Questions for Review

1. A competitive market is a market in which there are many buyers and many sellers of an
identical product so that each has a negligible impact on the market price. Another type
of market is a monopoly, in which there is only one seller. There are also other markets
that fall between perfect competition and monopoly.
2. The quantity of a good that buyers demand is determined by the price of the good,
income, the prices of related goods, tastes, expectations, and the number of buyers.
3. The demand schedule is a table that shows the relationship between the price of a good
and the quantity demanded. The demand curve is the downward-sloping line relating
price and quantity demanded. The demand schedule and demand curve are related
because the demand curve is simply a graph showing the points in the demand schedule.
The demand curve slopes downward because of the law of demand—other things being
equal, when the price of a good rises, the quantity demanded of the good falls. People
buy less of a good when its price rises, both because they cannot afford to buy as much
and because they switch to purchasing other goods.
4. A change in consumers' tastes leads to a shift of the demand curve. A change in price
leads to a movement along the demand curve.
5. Because Popeye buys more spinach when his income falls, spinach is an inferior good for
him. Because he buys more spinach and the price of spinach is unchanged, his demand
curve for spinach shifts out as a result of the decrease in his income.
6. The quantity of a good that sellers supply is determined by the price of the good, input
prices, technology, expectations, and the number of sellers.
7. A supply schedule is a table showing the relationship between the price of a good and the
quantity a producer is willing and able to supply. The supply curve is the upward-sloping
line relating price and quantity supplied. The supply schedule and the supply curve are
related because the supply curve is simply a graph showing the points in the supply
schedule.
The supply curve slopes upward because when the price is high, suppliers' profits
increase, so they supply more output to the market. The result is the law of supply—other
things being equal, when the price of a good rises, the quantity supplied of the good also
rises.
8. A change in producers' technology leads to a shift in the supply curve. A change in price
leads to a movement along the supply curve.
9. The equilibrium of a market is the point at which the quantity demanded is equal to
quantity supplied. If the price is above the equilibrium price, sellers want to sell more
than buyers want to buy, so there is a surplus. Sellers try to increase their sales by cutting
prices. That continues until they reach the equilibrium price. If the price is below the
equilibrium price, buyers want to buy more than sellers want to sell, so there is a
shortage. Sellers can raise their price without losing customers. That continues until they
reach the equilibrium price.
10. When the price of beer rises, the demand for pizza declines, because beer and pizza are
complements and people want to buy less beer. When we say the demand for pizza
declines, we mean that the demand curve for pizza shifts to the left as in Figure 5. The
supply curve for pizza is not affected. With a shift to the left in the demand curve, the
equilibrium price and quantity both decline, as the figure shows. Thus, the quantity of
 pizza supplied and demanded both fall. In sum, supply is unchanged, demand is
decreased, quantity supplied declines, quantity demanded declines, and the price falls.

Figure 5
11. Prices play a vital role in market economies because they bring markets into equilibrium.
If the price is different from its equilibrium level, quantity supplied and quantity
demanded are not equal. The resulting surplus or shortage leads suppliers to adjust the
price until equilibrium is restored. Prices thus serve as signals that guide economic
decisions and allocate scarce resources.
Problems and Applications
1. a. Cold weather damages the orange crop, reducing the supply of oranges. This can
be seen in Figure 6 as a shift to the left in the supply curve for oranges. The new
equilibrium price is higher than the old equilibrium price.

Figure 6
b. People often travel to the Caribbean from New England to escape cold weather,
so the demand for Caribbean hotel rooms is high in the winter. In the summer,
fewer people travel to the Caribbean, because northern climes are more pleasant.
The result, as shown in Figure 7, is a shift to the left in the demand curve. The
equilibrium price of Caribbean hotel rooms is thus lower in the summer than in
the winter, as the figure shows.

Figure 7

c. When a war breaks out in the Middle East, many markets are affected. Because a
large proportion of oil production takes place there, the war disrupts oil supplies,
shifting the supply curve for gasoline to the left, as shown in Figure 8. The result
is a rise in the equilibrium price of gasoline. With a higher price for gasoline, the
cost of operating a gas-guzzling automobile like a Cadillac will increase. As a
result, the demand for used Cadillacs will decline, as people in the market for cars
will not find Cadillacs as attractive. In addition, some people who already own
Cadillacs will try to sell them. The result is that the demand curve for used
Cadillacs shifts to the left, while the supply curve shifts to the right, as shown in
Figure 9. The result is a decline in the equilibrium price of used Cadillacs.
 Figure 8 Figure 9

2. The statement that "an increase in the demand for notebooks raises the quantity of
notebooks demanded, but not the quantity supplied," in general, is false. As Figure 10
shows, the increase in demand for notebooks results in an increased quantity supplied.
The only way the statement would be true is if the supply curve was a vertical line, as
shown in Figure 11.

Figure 10
 Figure 11
3. a. If people decide to have more children, they will want larger vehicles for hauling
their kids around, so the demand for minivans will increase. Supply will not be
affected. The result is a rise in both the price and the quantity sold, as Figure 12
shows.

Figure 12

b. If a strike by steelworkers raises steel prices, the cost of producing a minivan rises
and the supply of minivans decreases. Demand will not be affected. The result is a
rise in the price of minivans and a decline in the quantity sold, as Figure 13
shows.
 Figure 13

c. The development of new automated machinery for the production of minivans is

Figure 14

d. The rise in the price of sport utility vehicles affects minivan demand because
sport utility vehicles are substitutes for minivans. The result is an increase in
demand for minivans. Supply is not affected. The equilibrium price and quantity
of minivans both rise, as Figure 12 shows.
e. The reduction in peoples' wealth caused by a stock-market crash reduces their
income, leading to a reduction in the demand for minivans, because minivans are
likely a normal good. Supply is not affected. As a result, both the equilibrium
price and the equilibrium quantity decline, as Figure 15 shows.
 Figure 15
4. a. DVDs and TV screens are likely to be complements because you cannot watch a
DVD without a television. DVDs and movie tickets are likely to be substitutes
because a movie can be watched at a theater or at home. TV screens and movie
tickets are likely to be substitutes for the same reason.
b. The technological improvement would reduce the cost of producing a TV screen,
shifting the supply curve to the right. The demand curve would not be affected.
The result is that the equilibrium price will fall, while the equilibrium quantity
will rise. This is shown in Figure 16.

Figure 16
c. The reduction in the price of TV screens would lead to an increase in the demand
for DVDs because TV screens and DVDs are complements. The effect of this
increase in the demand for DVDs is an increase in both the equilibrium price and
quantity, as shown in Figure 17.
 Figure 17
d. The reduction in the price of TV screens would cause a decline in the demand for
movie tickets because TV screens and movie tickets are substitute goods. The
decline in the demand for movie tickets would lead to a decline in the equilibrium
price and quantity sold. This is shown in Figure 18.

Figure 18

5. Technological advances that reduce the cost of producing computer chips represent a
decline in an input price for producing a computer. The result is a shift to the right in the
supply of computers, as shown in Figure 19. The equilibrium price falls and the
equilibrium quantity rises, as the figure shows.
 Figure 19
Because computer software is a complement to computers, the lower equilibrium price of
computers increases the demand for software. As Figure 20 shows, the result is a rise in
both the equilibrium price and quantity of software.

Figure 20
Because typewriters are substitutes for computers, the lower equilibrium price of
computers reduces the demand for typewriters. As Figure 21 shows, the result is a decline
in both the equilibrium price and quantity of typewriters.
 Figure 21

6. A movement along a supply curve is caused by a change in the price of the good. Thus,
the statement that “As the price goes up, farmers have motivation to do anything they can
to get their product to market” refers to a movement along the supply curve. A shift in the
supply curve is caused by a change in a nonprice determinant of supply. Thus, the
statement that “Political unrest overseas threatens to disrupt the supply of America’s
sweetest temptations” refers to a shift in the supply curve.
7. a. When a hurricane in South Carolina damages the cotton crop, it raises input prices
for producing sweatshirts. As a result, the supply of sweatshirts shifts to the left,
as shown in Figure 22. The new equilibrium price is higher and the new
equilibrium quantity of sweatshirts is lower.

Figure 22
b. A decline in the price of leather jackets leads more people to buy leather jackets,
reducing the demand for sweatshirts. The result, shown in Figure 23, is a decline
in both the equilibrium price and quantity of sweatshirts.

Figure 23

c. The effects of colleges requiring students to engage in morning exercise in

Figure 24
d. The invention of new knitting machines increases the supply of sweatshirts. As
Figure 25 shows, the result is a reduction in the equilibrium price and an increase
in the equilibrium quantity of sweatshirts.
 Figure 25
8. A temporarily high birth rate in the year 2010 leads to opposite effects on the price of
baby-sitting services in the years 2015 and 2025. In the year 2015, there are more five-
year olds who need sitters, so the demand for baby-sitting services rises, as shown in
Figure 26. The result is a higher price for baby-sitting services in 2015. However, in the
year 2025, the increased number of 15-year-olds shifts the supply of baby-sitting services
to the right, as shown in Figure 27. The result is a decline in the price of baby-sitting
services.

Figure 26 Figure 27

9. Ketchup is a complement for hot dogs. Therefore, when the price of hot dogs rises, the
quantity demanded of hot dogs falls and this lowers the demand for ketchup. The end
 result is that both the equilibrium price and quantity of ketchup fall. Because the quantity
of ketchup falls, the demand for tomatoes by ketchup producers falls, so the equilibrium
price and quantity of tomatoes fall. When the price of tomatoes falls, producers of tomato
juice face lower input prices, so the supply curve for tomato juice shifts out, causing the
price of tomato juice to fall and the quantity of tomato juice to rise. The fall in the price
of tomato juice causes people to substitute tomato juice for orange juice, so the demand
for orange juice declines, causing the price and quantity of orange juice to fall. Now you
can see clearly why a rise in the price of hot dogs leads to a fall in the price of orange
juice!
10. Quantity supplied equals quantity demanded at a price of $6 and quantity of 81 pizzas
(Figure 28). If the price were greater than $6, quantity supplied would exceed quantity
demanded, so suppliers would reduce the price to gain sales. If the price were less than
$6, quantity demanded would exceed quantity supplied, so suppliers could raise the price
without losing sales. In both cases, the price would continue to adjust until it reached $6,
the only price at which there is neither a surplus nor a shortage.

Figure 28
11. a. Because flour is an ingredient in bagels, a decline in the price of flour would shift
the supply curve for bagels to the right. The result, shown in Figure 29, would be
a fall in the price of bagels and a rise in the equilibrium quantity of bagels.

Figure 29
Because cream cheese is a complement to bagels, the fall in the equilibrium price
of bagels increases the demand for cream cheese, as shown in Figure 30. The
result is a rise in both the equilibrium price and quantity of cream cheese. So, a
fall in the price of flour indeed raises both the equilibrium price of cream cheese
and the equilibrium quantity of bagels.

Figure 30
What happens if the price of milk falls? Because milk is an ingredient in cream
cheese, the fall in the price of milk leads to an increase in the supply of cream
cheese. This leads to a decrease in the price of cream cheese (Figure 31), rather
than a rise in the price of cream cheese. So a fall in the price of milk could not
have been responsible for the pattern observed.

Figure 31
 b. In part (a), we found that a fall in the price of flour led to a rise in the price of
cream cheese and a rise in the equilibrium quantity of bagels. If the price of flour
rose, the opposite would be true; it would lead to a fall in the price of cream
cheese and a fall in the equilibrium quantity of bagels. Because the question says
the equilibrium price of cream cheese has risen, it could not have been caused by
a rise in the price of flour.
What happens if the price of milk rises? From part (a), we found that a fall in the
price of milk caused a decline in the price of cream cheese, so a rise in the price
of milk would cause a rise in the price of cream cheese. Because bagels and cream
cheese are complements, the rise in the price of cream cheese would reduce the
demand for bagels, as Figure 32 shows. The result is a decline in the equilibrium
quantity of bagels. So a rise in the price of milk does cause both a rise in the price
of cream cheese and a decline in the equilibrium quantity of bagels.

Figure 32
12. a. As Figure 33 shows, the supply curve is vertical. The constant quantity supplied
makes sense because the basketball arena has a fixed number of seats at any price.

Figure 33
b. Quantity supplied equals quantity demanded at a price of $8. The equilibrium
quantity is 8,000 tickets.
c.
 Price Quantity Demanded Quantity Supplied
$4 14,000 8,000
$8 11,000 8,000
$12 8,000 8,000
$16 5,000 8,000
$20 2,000 8,000
The new equilibrium price will be $12, which equates quantity demanded to
quantity supplied. The equilibrium quantity remains 8,000 tickets.
13. Equilibrium occurs where quantity demanded is equal to quantity supplied. Thus:
Qd = Qs
1,600 – 300P = 1,400 + 700P
200 = 1,000P
P = $0.20
Qd = 1,600 – 300(0.20) = 1,600 – 60 = 1,540
Qs = 1,400 + 700(0.20) = 1,400 + 140 = 1,540.
The equilibrium price of a chocolate bar is $0.20 and the equilibrium quantity is 1,540
bars.