Chapter 4 Bringing Supply and Demand Together Homework PDF

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Chapter 4 Bringing Supply and Demand Together Homework...

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Chapter 4: Bringing Supply and Demand Together 1. Market equilibrium The following table shows the monthly demand and supply in the market for shoes in Vancouver. Price

Quantity Demanded

Quantity Supplied

(Dollars per pair of shoes)

(Pairs of shoes)

(Pairs of shoes)

20

1,100

200

40

900

400

60

800

500

80

600

900

100

500

1,200

Based on the preceding table, plot the demand for shoes on the following graph using the blue points (circle symbol). Next, plot the supply of shoes using the orange points (square symbol). Finally, use the black point (cross symbol) to indicate the equilibrium price and quantity in the market for shoes.

Explanation: Each point on the market demand curve for shoes corresponds to an entry in the demand schedule. For example, at a price of $40 per pair, the quantity of shoes demanded is 900 pairs per month. Therefore, the point (900, 40) lies on the market demand curve for shoes. Similarly, each point on the market supply curve corresponds to an entry from the market supply column. For example, at a price of $80 per pair, the quantity of shoes supplied is 900 pairs per month. Therefore, the point (900, 80) lies on the market supply curve. To generate market demand and supply curves, plot a point for each entry in the demand column and each entry in the supply column. The market equilibrium occurs at the price at which quantity demanded equals quantity supplied. In this case, the demand and supply curves intersect at a price of $70 per pair of shoes and a quantity of 700 pairs per month. Therefore, the point (700, 70) represents the equilibrium in this market.

2. Disequilibrium Suppose the market for cantaloupes is unregulated. That is, cantaloupe prices are free to adjust based on the forces of supply and demand. If a shortage exists in the cantaloupe market, then the current price must be lower than the equilibrium price. For the market to reach equilibrium, you would expect buyers to offer higher prices. Explanation: Prices below the equilibrium price generate excess demand because buyers are willing to purchase more cantaloupes than sellers are willing to sell—the quantity supplied is less than the quantity demanded at that price. Some buyers who wish to purchase cantaloupes at the current price will be unable to do so. In order to purchase cantaloupes, some buyers will offer higher prices. As buyers bid and drive prices upward, some sellers will be willing to sell additional cantaloupes. Therefore, the market will move toward the equilibrium price, where the quantity of cantaloupes demanded by buyers equals the quantity supplied by sellers.

3. Market equilibrium and disequilibrium The following graph shows the monthly demand and supply curves in the market for calendars. Use the graph input tool to help you answer the following questions. Enter an amount into the Price field to see the quantity demanded and quantity supplied at that price. You will not be scored on any changes you make to this graph.

The equilibrium price in this market is $50 per calendar, and the equilibrium quantity is $250 calendars bought and sold per month. Explanation: The market equilibrium occurs at the price at which quantity demanded equals quantity supplied. In this case, the demand and supply curves intersect at a price of $50 per calendar and a quantity of 250 calendars per month. You can see this by adjusting the values in the Price field until the black points (cross symbol) overlap, indicating the intersection of these two curves. Complete the following table by indicating at each price whether there is a shortage or surplus in the market, the amount of that shortage or surplus, and whether this places upward or downward pressure on prices.

Explanation: At a price of $40 per calendar, consumers demand 270 calendars per month, but producers are willing to supply 230 calendars per month. Therefore, quantity demanded exceeds quantity supplied by 40 calendars per month. Because consumers want to buy more calendars than producers are willing to sell at that price, there is a shortage (excess demand) of calendars. In this situation, consumers, seeking calendars that are not available in the quantities they desire, will bid prices higher, and sellers, recognizing that they can raise their prices and still sell out their entire inventory, will respond by raising their prices. Thus, a shortage (excess demand) puts upward pressure on price.

At a price of $60 per calendar, consumers demand 230 calendars per month, but producers supply 270 calendars per month. Therefore, quantity supplied exceeds quantity demanded by 40 calendars per month. Because producers want to sell more calendars than consumers are willing to buy at that price, there is a surplus (excess supply) of calendars. In this situation, sellers will start to lower their prices to sell off their excess inventories, while consumers respond to the lower prices by increasing their purchases of calendars. Thus, a surplus (excess supply) puts downward pressure on price.

4. Shifts in supply or demand I The following graph shows the market for doughnuts in Toronto, where there are more than a thousand doughnut shops at any given moment. Suppose Health Canada issues a public statement saying that consuming doughnuts is good for your health. Show the effect of this change on the market for doughnuts by shifting one or both of the curves on the following graph, holding all else constant.

Explanation:

When consumers find out that eating doughnuts is good for their health, this causes them to increase their consumption of doughnuts. Therefore, the demand for doughnuts increases, and the demand curve shifts to the right. Note that the supply curve does not shift because none of the factors affecting supply have changed. In particular, the supply curve shifts in response to changes in the following: Factors Affecting Supply • Price of inputs • Production technology • Number of producers • Expectations of producers • Prices of related goods and services • Government regulations • Taxes and subsidies • Weather

5. Shifts in supply or demand II The following graph shows the market for cakes in Toronto, where there are more than a thousand bakeries at any given moment. Suppose an innovation in the baking process makes it possible to produce more cakes at a lower cost than ever before. Show the effect of this change on the market for cakes by shifting one or both of the curves on the following graph, holding all else constant.

Explanation: The innovation in the baking process lowers the cost of producing cakes. Therefore, for any given price of a cake, sellers are willing and able to supply more cakes. Visually, this is seen as a rightward shift of the supply curve. Note that the demand curve does not shift because none of the factors affecting demand have changed. In particular, the demand curve shifts in response to changes in any of the following: Factors Affecting Demand • Price of a related good (complement or substitute) • Income of consumers • Tastes of consumers • Number of consumers • Expectations of consumers

6. University admissions

Suppose the following graph shows the supply of and demand for admission to York University, where supply represents the number of student openings and demand represents the number of students who want to attend York U (that is, the number of student applications) at any given level of tuition. Use the graph to help you answer the questions that follow. Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther.

The equilibrium level of tuition at York U is $45,000 per academic year. If York U sets its tuition at this price, the number of openings available will be equal to the number of student applications. Explanation: The equilibrium level of tuition is determined by the intersection of the supply and demand curves, which occurs at a price of $45,000. At this price, quantity supplied and quantity demanded are both equal to 12,000 students. Therefore, the number of student applications (demand) will equal the number of openings available (supply). Now suppose that the tuition for York U is set at $30,000. At this level of tuition, the number of student applications will be greater than the number of openings available. Explanation:

Fixing tuition at $30,000 imposes a price ceiling in this market. When the tuition is $30,000, York U receives 16,000 student applications, but there are only 12,000 student openings. Setting the tuition below the equilibrium level causes excess demand, which may compel York U to use such non pricerationing procedures as assessing students based on their extracurricular activities, portfolios, or volunteering. Now suppose that the tuition for York U is set at $30,000. At this level of tuition, the number of student applications will be greater than the number of openings available. Explanation: Fixing tuition at $30,000 imposes a price ceiling in this market. When the tuition is $30,000, York U receives 16,000 student applications, but there are only 12,000 student openings. Setting the tuition below the equilibrium level causes excess demand, which may compel York U to use such non pricerationing procedures as assessing students based on their extracurricular activities, portfolios, or volunteering. Suppose that in its latest issue, a popular magazine publishes information about universities in Canada. The magazine declares York U to be Canada's best university. Adjust the previous graph to show the effect this will have on the market for admission to York U. The new equilibrium level of tuition at York U is $75,000 per academic year. Explanation: The positive publicity will increase the number of student applications York U receives at every given level of tuition. Therefore, the demand for admission will shift to the right. As a result, the equilibrium level of tuition increases to $75,000. If the magazine declares York U to be Canada's best university and the tuition for York U is set at $30,000, York U will receive $12,000 more applications for admission than there are openings. Explanation: The positive publicity will increase the number of student applications York U receives at every given level of tuition. Therefore, the demand for admission will shift to the right. If tuition is set at $30,000, York U will receive 24,000 student applications, but it has 12,000 openings. Therefore, there will be a shortage of 12,000 openings.

7. A supply and demand puzzle The following graph shows the market for roses in 2016. Between 2016 and 2017, the equilibrium price of roses remained constant, but the equilibrium quantity of roses increased. From this, you can conclude that between 2016 and 2017, the supply of roses increased , and the demand for roses increased. Adjust the graph to illustrate your answer by showing the positions of the supply and demand curves in 2017.

Explanation: To solve this puzzle, start by thinking about the individual effects of changes in supply and demand on the equilibrium price and quantity of roses. If the demand for roses remains constant, a shift in the supply curve would result in a movement along the demand curve. If the supply of roses remains constant, a shift in the demand curve would result in a movement along the supply curve. Either way, this causes a change in both the equilibrium price and the equilibrium quantity. Because the price of roses remained constant in this case, however, both the supply curve and the demand curve must have shifted, and the effects of those shifts on the equilibrium price offset each other. Therefore, the curves shifted in the same direction. Because the quantity of roses increased, the supply of roses increased, and the demand for roses increased. Effects of Shifts in Demand or Supply on Equilibrium No Change in Supply

Increase in Supply

Decrease in Supply

No Change in Demand

P and Q unchanged

P ↓, Q ↑

P ↑, Q ↓

Increase in Demand

P ↑, Q ↑

P ?, Q ↑

P ↑, Q ?

Decrease in Demand

No Change in Supply

Increase in Supply

Decrease in Supply

P ↓, Q ↓

P ↓, Q ?

P ?, Q ↓

(Note: The ↑ (up arrow) indicates that the equilibrium object increases; the ↓ (down arrow) indicates that it decreases; and the ? (question mark) indicates that the direction of the change is indeterminate.)

8. Another supply and demand puzzle The market price of calzones in a university town increased recently, and the students in an economics class are debating the cause of the price increase. Some students suggest that the price increased because the price of dough, an important ingredient for making calzones, has increased. Other students attribute the increase in the price of calzones to a recent increase in the price of cheeseburgers at local burger joints. Everyone agrees that the increase in the price of cheeseburgers was caused by a recent increase in the price of hamburger buns, which are not generally used in making calzones. Assume that pizza parlours and burger joints are entirely separate entities—that is, there aren't places that serve both calzones and cheeseburgers. The first group of students thinks the increase in the price of calzones is due to the fact that the price of dough, an important ingredient for making calzones, has increased. On the following graph, adjust the supply and demand curves to illustrate the first group’s explanation for the increase in the price of calzones.

Explanation: When the price of dough increases, the supply curve shifts to the left because fewer calzones are supplied at every given price. Note that according to this model, the price increases, and as a result, the quantity demanded decreases. This is illustrated by a movement along the demand curve rather than a shift in demand itself. The second group of students attributes the increase in the price of calzones to the increase in the price of cheeseburgers at local burger joints. On the following graph, adjust the supply and demand curves to illustrate the second group’s explanation for the increase in the price of calzones....