CHAPTER 3: Demand and Supply (Pg. 58-73 and 76-77)
Answers to the Review Quizzes
Review Quiz Page 58
1. The money price of a good is the dollar amount that must be paid for it. The relative price of
a good is its money price expressed as a ratio to the money price of another good. Thus, the
relative price is the amount of the other good that must be foregone to purchase a unit of the
first good.
2. The relative price of a good is the opportunity cost of buying that good because it shows how
much of the next best alternative good must be forgone in order to buy a unit of the first
good.
3. There are many potential examples that students may give. Some examples of items where
both the money price and the relative price have risen over time are college tuition;
automobiles; movie theatre tickets.
4. As in the previous question, many examples may be given. Some examples of items where
both the money price and the relative price have fallen over time are personal computers;
televisions; calculators.
Review Quiz Page 63
1. The quantity demanded of a good or service is the amount that consumers plan to buy during
a particular period, and at a particular price.
2. The law of demand states: “Other things remaining the same, the higher the price of a good,
the smaller is the quantity demanded.” The law of demand is illustrated by a downwardsloping demand curve drawn with the quantity demanded on the horizontal axis and the price
on the vertical axis. The slope is negative to show that the higher the price of a good, the
lower is the quantity demanded.
3. For any fixed quantity of a good available, the height of the demand curve shows the
maximum price that consumers are willing to pay for that quantity of the good. The price on
the demand curve at this quantity indicates the marginal benefit to consumers of the last unit
consumed at that quantity.
4. Influences that change the demand for a product include:
a. The prices of related goods. A rise (fall) in the price of a substitute good shifts the
demand curve for the first good rightward (left). A rise (fall) in the price of a
complement good shifts the demand curve for the first good leftward (right).
b. The expected future price of the product. A rise (fall) in the expected future price of a
good shifts the demand curve in the current period rightward (left).
c. Consumer income. For a normal good, an increase (decrease) in income shifts the
demand curve rightward (left). For an inferior good, an increase in income shifts the
demand curve leftward (right).
2
d. Expected future income. For a normal good, an increase (decrease) in expected future
income shifts the demand curve rightward (left). For an inferior good, an increase in
expected future income shifts the demand curve leftward (right).
e. The population. An increase (decrease) in population in the market shifts the demand
curve rightward (left).
f. People’s preferences. If people’s preferences for a good rise (fall), this shifts the demand
curve rightward (left).
5. If the price of Palm Pilots falls and nothing else changes, then the quantity of Palm Pilots
demanded will rise, but the demand for Palm Pilots will remain unchanged.
Review Quiz Page 67
1. The quantity supplied of a good or service is the amount of the good or service that firms
plan to sell in a particular period of time at a specified price.
2. The law of supply holds that “other things remaining the same, the higher the price of a good,
the greater is the quantity supplied.” The law of supply is illustrated by an upward-sloping
supply curve drawn with the quantity supplied on the horizontal axis and the price on the
vertical axis. The slope is positive to show that the higher the price of a good, the greater is
the quantity supplied.
3. For any quantity, the height of the supply curve shows the minimum price that suppliers must
receive to produce that quantity of output. As a result, the price is the marginal cost of the
last unit produced at this level of output.
4. Influences that change the supply of a product include:
a. Prices of productive resources. A rise (fall) in the price of a productive resource increases
firms’ costs of production and causes the supply curve for the product to shift leftward
(right).
b. Prices of other related goods produced. If the sale price of a substitute in production rises
(falls), firms decrease their sales of the original good and the supply curve for the original
good shifts leftward (right). A rise (fall) in the price of a complement in production
increases (decreases) production of the original good, causing the supply curve of the
original good to shift rightward (left).
c. The expected future price of the product. A rise (fall) in the expected future price of the
product causes suppliers to reduce (increase) the amount they sell today. This change in
expectations shifts the supply curve in the current period leftward (right).
d. Technology. An advance in technology shifts the supply curve rightward.
e. The number of sellers. An increase (decrease) in the number of sellers in a market
increases the quantity of the good available at every price, and shifts the supply curve
rightward (left).
5. If the price of Palm Pilots falls and nothing else changes, then the quantity of Palm Pilots
supplied will rise, but the supply for Palm Pilots will remain unchanged.
3
Review Quiz Page 69
1. Equilibrium price is the price for which the quantity demanded by the buyers is equal to the
quantity supplied by the sellers.
2. A shortage arises at market prices below the equilibrium price.
3. A surplus arises at market prices above the equilibrium price.
4. A shortage causes prices to rise, decreasing quantity demanded and increasing quantity
supplied until the equilibrium price is attained.
5. A surplus causes prices to fall, decreasing quantity supplied and increasing quantity
demanded until the equilibrium price is attained.
6. At the equilibrium price, the quantity demanded by consumers equals the quantity supplied
by producers. At this price, the plans of producers and consumers are coordinated and there
is no influence on the price to move away from equilibrium.
7. The equilibrium price reflects that the highest price consumers are willing to pay for that
level of goods or services is just equal to the minimum price that suppliers would require for
delivering it. If less (more) quantity were supplied, then the price that consumers would be
willing to pay at this lower level of goods or services supplied would be higher (lower) than
the minimum price that suppliers would require to supply it. This means that suppliers would
gain profits from raising (lowering) their price at the lower level of supply or by increasing
(decreasing) their level supplied. Either way, the supply curve will shift rightward (left) and
the market price will rise (fall) to the equilibrium price.
Review Quiz Page 73
1. a. A fall in the price of a PC increases the demand for CD-Rs because a PC is a complement
of a CD-R. The demand curve for CD-Rs shifts rightward. Supply remains unchanged.
The price of a CD-R rises and the quantity of CD-Rs increases. You can illustrate this
outcome by drawing a diagram like Figure 3.8 page 70.
b. A rise in the price of an MP3 download decreases the demand for CD-Rs because an
MP3 download is a complement of a CD-R. The demand curve for CD-Rs shifts
leftward. Supply remains unchanged. The price of a CD-R falls and the quantity of CDRs decreases. You can illustrate this outcome by drawing a diagram like Figure 3.8 page
70 but with the arrows pointing in the opposite directions.
c. An increase in the number of firms that produce CD-Rs increases the supply of CD-Rs.
The supply curve of CD-Rs shifts rightward. Demand remains unchanged. The price of
a CD-R falls and the quantity of CD-Rs increases. You can illustrate this outcome by
drawing a diagram like Figure 3.9 page 71.
d. A rise in the wages of CD-R producers decreases the supply of CD-Rs because it
increases the cost of producing CD-Rs. The supply curve of CD-Rs shifts leftward.
Demand remains unchanged. The price of a CD-R rises and the quantity of CD-Rs
decreases. You can illustrate this outcome by drawing a diagram like Figure 3.9 page 71
but with the arrows pointing in the opposite directions.
4
e. There are six combinations:
1. If (a) and (b) occur together, demand might increase or decrease, supply is
unchanged, so the outcome cannot be predicted. You can illustrate this outcome by
drawing a diagram like Figure 3.8 page 70 but with the demand curve possibly
shifting in either direction.
2. If (a) and (c) occur together, demand increases and supply increases so the quantity
increases and the price might rise or fall. You can illustrate this outcome by drawing
a diagram like Figure 3.10 page 72.
3. If (a) and (d) occur together, demand increases and supply decreases so the price rises
and quantity might increase or decrease. You can illustrate this outcome by drawing
a diagram like Figure 3.11 page 73 but with the arrows pointing in the opposite
directions.
4.) If (b) and (c) occur together, demand decreases and supply increases, so the price falls
and quantity might increase or decrease. You can illustrate this outcome by drawing
a diagram like Figure 3.11 page 73.
5. If (b) and (d) occur together, demand decreases and supply decreases, so the quantity
decreases and the price might rise or fall. You can illustrate this outcome by drawing
a diagram like Figure 3.10 page 72 but with the arrows pointing in the opposite
directions.
6. If (c) and (d) occur together, supply might increase or decrease, demand is
unchanged, so the outcome cannot be predicted. You can illustrate this outcome by
drawing a diagram like Figure 3.9 page 71 but with the supply curve possibly shifting
in either direction.
Answers to the Problems
1. a. The price of an audiotape will rise, and the quantity of audiotapes sold will increase.
CDs and audiotapes are substitutes. If the price of a CD rises, people will buy more
audiotapes and fewer CDs. The demand for audiotapes will increase. The price of an
audiotape will rise, and more audiotapes will be sold.
b. The price of an audiotape will fall, and fewer audiotapes will be sold.
Walkmans and audiotapes are complements. If the price of a Walkman rises, fewer
Walkmans will be bought. The demand for audiotapes will decrease. The price of an
audiotape will fall, and people will buy fewer audiotapes.
c. The price of an audiotape will fall and fewer audiotapes will be sold.
The increase in the supply of CD players will lower the price of a CD player. With CD
players cheaper than they were, some people will buy CD players. The demand for CDs
will increase, and the demand for audiotapes will decrease. The price of an audiotape
will fall, and people will buy fewer audiotapes.
d. The price of an audiotape will rise, and the quantity sold will increase.
An increase in consumers’ income will increase the demand for audiotapes. As a result,
the price of an audiotape will rise and the quantity bought will increase.
e. The price of an audiotape will rise, and the quantity sold will decrease.
5
If the workers who make audiotapes get a pay raise, the cost of making an audiotape
increases and the supply of audiotapes decreases. The price will rise, and people will buy
fewer audiotapes.
f. The quantity sold will decrease, but the price might rise, fall, or stay the same.
Walkmans and audiotapes are complements. If the price of a Walkman rises, fewer
Walkmans will be bought and so the demand for audiotapes will decrease. The price of
an audiotape will fall, and people will buy fewer audiotapes. If the wages paid to
workers, who make audiotapes rise, the supply of audiotapes decreases. The quantity of
audiotapes sold will decrease, and the price of an audiotape will rise. Taking the two
events together, the quantity sold will decrease, but the price might rise, fall, or stay the
same.
2. a. The price of a DVD player falls, and fewer DVD players will be sold. A DVD is a
complement of a DVD player. If the price of a DVD rises, fewer people will want to own
a DVD player, so the demand for DVD players will decrease. With all other influences
on the demand and supply of DVD players remaining the same, the price of a DVD
player will fall. The quantity of DVD players bought will decrease.
b. The price of a DVD player rises, and more DVD players will be sold. A DVD is a
complement of a DVD player. If the price of a DVD falls, more people will want to own
a DVD player, so the demand for DVD players will increase. With all other influences
on the demand and supply of DVD players remaining the same, the price of a DVD
player will rise. The quantity of DVD players bought will increase.
c. The price of a DVD player will fall, and the quantity of DVD players sold will increase.
If the supply of DVD players increases, the price of a DVD player will fall and the
quantity bought will increase.
d. The price of a DVD player will fall, and fewer DVD players will be sold. The decrease
in consumers’ incomes will decrease the demand for DVD players. Other things
remaining the same, the price of a DVD player will fall and fewer DVD players will be
bought.
e. The price of a DVD player will rise, and the quantity sold will decrease. If the wage of
workers who produce DVD players increases, the cost of producing a DVD player
increases and the supply of DVD players decreases. Other things remaining the same, the
price will rise, and people will buy fewer DVD players.
f. The price of a DVD player will rise, but the quantity might increase, decrease, or remain
the same. A rise in the wage rate of the workers who make DVD players will decrease
the supply of DVD players. The fall in the price of a DVD will increase the demand for
DVD players. Taking the two events together, the decrease in supply and the increase in
demand will lead to a rise in the price of a DVD player. The quantity bought might
increase, decrease, or remain the same.
3. a. (ii) and (iii) and (iv). The demand for gasoline will change if the price of a car changes,
all speed limits on highways are abolished, or robot production cuts the cost of producing
a car. If the price of a car rises, the quantity of cars bought decrease. So, the demand for
gasoline decreases. If all speed limits on highways are abolished, people will drive faster
and use more gasoline. The demand for gasoline increases. If robot production plants
lower the cost of producing a car, the supply of cars will increase. With no change in the
6
b.
c.
d.
4. a.
b.
c.
d.
demand for cars, the price of a car will fall and more cars will be bought. The demand
for gasoline increases.
(i). The supply of gasoline will change if the price of crude oil changes. If the price of
crude oil rises, the cost of producing gasoline will rise. So, the supply of gasoline
decreases.
(i). If the price of crude oil (a resource used to make gasoline) rises, the cost of
producing gasoline will rise. So, the supply of gasoline decreases. The demand for
gasoline does not change, so the price of gasoline will rise and there is a movement up
the demand curve for gasoline. The quantity demanded of gasoline decreases.
(ii) and (iii) and (iv). If the price of a car rises, the quantity of cars bought decrease. So,
the demand for gasoline decreases. The supply of gasoline does not change, so the price
of gasoline falls and there is a movement down the supply curve of gasoline. The
quantity supplied of gasoline decreases.
If all speed limits on highways are abolished, people will drive faster and use more
gasoline. The demand for gasoline increases. The supply of gasoline does not change, so
the price of gasoline rises and there is a movement up along the supply curve. The
quantity supplied of gasoline increases.
If robot production plants lower the cost of producing a car, the supply of cars will
increase. With no change in the demand for cars, the price of a car will fall and more
cars will be bought. The demand for gasoline increases. The supply of gasoline does not
change, so the price of gasoline rises and the quantity of gasoline supplied increases.
(i). The demand for leather bags will increase when airfares halve. More people will
plan on buying an air ticket and will also plan on buying a travel bag. Then demand for
leather bags will increase.
(ii), (iii), and (iv). The supply of leather will decrease when the price of beef falls.
Cowhide (from which leather is made) is a complement in production of beef. If the
price of beef falls, fewer cows will be slaughtered and less cowhide will be produced.
The supply of leather decreases. The price of leather will rise and the supply of leather
bags will decrease. The producers of leather bags will switch to using the cheaper cloth.
The supply of leather bags will decrease. A new technology for cutting leather will lower
the cost of making a leather bag and the increase the supply of leather bags.
(ii), (iii), and (iv). When the supply of leather bags changes, there is a shift of the supply
curve and a movement along the demand curve. The quantity demanded of leather bags
will increase if the supply of leather bags increases and the quantity demanded of leather
bags will decrease if the supply of leather bags decreases. So, a fall in the price of beef
and a new cheaper cloth for making bags will lead to a decrease in the quantity demanded
of leather bags. A new technology increases the supply of leather bags and increases the
quantity demanded of leather bags.
(i). When the demand for leather bags changes, there is a shift of the demand curve and a
movement along the supply curve. The quantity supplied of leather bags will increase if
airfares halve.
5. a. The demand curve is the curve that slopes down toward to the right. The supply curve is
the curve that slopes up toward to the right.
7
b. The equilibrium price is $14 a pizza, and the equilibrium quantity is 200 pizzas a day.
Market equilibrium is determined at the intersection of the demand curve and supply
curve.
6. a. The demand curve is the curve that slopes downward to the right. The supply curve is the
curve that slopes upward toward to the right.
b. The equilibrium price is $3 a fish, and the equilibrium quantity is 100 fish a day. Market
equilibrium is determined at the intersection of the demand curve and supply curve.
7. a. The equilibrium price is 50 cents a pack, and the equilibrium quantity is 120 million
packs a week. The price of a pack adjusts until the quantity demanded equals the
quantity supplied. At 50 cents a pack, the quantity demanded is 120 million packs a
week and the quantity supplied is 120 million packs a week.
b. At 70 cents a pack, there will be a surplus of gum and the price will fall.
At 70 cents a pack, the quantity demanded is 80 million packs a week and the quantity
supplied is 160 million packs a week. There is a surplus of 80 million packs a week. The
price will fall until market equilibrium is restored - 50 cents a pack.
8. a. The equilibrium price is 65 cents a bag, and the equilibrium quantity is 145 million bags
a week. The price of a bag adjusts until the quantity demanded equals the quantity
supplied. At 65 cents a bag, the quantity demanded is 145 million bags a week and the
quantity supplied is 145 million bags a week.
b. At 60 cents a bag, there will be a shortage of potato chips and the price will rise. At 60
cents a bag, the quantity demanded is 150 million bags a week and the quantity supplied
is 140 million bags a week. There is a shortage of 10 million bags a week. The price will
rise until market equilibrium is restored - 65 cents a bag.
9. a. The supply curve has shifted leftward. As the number of gum-producing factories
decreases, the supply of gum decreases. There is a new supply schedule, and the supply
curve shifts leftward.
b. There has been a movement along the demand curve. The supply of gum decreases, and
the supply curve shifts leftward. Demand does not change, so the price rises along the
demand curve.
c. The equilibrium price is 60 cents, and the equilibrium quantity is 100 million packs a
week. Supply decreases by 40 millions packs a week. That is, the quantity supplied at
each price decreases by 40 million packs. The quantity supplied at 50 cents is now 80
million packs, and there is a shortage of gum. The price rises to 60 cents a pack, at which
the quantity supplied equals the quantity demanded (100 million packs a week).
10. a. There has been a movement along the supply curve. The demand for potato chips
increases, and the demand curve shifts rightward. Supply does not change, so the price
rises along the supply curve.
b. The demand curve has shifted rightward. As the new dip comes onto the market, the
demand for potato chips increases. There is a new demand schedule, and the demand
curve shifts rightward.
8
c. The equilibrium price is 80 cents, and the equilibrium quantity is 160 million bags a
week. Demand increases by 30 millions bags a week. That is, the quantity demanded at
each price increases by 30 million bags. The quantity demanded at 65 cents is now
17potatoe chips. The price rises to 80 cents a bag, at which the quantity supplied equals
the quantity demanded (160 million bags a week).
11. The new price is 70 cents a pack, and the quantity is 120 million packs a week. The demand
for gum increases, and the demand curve shifts rightward. The quantity demanded at each
price increases by 40 million packs. The result of the fire is a price of 60 cents a pack. At
this price, there is now a shortage of gum. The price of gum will rise until the shortage is
eliminated.
12. The new price is 100 cents a bag, and the quantity is 140 million bags a week. The supply of
potato chips decreases, and the supply curve shifts leftward. The quantity supplied at each
price decreases by 40 million bags. The result of the new dip entering the market is a price
of 80 cents a bag. At t his price, there is now a shortage of potato chips. The price of potato
chips will rise until the shortage is eliminated.