By contrast, a change (increase or decrease) in quantity demanded is a movement along an existing demand curve or schedule from one price-quantity combination to another. A change in product price causes the change in (q__________ d_____________ ). (Note: You should not say either increase or decrease in price, but mention either increase or decrease in demand or quantity demanded!) Answer the following questions by correctly indicating the terms. P P QQ (Increase, Decrease) in _________________ (Increase, Decrease) in _________________ 8 ( 6 pts). List five basic determinants of market demand that could cause demand to decrease. (a) Consumers' tastes become ( more, less ) favorable toward the item. (b) The number of buyers ( increases, decreases ). (c) Incomes ( rise, fall ) and the item is a normal good. (d) Incomes ( rise, fall ) and the item is an inferior good. (e) A(n) ( increase, decrease ) in the price of a substitute good. (f) A(n) ( increase, decrease ) in the price of a complementary good. (g) Consumers expect ( higher, lower ) prices in the future. P Q Indicate direction with an arrow head. Note: A normal (superior) good is one whose demand varies directly with income as is true for most goods and services: the more income one earns, the ( more, less ) one is willing and able to buy. However, there are exceptions, called inferior goods, whose demand varies ( directly, inversely ) with income. Inferior goods are those whose demand ( increases, decreases ) when incomes fall and vice versa. For example, college students living off-campus frequently consume large amounts of ramen noodles and boxed macaroni and cheese. When they finish school and start their careers, their consumption of these goods frequently declines. This suggests that ramen noodles and boxed macaroni and cheese are called ( ________ ________ ). 9 ( 1 pt). Individual vs. market demand. 4 Fall 2016 ECON 202-01 (online): Principles of Macroeconomics Sep. 6 Name: __________________ By adding the quantities demanded by all consumers at each of the various possible prices, we can get from ( _____________ ) demand to market demand. Graphically the market demand is the ( horizontal , vertical ) sum of the individual schedules (see Figure 3.2 on p.50). 10 ( 2 pts). Define "supply." The definition of supply is very similar to that of demand. Supply is a schedule which shows the various amounts of a product sellers are ( ____________ ) and ( _______________ ) to produce and offer for sale at each price in a series of possible prices during a specified period, other things being equal. Supply portrays relationship between ( __________ ) and ( ________ s________ ), they are (directly, inversely) related either in the table or in the (graph). 11 (1 pt). Describe and give a reason for the law of supply. The law of supply indicates that producers will produce and sell ( more, less ) of their product at a high price than at a low price. This means that there is a ( positive, negative ) relationship between price and quantity supplied. The basic explanation is that, given product costs, a higher price means greater profits and thus more incentive for business to increase the quantity supplied. 12 ( 5 pts). List six basic determinants of increase in market supply. (a) Resource or input prices: ( increase, decrease ) (b) Changes in technology: ( improvement, deterioration ) (c) Taxes: ( increase, decrease ); and subsidies: ( increase, decrease ). (d) Prices of other related goods or products: ( increase, decrease ), if there is a substitution in production (e) Producer expectations of future price of his/her product: ( increase, decrease ), as farmers Producer expectations of future price of product: ( increase, decrease ), by most manufacturers (f) Number of sellers: ( more, less ) 13 (4 pts). What is the difference between a change in supply and a change in quantity supplied? A ( change in __________________ ) is a shift in the entire supply curve either to the left (a decrease in supply) or to the right (an increase in supply). A change in supply, therefore, is a change in the entire supply schedule or curve. In contrast, a ( change in __________________ ) is a movement along an existing supply curve or schedule from one price-quantity combination to another. A change in product price causes the change in quantity supplied. P P QQ (Increase, Decrease) in ____________________ (Increase, Decrease) in ___________________ 14 ( 2 pts). Now in the market equilibrium, define equilibrium price and quantity. With demand and supply in the market, we can now understand how the decisions of both buyers and sellers interact each other to determine the equilibrium price and equilibrium quantity in the 5 Fall 2016 ECON 202-01 (online): Principles of Macroeconomics Sep. 6 Name: __________________ ( m_________ e_______________ ). Equilibrium price (or m________ c__________ p________ ) is the price where the intentions of buyers and sellers match. Equilibrium quantity is where the quantity demanded and the quantity supplied at the equilibrium price are identical in the competitive market setting, Q(D) = Q(S). 15 ( 1 pt). What effect will have upon the supply of television sets in a competitive market, if there is an increase in the price of electronic equipment used in producing television sets? This should ( increase, decrease ) the supply because a higher price must be charged for each quantity due to the rising price of resources. The supply curve will shift to the (right, left). 16 (Question, p.74) Suppose the total demand for wheat and the total supply of wheat per month in the Kansas City grain market are as follows: Thousands of bushels demanded Price per bushel Thousand of bushels supplied 72 73 75 77 79 81 (3 pts)What is the equilibrium price? ( $ _____ ) Fill in the surplus-shortage column. Now use it to explain why your answers are correct: At the immediately lower price of $3.70, there is a ( shortage, surplus ) of ( ______ ) bushels. At the immediately higher price of $4.30, there is a ( shortage, surplus ) of ( ______ ) bushels. ( exrtra pts) Graph the demand for wheat and the supply of wheat. Rough one is good. Be sure to label the axes of your graph correctly. Label equilibrium price P and the equilibrium quantity Q. 85 $3.40 80 3.70 75 4.00 70 4.30 65 4.60 60 4.90 Surplus (+) or shortage (-) _____ _____ _____ _____ _____ _____ a . b. What is the equilibrium quantity? ( _______ ) c. d. (2 pts) "Surpluses drive prices up; shortages drive them down." Do you agree? Or not? Explain. 6 (2 pts)Why will $3.40 not be the equilibrium price in this market? Why not $4.90? _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ Fall 2016 ECON 202-01 (online): Principles of Macroeconomics Sep. 6 Name: __________________ _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ 17 (Question 4 on page 74, 8 pts) How will each of the following changes in demand and/or supply affect equilibrium price and equilibrium quantity in a competitive market; that is do price and quantity rise, fall, remain unchanged, or are the answers indeterminate because they depend on the magnitudes of the shifts? Use supply and demand diagrams to verify your answers on the graph providedbelow.Labelallaxisincludingdemandandsupply. (SeePPTslides#3-60~#3-62,howto do it.) a. Supply decreases and demand is constant. I provide as an example for you to solve others. S' S Q b. Supply increases and demand decreases, simultaneously. Now you provide D & S graphs. P e2 Pe2 e1 D Pe1 Qe2 Qe1 Conclusion from D constant & S: Price increases (P), and Quantity may decrease (Q). P Pe e S D Conclusion from D & S: Price ________ (P __ ), and Quantity _______ (Q __ ). So (price, quantity) is indeterminate. c. Demand increases and supply decreases, simultaneously. P Pe S D Qe Qe Q Conclusion from D & S: Price ________ (P __ ), and Quantity _______ (Q __ ). So (price, quantity) is indeterminate. d. Demand decreases and supply decreases, simultaneously. e 7 Q PS Pe e D Qe Conclusion from D & S: Price ________ (P __ ), and Quantity _______ (Q __ ). So (price, quantity) is indeterminate