowers the cost of
28. Suppose that the effect from people deciding they
producing coffee. As a result, the price of a pound
of coffee ____ and the quantity of coffee ____. want to read more books is larger than the effect
from the increase in the price of paper. In this
a. rises, increases. case, the equilibrium quantity of books
b. rises, decreases.
a. definitely increases.
c. falls; increases
b. definitely does not change.
d. falls; decreases
c. definitely decreases.
d. might increase, not change, or decrease.
52 CHAPTER 3

29. Which of the following definitely raises the 3. a. Table 3.1 presents the demand and supply
equilibrium price? schedules for comic books. Graph these
a. An increase in both demand and supply. demand and supply schedules in Figure 3.7.
b. A decrease in both demand and supply. What is the equilibrium price? The equilibrium
c. An increase in demand combined with a quantity?
decrease in supply. b. What is the marginal benefit received by the
d. A decrease in demand combined with an consumer of the 12,000,000th comic book?
increase in supply. What is the minimum price for which a pro-
ducer is willing to produce the 12,000,000th
30. Is it possible for the price of a good to stay the comic book?
same while the quantity increases?
a. Yes, if both the demand and supply of the TABLE 3.1
goods increase by the same amount.
Demand and Supply Schedules
b. Yes, if the demand increases by the same
amount the supply decreases. Quantity demanded Quantity
c. Yes, if the supply increases and the demand Price supplied
does not change. (per comic
d. No, it is not possible. book) (per month) (per month)
$2.50 14,000,000 8,000,000
„ Short Answer Problems 3.00 13,000,000 10,000,000
3.50 12,000,000 12,000,000
4.00 11,000,000 13,000,000
4.50 10,000,000 14,000,000

1. a. This year the price of a hamburger is $2 and the d. If any of these influences change, what happens to the
price of a compact disc is $12. In terms of supply curve?
hamburgers, what is the relative price of a
compact disc? In terms of hamburgers, what is
the oppor-tunity cost of buying a compact disc?
How are the two answers related?
b. Next year the (money) price of a compact disc
doubles to $24 and the (money) price of a
hamburger remains at $2. Now what is the
relative price of a compact disc?
c. The following year the (money) price of a
compact disc stays at $24 and the (money)
price of a hamburger doubles to $4. What is the
relative price of a compact disc?
d. In the next year, the (money) price of a
compact disc doubled to $48 and the money
price of a hamburger tripled to $12. What is the
relative price of a compact disc?
e. Can a product’s relative price fall even
though its money price has risen? Why or
why not?
2. a. When drawing a demand curve, what six
influences are assumed not to change?
b. If any of these influences change, what
happens to the demand curve?
c. When drawing a supply curve, what five
influ-ences are assumed not to change?
c. Suppose that the price of a movie, a
substitute for comic books, rises so that
at every price of a comic book
consumers now want to buy 2,000,000
more comic books than before. That is,
at the price of $2.50, consumers now
will buy 16,000,000 comics; and so on.
Plot this new demand curve in Figure
3.7. What is the new equilibrium price?
The new equilibrium quantity?
DEMAND AND SUPPLY 53

4. New cars are a normal good. Suppose that the and supply diagram to determine how the
economy enters a period of strong economic equi-librium price and quantity of chicken
expan-sion so that people’s incomes increase change.
substantially. Use a demand and supply diagram b. Return to the initial equilibrium, before eating
to determine what happens to the equilibrium price buffalo wings became stylish. Now suppose
and quantity of new cars. that a heat wave occurred and caused tens of
5. DVDs and video tapes are substitutes. Use a thou-sands of chickens to die or commit
supply and demand diagram to determine what suicide. Keeping in mind that dead chickens
happens to the equilibrium price and quantity of cannot be marketed, use a demand and supply
video tapes when the price of a DVD falls because diagram to determine what happens to the
of an in-crease in the supply of DVDs. equilibrium price and quantity of chicken.
6. Suppose we observe that the consumption of pea- c. Now assume that both the heat wave and fad
nut butter increases at the same time its price strike at the same time. Use a demand and sup-
rises. What must have happened in the market for ply diagram to show what happens to the equi-
pea-nut butter? Is the observation that the price librium price and quantity of chicken. (Hint:
rose and the quantity increased consistent with Can you tell for sure what happens to the
the law of demand? Why or why not? price? The quantity?)
7. Suppose that the wages paid oil workers fall. Use
a demand and supply diagram to determine the „ You’re the Teacher
effect this action has on the equilibrium price and
quan-tity of gasoline. 1. When you and a friend are studying Chapter 3, the
friend says to you, “I really don’t understand the
8. Chemical companies discover a new, more
difference between a ‘shift in a curve’ and a
efficient technology for producing benzene. Use a
demand and supply model to determine the impact ‘move-ment along’ a curve. Can you help me? It’s
that this new method has on the equilibrium price proba-bly important to understand this, so what’s
and quantity of benzene. the dif-ference?” Explain the difference to your
9. The price of a personal computer has continued friend.
to fall in the face of increasing demand. Explain. 2. “This demand and supply model is nonsense. It
10. a. The market for chickens initially is in equilib- says that if demand for some product decreases,
rium. Suppose that eating buffalo wings the price of that good falls. But, come on —
(which, contrary to the name, are made from except for computers, how many times have you
chicken wings) becomes so stylish that people actually seen a price fall? Prices always rise, so
eat them for breakfast, lunch, and dinner. Use don’t try telling me that that they fall.” The
a demand demand and supply model is sound; it is this
statement that is non-sense. Show the speaker the
error in that analysis.