Chapter 2 Answers to Review Questions
1.
LO1
Supply and demand and a production possibilities curve are both examples of simple economic
models. An economic model will not provide good predictions if its assumptions do not capture crucial
elements of relationships among economic variables. Consider the list in Section 3.3, “When is the
Simple Supply and Demand Model Appropriate?” The first item on that list states that all participants in
the market must be so small that no seller or buyer can influence price if a supply and demand model is to
pertain. As an example, we cannot expect a supply and demand model to make good predications if it is
applied to a market where a single large seller sets prices. The presence of a single large seller violates
the first assumption listed in Section 3.3. Supply and demand do not capture the ability of a single large
seller to set prices.
2.
LO2, LO3, LO4
The equilibrium price of a good is determined by the intersection of its supply and demand
curves. We can know everything about a good’s cost of production (that is, we can know its supply
exactly), yet still not know where the demand curve will intersect the supply curve.
3.
LO3
A change in demand means a shift of the entire demand curve, whereas a change in the quantity
demanded means a movement along the demand curve in response to a change in price.
4.
LO2
A change in supply means a shift of the entire supply curve, whereas a change in the quantity
supplied means a movement along the supply curve in response to a change in price.
5.
LO4
If the price of gasoline were prevented by regulations from rising to its equilibrium level, buyers
would want to buy more gasoline at the controlled price than sellers would be willing to supply. We
would expect to see symptoms of a gap between the quantity buyers would be willing to buy and sellers
would be willing to supply at the controlled price, such as lines of cars waiting at the pumps to buy
gasoline. The amount by which the quantity demanded exceeds quantity supplied is referred to as excess
demand, or a shortage.
6.
LO6
Equilibrium price can rise, fall, or remain unchanged depending on the size of the increase in
supply relative to the increase in demand. Equilibrium quantity will increase.
7.
LO4, LO5
The presence of excess demand or supply in an unregulated market implies the existence of
unexploited opportunities for individuals. When there is excess demand, sellers can raise prices and still
sell all they wish to. Similarly, excess supply enables buyers to offer less and still buy as much as they
wish to. In both cases, self-interested persons will exploit these opportunities quickly until they no longer
exist.
8.
LO5
It is said that during the Great Depression, poor people often ate lard sandwiches. Lard
sandwiches can be considered an inferior good in the sense that most poor people would stop eating them
if their incomes increased. Prime rib roasts can be considered a normal good in the sense that most
people would eat more prime rib roasts if their incomes increased. We would expect a society with a
preponderance of very poor people and a small number of relatively wealthy people to have higher
demands for inferior goods (such as lard sandwiches) and lower demands for normal goods (such as
prime rib roasts) relative to a society with a more even distribution of income.
9.
LO7
Consider a number of possibilities. Some buyers or sellers in a market may have the ability to
influence price; the quality of goods in the market may vary; some buyers or sellers may have better
access to information than others; it may be difficult for buyers and sellers to meet and conduct
transactions. Each of these possibilities violates one or another of the assumptions listed in Section 3.3,
“When is the Simple Supply and Demand Model Appropriate?” If any of them pertain, a model other than
supply and demand might well provide better insights than supply and demand does about cause-andeffect. Thus supply and demand cannot serve as an all-purpose, generalized model of markets.
Answers to Problems
1.
LO4
If a regulation holds price below equilibrium, supply and demand predict that quantity
supplied will be less than quantity demanded. Excess demand is said to exist if quantity supplied
falls short of quantity demanded. However, a regulation is not the only reason that quantity
demanded can exceed quantity supplied. For example, if supply decreases or demand increases
and market price cannot adjust quickly, a shortage can exist for an extended period of time.
Market price might adjust slowly if information about price is not readily available to all
participants in a market or if it is difficult for buyers and sellers to meet and conduct transactions.
[See assumptions (3) and (4) in Section 3.3.]
2.
LO3, LO4, LO6
a.
Substitutes
b.
Complements
c.
Probably substitutes for most people, but complements for some others who like to eat ice cream
and chocolate together
d.
Substitutes
3
LO6
a.
Supply shifts right. The discovery is a technological improvement; the improved technique would
enable more crops to be produced with the same inputs.
b.
Supply shifts right. Fertilizer is an input; lower input prices shift the supply curve to the right.
c.
Supply shifts right. The new tax breaks make farming relatively more profitable than before.
Thus those who were employed in a job that was just a little better than being a farmer would switch to
farming.
d.
Supply shifts left. Droughts destroy wheat.
4
LO3, LO6
a.
Demand shifts right. Income has risen and vacations are a normal good.
b.
Demand shifts left. Preferences have shifted from beef to other meats.
c.
Demand shifts right. Population has risen.
d.
Demand shifts right. The price of a substitute has risen.
e.
Demand is unaffected. There will be a movement along the demand curve—i.e., quantity
demanded will fall.
5.
LO2, LO3, LO6
The demand for binoculars might increase, leading to an increase in the quantity of binoculars
supplied, but no change in the supply of binoculars should occur. Other things equal, the UFO sighting
does nothing to change the factors that govern the supply of binoculars.
6.
LO6
An increase in the cost of an input used in orange production will shift the supply curve of
oranges to the left, resulting in an increase in the equilibrium price and a decline in the equilibrium
quantity of oranges.
7.
LO6
An increase in the birthrate will increase the population of potential buyers of land, and hence
shift the demand curve for land to the right, resulting in an increase in the equilibrium price of land.
8.
LO6
The discovery will shift the demand curve for fish to the right, increasing both the equilibrium
price and the equilibrium quantity of fish.
9.
LO6
An increase in the price of chicken feed shifts the supply curve of chickens to the left, resulting in
an increase in the equilibrium price of chickens, which are a substitute for beef. This shifts the demand
curve for beef to the right, increasing both the equilibrium price and the equilibrium quantity of beef.
10.
LO6
Compared with the rest of the year, there are more people who want to stay in hotel rooms near
campus during parents’ weekend and graduation weekend. Thus the demand curve shifts to the right
during these weekends. This implies a higher equilibrium price for hotel rooms (and, of course, a higher
equilibrium quantity of rooms rented).
11.
LO6
The mad cow disease announcement is likely to cause many consumers to forsake beef for
substitute sources of protein—and hence produce a rightward shift in the demand for chicken. The
discovery of the new chicken breed will cause a rightward shift in the supply curve of chicken. The two
developments together will increase the equilibrium quantity of chicken sold in Canada, but we cannot
determine the net effect on equilibrium price from the information given.
12.
LO6
The population increase causes a rightward shift in the demand curve for potatoes, and the
development of the higher yielding variety causes a rightward shift in the supply curve for potatoes. The
equilibrium quantity of potatoes goes up, but the equilibrium price may go either down or up.
13.
LO6
The discovery of the cold-fighting property causes a rightward shift in the demand curve for
apples, and the fungus causes a leftward shift in the supply curve. The equilibrium price of apples rises,
but the equilibrium quantity may go either down or up.
14.
LO6
Since butter and corn are complements, an increase in the price of butter will cause the demand
curve for corn to shift leftward. The fertilizer price decrease causes the supply curve for corn to shift
rightward. The equilibrium price of corn falls, but the equilibrium quantity may go either down or up.
15.
LO6
Since both the demand and supply curves for tofu have shifted to the right, the equilibrium quantity
of tofu sold is higher than before. The equilibrium price may be either higher (left panel) or lower (right
panel).
Price
($/kg)
Price
($/kg)
S
S
S'
P'
P
P
P'
S'
D'
D'
D
D
Q
Q'
Millions of
kg per month
Q
Q' Millions of
kg per month
16.
LO5
If the conditions listed in Section 3.3, “When is the Simple Supply and Demand Model
Appropriate?” are met, then an equilibrium of supply with demand will leave no unexploited
opportunities. However, many of the goods and services we enjoy are not provided through markets.
Care of children and preparation of meals in households, the provision of legal decisions by courts, and
the services of fire and police departments are only a few examples of services that are provided without
using markets. The government pays salaries to judges; if the private sector supplied and paid for the
services of judges, “justice” probably would go to whichever special interest was paying the judges. We
do not expect to provide a credit card number to the fire department’s dispatcher if we need a truck and
crew to put out a fire, and so on. There is no particular reason to conclude that we will be better off if all
goods and services are provided by markets.
17.
LO7
It is not appropriate to use supply and demand in this case because there is only one supplier and
because price is determined by a regulatory authority. Price is not determined by an equilibrium of
supply with demand.