Answer & Explanation:***Instructions: Please answer question #1 and #2 with a
minimum of 100-word count. For question #3, please review the article and
answer each question with a minimum of 100-word count. Separate your answers by
paragraphs for each question for an easier breakdown. Attached is the course
material for this unit. Must use the source provided for an in-text citation
and a reference. 1 or 2 outside source is required, but you can have more if
needed. Use APA Format only. Let me know if you have any questions or concerns.
1. Using the demand curve shifters (PYNTE), explain whether
each of the following will increase or decrease demand for cell phones. Tell whether the demand curve shifts to the
right or to the left.
a. A decrease in the
incomes of consumers of cell phones.
b. An increase in the
price of apps for cell phones.
c. An increase in the
number of consumers in the market for cell phones.
2. Using the supply curve shifters (SPEND) explain whether
each of the following will increase or decrease the supply of cell phones. Tell whether the supply curve shifts to the
right or to the left.
a. The market price of the glass used in cell phone screens
increases.
b. The number of firm that make cell phones increases.
c. Cell phone manufacturers expect the market price of cell
phones to increase next month.
3. Read the following article regarding Cap and Trade
policies.
http://online.wsj.com/article/SB10001424052702304620304575165843688369042.html?mod=WSJ_hpp_sections_news
a. What is a good or
service market that might be affected limiting pollution via the cap and trade
policy as described in the article?
Explain.
[For simplicity, do not choose “jobs” or employment. Choose a good or service that would have its
supply or demand affected by the cap and trade policy.]
b. Which of the
shifters that shift either supply or demand (SPEND or PYNTE) does a Cap and
Trade policy affect in the market you chose in Part (a)? Which curve (supply or demand) would shift in
response to the policy? Will it increase
or decrease?
c. Draw a supply and
demand graph. Start with an initial
equilibrium like you see on Slide #25 in the Attend section. Shift the curve in the direction that you
chose in the previous section. Find the
new equilibrium. (You do not need to
turn in your graph. It is for your own
use.) *you do not need to give me this, but you need it to answer part D*
d. Did equilibrium price increase or decrease? Did equilibrium quantity increase or
decrease?
read_2.pdf
supply_and_demand_notes.ppt
Unformatted Attachment Preview
4
c h a p t e r
Demand, Supply, and
Market Equilibrium
4.1
Markets
4.2
Demand
4.3
Shifts in the Demand Curve
4.4
Supply
4.5
Shifts in the Supply Curve
4.6
Market Equilibrium Price and
Quantity
UPI/Brian Kersey/Landov
f o u r
The National Football League posted attendance of roughly 74,000
for Super Bowl XLIV in Miami. Just weeks before the game, however, tickets were selling on secondary ticket exchange sites such as StubHub and
TicketMaster for anywhere from $1,200 to $3,500—well above face value.
What does this tell us about the prices that fans are willing to pay and the
number of tickets they are willing to buy? Why does the NFL set its ticket
prices so low? Do scalpers “rip off” innocent buyers? A further look at supply and demand will help us answer these and many other questions.
W
R
I
G
H
T
,
S
H
E
R
R
Y
2
7
9
3
B
U
Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
99
chapter 4 Demand, Supply, and Market Equilibrium
was hinting at the importance of supply and demand, he was right on target. Supply and
demand is without a doubt the most powerful tool in the economist’s toolbox. It can help
explain much of what goes on in the world and help predict what will happen tomorrow.
In this chapter, we will learn about the law of demand and the law of supply and the factors
that can change supply and demand.
We then bring market supply and market demand together to determine equilibrium price
and quantity. We also learn how markets with many buyers and sellers adjust to temporary
shortages and surpluses.
© Flying Colours
Ltd/Jupiterimages
According to Thomas Carlyle, a nineteenth-century philosopher, “Teach
a parrot the term ‘supply and demand’ and you’ve got an economist.”
Unfortunately, economics is more complicated than that. However, if Carlyle
Do markets have to be
physical places?
market
the process of buyers and
sellers exchanging goods
and services
4.1
Markets
W
R Why is it so difficult to define a market?
I
Defining a Market
G
Although we usually think of a market as a H
place where some sort of
exchange occurs, a market is not really a place at all. A market is the proT
cess of buyers and sellers exchanging goods and services. Supermarkets,
,
the New York Stock Exchange, drug stores, roadside
stands, garage sales,
Internet stores, and restaurants are all markets.
Every market is different. That is, the conditions under which the
S can vary. These differexchange between buyers and sellers takes place
ences make it difficult to precisely define a market.
H After all, an incredible variety of exchange arrangements exist in the real world—organized
E
securities markets, wholesale auction markets, foreign exchange markets,
The stock market involves many buyers
R
real estate markets, labor markets, and so forth.
and sellers; and profit statements and stock
are readily available. New informaGoods being priced and traded in various ways
R at various locations by prices
tion
is
quickly understood by buyers and
various kinds of buyers and sellers further compound the problem of definsellers and is incorporated into the price of
Y
ing a market. For some goods, such as housing, markets are numerous but the stock. When people expect a company
limited to a geographic area. Homes in Santa Barbara, California, for exam- to do better in the future, the price of the
ple (about 100 miles from downtown Los Angeles), do not compete directly stock rises; when people expect the com2
with homes in Los Angeles. Why? Because people who work in Los Angeles pany to do poorly in the future, the price of
7 distance. Even within cit- the stock falls.
will generally look for homes within commuting
ies, separate markets for homes are differentiated
9 by amenities such as more
living space, newer construction, larger lots, and better schools.
In a similar manner, markets are numerous3
but geographically limited for a good such as
cement. Because transportation costs are so high
B relative to the selling price, the good is not economic
shipped any substantial distance, and buyers are usually in contact only with local producers. content
standards
U
Price and output are thus determined in a number of small markets. In other markets, such as Prices send signals and
those for gold or automobiles, markets are global. The important point is not what a market provide incentives to b uyers
and sellers. When supply
looks like, but what it does—it facilitates trade.
ECS
Buyers and Sellers
The roles of buyers and sellers in markets are important. Buyers, as a group, determine the
demand side of the market. Buyers include the consumers who purchase the goods and
or demand changes, m
arket
prices adjust, affecting incentives. Understanding the
role of prices as s ignals and
incentives helps people anticipate market o
pportunities
and make better choices as
producers and consumers.
Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
REUTERS/Peter Foley/Landov
What is a market?
100
PART 2 Supply and Demand
AP Photo/Paul Sakuma
services and the firms that buy inputs—labor, capital, and raw materials.
Sellers, as a group, determine the supply side of the market. Sellers include
the firms that produce and sell goods and services and the resource owners
who sell their inputs to firms—workers who “sell” their labor and resource
owners who sell raw materials and capital. The interaction of buyers and
sellers determines market prices and outputs—through the forces of supply
and demand.
In the next few chapters, we focus on how supply and demand work in
a competitive market. A competitive market is one in which a number of
buyers and sellers are offering similar products, and no single buyer or
eBay is an Internet auction company that brings
seller can influence the market price. That is, buyers and sellers have little
together millions of buyers and sellers from all
market power. Because many markets contain a high degree of competitiveover the world. The gains from these mutually
ness, the lessons of supply and demand can be applied to many different
beneficial exchanges are large. Craigslist also
types of problems.
uses the power of the Internet to connect many
buyers and sellers in local markets.
The supply and demand model is particularly useful in markets like
agriculture, finance, labor, construction, services, wholesale, and retail.
In short, a model is only as good as it explains and predicts. The model
competitive market
a market where the many
of supply and demand is veryW
good at predicting changes in prices and quantities in many
buyers and sellers have
markets
large
and
small.
R
little market power—each
buyer’s or seller’s effect on
market price is negligible
SECTION QUIZ
1. Which of the following is a market?
I
G
H
T
,
a. a garage sale
b. a restaurant
S
H
d. an eBay auction
E
e. all of the above
R
2. In a competitive market,
a. there are a number of buyers and sellers.
R
b. no single buyer or seller can appreciably affect the market price.
Y
c. the New York Stock Exchange
c. sellers offer similar products.
d. all of the above are true.
2
7 between buyers and sellers occurs make it difficult to
a. Differences in the conditions under which the exchange
precisely define a market.
9
b. All markets are effectively global in scope.
3
c. All markets are effectively local in scope.
B
d. Both (a) and (b) are true.
4. Buyers determine the ____________ side of the market;Usellers determine the ____________ side of the market.
3. Which of the following is true?
a. demand; demand
b. demand; supply
c. supply; demand
d. supply; supply
(continued)
Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
101
chapter 4 Demand, Supply, and Market Equilibrium
S E C T I O N Q U I Z (Cont.)
5. When transportation costs are high relative to a good’s selling price,
a. markets tend to be more local.
b. markets tend to be more global.
c. markets do not exist.
d. it makes no difference in how local or global markets are.
1. Why is it difficult to define a market precisely?
2. Why do you get your produce at a supermarket rather than directly from farmers?
3. Why do the prices people pay for similar items at garage sales vary more than for similar items in a department
store?
Answers: 1. e
2. d
3. a
4. b
5. a.
What is the law of demand?
What is an individual demand curve?
W
R
I
G
H
T
,
4.2
Demand
What is a market demand curve?
The Law of Demand
S
H
Sometimes observed behavior is so pervasive it is called a law—the law of demand, for
E quantity of a good or service demanded
example. According to the law of demand, the
varies inversely (
negatively) with its price, R
ceteris paribus. More directly, the law of
demand says that, other things being equal, when the price (P) of a good or service falls,
R
the quantity demanded (QD) increases. Conversely, if the price of a good or service rises,
Y
the quantity demanded decreases.
P ↑ ⇒ QD ↓ and P ↓ ⇒ QD ↑
2
7
Why Is There a Negative Relationship
between
9
3
Price and the Quantity Demanded?
B
The law of demand describes a negative (inverse) relationship between price and quantity
U
demanded. When price goes up, the quantity demanded
goes down, and vice versa. But why
is this so? There are several reasons. Observed behavior tells us that consumers will buy
more goods and services at lower prices than at higher prices. Businesses would not put items
on sale if they did not think they could sell more at lower prices—that is, at a lower price,
there is a greater quantity demanded.
Another reason for the negative relationship is what economists call diminishing
marginal utility. In a given time period, a buyer will receive less satisfaction from each
successive unit of a good c onsumed. For example, a second ice cream cone will yield less
satisfaction than the first, a third will yield less satisfaction than the second, and so on.
ECS
economic
content
standards
Higher prices for a good or
service provide the incentives
for buyers to purchase less.
Lower prices for goods or
services provide incentives
to purchase more of the
good or service.
law of demand
the quantity of a good or
service demanded varies
inversely (negatively) with
its price, ceteris paribus
diminishing marginal
utility
the concept that in a given
time period, an individual
will receive less satisfaction
from each successive unit of
a good consumed
Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
102
PART 2 Supply and Demand
COURTESY OF ROBERT L. SEXTON
It follows from diminishing marginal utility that if people derive decreasing
amounts of satisfaction from s uccessive units, consumers will buy additional
units only if the price is reduced.
Finally, there are the substitution and income effects of a price change.
For example, if the price of pizza increases, the quantity of pizza demanded
will fall because some consumers might switch from of pizza to hamburgers, tacos, burritos, submarine sandwiches or other foods that substitute
for pizza. This is called the substitution effect of a price change. In addition, an increase in the price of pizza will reduce the quantity of pizza
demanded because it reduces a buyer’s purchasing power. Purchasing power
is the quantity of goods a consumer can buy with a fixed income. So when
the price of pizza rises, the decreased purchasing power of the consumer’s
income will usually lead the consumer to buy less pizza. Alternatively, when
the price of a pizza falls, the increased purchasing power of the consumer’s
income will usually lead the consumer to buy a greater quantity of pizza.
This is called the income effect of a price change.
Economists conducted an experiment with rats to see how they
would respond to changing prices
of different drinks (changing the
number of times a rat had to press
a bar). Rats responded by choosing
more of the beverage with a lower
price, showing they were willing to
substitute when the price changed.
That is, even rats seem to behave
rationally—responding to incentives
and opportunities to make themselves better off.
individual demand
schedule
a schedule that shows the
relationship between price
and quantity demanded
W
IndividualR Demand
I
An Individual Demand Schedule
G
The individual demand schedule shows the relationship between the price
Hthe quantity demanded. For example, suppose Elizabeth
of the good and
enjoys drinkingTcoffee. How many pounds of coffee would Elizabeth be
willing and able to buy at various prices during the year? At a price of $3
, buys 15 pounds of coffee over the course of a year. If
a pound, Elizabeth
the price is higher, at $4 per pound, she might buy only 10 pounds; if it
is lower, say $1 per pound, she might buy 25 pounds of coffee during the
S
year. Elizabeth’s demand for coffee for the year is summarized in the demand schedule
in Exhibit 1. Elizabeth mightHnot be consciously aware of the amounts that she would
purchase at prices other thanEthe prevailing one, but that does not alter the fact that she
has a schedule in the sense that she would have bought various other amounts had other
R
prices prevailed. It must be emphasized
that the schedule is a list of alternative possibilities. At any one time, only one
R of the prices will prevail, and thus a certain quantity will
be purchased.
Y
individual demand curve
An Individual Demand Curve
By plotting the different prices 2
and corresponding quantities demanded in Elizabeth’s demand
schedule in Exhibit 1 and then7connecting them, we can create the individual demand curve
for Elizabeth shown in Exhibit 2. From the curve, we can see that when the price is higher, the
9quantity demanded is lower, and when the price is lower, the
3quantity demanded is higher. The demand curve shows how
Elizabeth’s Demand Schedule
Bthe quantity of the good demanded changes as its price varies.
for Coffee
a graphical representation
that shows the inverse
relationship between price
and quantity demanded
section 4.2
exhibit 1
© Cengage Learning 2013
Price of Coffee
(per pound)
Quantity of Coffee
Demanded
(pounds per year)
$5
5
4
10
3
15
2
20
1
25
U
What Is a Market Demand Curve?
Although we introduced the concept of the demand curve
in terms of the individual, economists usually speak of the
demand curve in terms of large groups of people—a whole
nation, a community, or a trading area. That is, to analyze
how the market works, we will need to use market demand.
As you know, every individual has his or her demand curve
Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
103
chapter 4 Demand, Supply, and Market Equilibrium
section 4.2
exhibit 3
R
R
Creating a Market Demand Curve
Y
a. Creating a Market Demand Schedule for Coffee
Quantity of Coffee Demanded (pounds per year)
1
$4
20
1
$3
25
1
b. Creating a Market Demand Curve for Coffee
Peter
$5
4
1
3
2
DHOMER
1
0
5 10 15 20 25
Quantity of Coffee
(pounds per year)
Price (per pound)
Price (per pound)
© Cengage Learning 2013
$5
4
3
2
Rest of
Quahog
5
Market
Demand
1
2,970
5
3,000
1
4,960
5
5,000
Market Demand
Rest of Quahog
$5
1
DMARGE
1
0
1
5 10 15 20 25
Quantity of Coffee
(pounds per year)
$5
4
5
3
2
DS
1
0
2,970
4,960
Quantity of Coffee
(pounds per year)
Price (per pound)
Peter
2
7 Lois
9 10
15
3
BLois
U
Price (per pound)
Price
(per pound)
4
3
DM
2
1
0
3,000
5,000
Quantity of Coffee
(pounds per year)
Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
© Cengage Learning 2013
Price of Coffee
(per month)
for every product. The horizontal summing of the demand curves of many individuals is
market demand curve
called the market demand curve.
the horizontal summation of
Suppose the consumer group is composed of Peter, Lois, and the rest of their small comindividual demand curves
munity, Quahog, and that the product is still coffee. The effect of price on the quantity of coffee
demanded by Lois, Peter, and the rest of Quahog is given in the demand schedule and demand
curves shown in Exhibit 3. At $4 per pound, Peter would be willing and able to buy 20 pounds
of coffee per year, Lois would be willing and able to buy
10 pounds, and the rest of Quahog would be willing and able
section 4.2
Elizabeth’s Demand Curve
to buy 2,970 pounds. At $3 per pound, Peter would be willexhibit 2
for Coffee
ing and able to buy 25 pounds of coffee per year, Lois would
be willing and able to buy 15 pounds, and the rest of Quahog
would be willing and able to buy 4,960 pounds. The market
$5
Elizabeth’s Demand
demand curve is simply the (horizontal) sum of the quantities
Curve
4
Peter, Lois, and the rest of Quahog demand at each price. That
is, at $4, the quantity demanded in the market would be 3,000
3
pounds of coffee (20 + 10 + 2,970 = 3,000), and at $3, the
quantity demanded in the market would be 5,000 pounds of
2
W
coffee (25 + 15 + 4,960 = 5,000).
1
In Exhibit 4, we offer a more complete setRof prices and
quantities from the market demand for coffee during the year.
I
Remember, the market demand curve shows the amounts
0
5
10 15 20 25
G and able to
that all the buyers in the market would be willing
Quantity of Coffee
(pounds per year)
buy at various prices. For example, when the price
H of coffee
is $2 per pound, consumers in the market collectively would
The dots represent various quantities of coffee
T At $1 per
be willing and able to buy 8,000 pounds per year.
that Elizabeth would be willing and able to
pound, the amount c oll …
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