Cram Review: Supply & Demand Portion for Final
Cram Review: Supply & Demand Portion for Final ECON 2305 - 001
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This 11 page Study Guide was uploaded by DulyNoted on Saturday December 12, 2015. The Study Guide belongs to ECON 2305 - 001 at University of Texas at Arlington taught by Ronnie W Liggett in Summer 2015. Since its upload, it has received 1167 views. For similar materials see PRINCIPLES OF MACROECONOMICS in Economcs at University of Texas at Arlington.
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MACROECONOMICS FINAL CRAM EXAM: CHAPTER 3 DEMAND & SUPPLY 3.1 DEMAND Other things remaining equal, the law of demand says that higher prices will lead to a smaller quantity demanded and lower prices to a larger quantity demanded. - As market price increases(decreases), the quantity demanded by consumers in the market decreases(increases). Which of the following is consistent with the law of demand? A reduction of the price of salt led to a 5 percent increase in the quantity of salt purchased - The law of demand says that the price and the quantity demanded are inversely related, that is they move in opposite directions. Suppose that the price of a jar of peanut butter is $5 and the price of a box of tea is $3. What is the relative price of a jar of peanut butter? 1.667 Because the relative price of a jar of peanut butter is the price of a jar of peanut butter divided by the price of a box of tea. The relative price of tea is .600 because the relative price of tea is the price of a box of tea divided by the price of a jar of peanut butter. Suppose that at first the price of a bag of coffee $10 and the price of a box of tea is $6. Then, the price of a bag of coffee changes to $20 and the price of a box of tea changes to $14. What has happened the money prices and relative prices of these twogoods? The money prices of both goods have increased. The money price of the box of tea rose by a larger percentage than that of the bag of coffee. Therefore the relative price of a box of tea increased, while the relative price of the bag of coffee decreased. According to the law of demand, the quantity demanded of any commodity is inversely related to its price, other things being equal. The relative price of any commodity is its price in terms of another commodity A market demand curve is derived by summing (at each price) the individual quantities demanded by all buyers in the market. A demand schedule gives a schedule of alternative quantities demanded per time dimension at different possible princes. The law of demand applies when other things, such as income and the prices of all other goods and services, are held constant. We measure the demand schedule in terms of a time dimension and in constant-quality units. Market Demand Curve is derived by summing the quantity demanded by individuals at each price. 3.2 SHIFTS IN DEMAND Indicate whether the following events would cause an "increase or a decrease in demand" or an "increase or a decrease in the quantity demanded" for cable-based Internet access service, which is a normal good. a. Firms providing wireless (an alternative to cable) Internet access services reduce their prices. This will cause a decrease in demand b. Firms providing cable-based Internet access services reduce their prices. This will cause a(n) increase in quantity demanded A change in a good's own price leads to a change in quantity demanded for any given demand curve, other things held constant. A change in any of the ceteris paribus conditions for demand leads to a change in demand which results in a movement (shift) of the curve. In this case, the good's own price did change. c. There is a decrease in the incomes earned by consumers of cable-based Internet access services. This will cause a(n) decrease in demand Factors other than the price of the good that affect the amount demanded are (1) income, (2) tastes and preferences, (3) the prices of related goods, (4)expectations, and (5) market size (the number of buyers). This change represents a change in consumer incomes and since cable-based satellite Internet service is a normal good, as income decreases, demand will decrease. d. Consumers' tastes shift away from using wireless Internet access in favor of cable-based Internet access services. increase in demand If the price of baconrises, and as a result the demand for sausageincreases, this implies that these two goods are substitutes. If the price of tennis racquetsfalls, and as a result the demand for tennis balls increases, it implies that these two goods are complements. If the price of coffeerises, and as a result the demand for sugarfalls, this implies that these two goods are complements. If the price of automobiles falls, and as a result the demand for motorbikes falls, this implies that these two goods are substitutes. Identify which of the following would generate an increase in the market demand for tablet devices, which are a normal good. An increase in the price of ultrathin computers, which are substitutes. An increase in the number of consumers in the market for tablet devices. All of the following pairs of goods are substitutes except The price of one good and the quantity demanded of a related good move in opposite directions. These two goods are not substitutes. The price of one good and the quantity demanded of a related good move in opposite directions. These two goods are not substitutes. All of the following pairs of goods are complements except we observe the price of coffee decreases and the demand for tea decreases. The price of one good and the quantity demanded of a related good move in the same direction. These two goods are not complements. Which of the following good is an inferior good? When consumer income increases, the demand for eggs decreases. A rise in demand is represented by a leftward shift in the demand curve, and a fall in demand is represented by a rightward shift in the demand curve. FALSE For substitutes, a change in the price of a product will cause a change in demand in the same direction for the other good. For complements, a change in the price of a product will cause a change in demand in the opposite direction for the other good. A change in a good's own price leads to a change in quantity demanded for any given demand curve. Whenever there is a change in a ceteris paribus condition there will be a change in demand which is represented by a shift in the entire demand curve. Demand curves are drawn with determinants other than the price of the good held constant. These other determinants, called ceteris paribus conditions, are: (1) Income (2) Tastes/Preferences (3) Prices of related goods (4) Expectations about future prices and incomes (5) The number of potential buyers in the market. at any given price. If any one of these determinants changes, the demand curve will shift to the right or to the left. A change in demand comes about only because of a change in the ceteris paribus conditions of demand. This change in demand is a shift in the demand curve to the left or to the right. A change in the quantity demanded comes about when there is a change in the price of the good (other things held constant). Such a change in quantity demanded involves a movement along a given demand curve. 3.3 SUPPLY According to thetext, firms encounter rising costs when they attempt to produce more in the same time period. As a consequence, they must be offered a higher price to be willing to incur these higher costs. The resulting relationship between price and quantity supplied is direct (positive) and is known as the law of supply Which of the following is consistent with the law ofsupply? An increase in the market price of MP3 players causes an increase in the production of MP3 players The law of supply says that the market price and the quantity supplied are directlyrelated, that is, they move in the same direction. The law of supply states that there is a positive relationship between the price and quantity supplied Thus, as the price decreases, the quantity produced by firms decreases According to the law ofsupply, as the price of the good decreases, it causes a movement downward along the supply curve As the price decreases, firms are enticed to produce less. This is seen as a movement along the stationary supply curve. Which of the following is an implication of the law of supply? Producers will offer more units at a higher price and fewer units at a lower price. The law of supply indicates a positive relationship between the price and the quantity supplied of a good. At higher prices, firms are willing to produce more than at lower prices. This is shown as movement along the supply curve. A market supply curve is derived by summing the individual producers' supply curves. A supply schedule gives a schedule of alternative quantities supplied per time dimension at different possible prices There is normally a direct relationship between price and quantity of a good supplied, other things held constant. The supply curve normally shows a direct relationship between price and quantity supplied. The market supply curve is obtained by horizontally adding individual supply curves in the market. 3.4 SHIFTS IN SUPPLY Consider the market for smartphones. Explain whether the following events would cause an increase or a decrease in supply or an increase or a decrease in the quantity supplied a. The price of touch screens used in smartphones declines. This will cause a(n) increase in supply - Equilibrium quantity would increase. Equilibrium price would decrease b. The price of machinery used to produce smartphones increases. This will cause a(n) decrease in supply. - Equilibrium quantity would decrease. Equilibrium price would increase c. The number of manufacturers of smartphones increases. This will cause a(n) increase in supply - Equilibrium quantity would increase. Equilibrium price would decrease d. There is a decrease in the market demand for smartphones. This will cause a(n) decrease in quantity supplied. - Equilibrium quantity would decrease. Equilibrium price would decrease Which of the following will cause an outward (rightward) shift in supply? A technological improvement An improvement in technology or productivity will reduce the costs of production(more output for each unit of resource input). Producers will react by increasing the rate of production and offering more product at each and every price. Whenever there is a change in a ceteris paribus condition there will be a change in supply which is represented by a shift in the entire supply curve All of the following will decrease the supply of bus trips except A technological change that makes buses safer and more fuel-efficient A technological advancement making bus trips more efficient will reduce costs. This therefore increases the supply curve and shifts it to the right. Assume the cost of aluminum used by soft-drink companies increases. Which of the following correctly describes the resulting effects in the market for canned soft drinks? The quantity of soft drinks demanded decreases and supply of soft drinks decreases When the price of aluminum increases, it increases the cost of producing canned soft drinks and shifts the supply curve to the left (a change in supply) along the downward-sloping demand curve. This results in a change in the quantity demanded as well. If the number of firms in an industry decreases, the supply curve will shift to the right. FALSE A change in a good's own price leads to a change in supply, which shifts the supply curve. F A change in which of the following will result in a shift of the supply curve? Taxes/subsides Cost of inputs used to produce the product Technology and productivity If the price changes, we move along a curve—there is a change in quantity demanded or supplied. If some other determinant changes, we shift a curve—there is a change in demand or supply. The supply curve is drawn with other things held constant. If these ceteris paribus conditions of supply change, the supply curve will shift. The major ceteris paribus conditions are: (1) input prices (2) technology and productivity (3) subsidies/taxes (4) expectations of future relative prices (5) the number of firms in the industry 3.4 DEMAND AND SUPPLY TOGETHER Assume that the cost of aluminum used by soft-drink companies increases: The demand for soft drinks decreases FALSE When the cost of aluminum used by soft-drink companies increases, input priceschange, which influences the supply of soft drinks not the demand for soft drinks. The quantity of soft drinks demanded decreases TRUE As the supply of soft drinks falls, there is a movement along the demand curve or a change in the quantity demanded. The supply of soft drinks decreases. TRUE A change or shift in supply is a movement of the entire curve. The only thing that can cause the entire curve to move is a change in a determinant other than its own price. In this case there is an increase in input prices that causes supply to decrease. The quantity of soft drinks supplied decreases. FALSE A change in a good's own price leads to a change in quantity supplied for any given supply curve, other things held constant. This is a movement along the curve or a change in the quantity supplied. The price of soft drinks did not change, so the quantity of soft drinks supplied has not decreased, rather the supply has decreased long dash— shifted to the left. If the demand and supply curves increase (shift outward) by identical proportions then quilibrium price stays the same and quantity rises Since both curves shift outward proportionately the equilibrium price remains constant and the equilibrium quantity rises. What if the increase in demand were larger than the increase in supply? The equilibrium price and quantity increase If demand increases more than the supply then the equilibrium price and quantity will both increase. What if the increase in demand were smaller than the increase in supply? Equilibrium price falls and quantity rises. The price at which quantity demanded equals quantity supplied and at which the demand curve intersects the supply curve is called the market clearing price. At equilibrium, there is neither excess quantity supplied nor excess quantity demanded. A shortage occurs when quantity demanded is greater than quantity supplied at a price below the market clearing price. A surplus occurs when quantity supplied is greater than quantity demanded at a price above the market clearing price. The market clearing price occurs at the interception of the market demand curve and the market supply curve. It is also called the equilibrium price, the price from which there is no tendency to change unless there is a change in demand or supply. Whenever the price is greater than the equilibrium price, there is an excess quantity supplied (a surplus). Whenever the price is less than the equilibrium price, there is an excess quantity demanded (a shortage). MACROECONOMICS FINAL CRAM EXAM : CHAPTER 4 EXTENSIONS OF D&S 4.1 THE PRICE SYSTEM AND MARKETS In a price system, changes in prices signal to consumer that some goods are relatively more/less scarce. A higher price signals that a good is more scarce while a lower price signals that a good is less scarce The price of milk increases. Which of the following is not part of the likely chain of events that follows from this price change? The manufacturers of milking machines lay off some workers Since the producers of milk will expand production, there will be a greater demand for milking machines. The manufacturers of these machines will be hiring workers rather than laying them off. Buyers and sellers receive information about what should be bought and what should be produced from prices in the market system. The prices of commodities are signals to everyone within the system as to what is relatively scarce and what is relatively abundant. Suppose that a country band called Only Here has released its first CD with WantedRecords at an intended list price of $14.99. Music stores have discovered that they can markup the price to $17.99 with continued strong sales. What information does this higher price convey to the recording label? The recording label should expand the production and distribution of Only Here's first CD. Consumers willingness to pay a higher price (or bidding prices up) is a signal of a shortage (excess demand) condition. Consumers are attempting to buy more CD's than are currently being produced. The recording label should increase production Voluntary exchange makes both parties to a trade better off. Voluntary exchange refers to acts of trading between individuals that make both parties to the trade subjectively better off. In a market system, how are the terms of exchange established? The forces underlying supply and demand interact to set a price. The terms of exchange — the prices we pay for desired ite—s are determined by the interaction of the forces underlying supply and demand. The publication Car and Driver reduces transactions costs for high-performance car buyers by providing reliable information so that car buyers do not have to spend as much time doing their own research. Transaction costs are those costs associated with the exchange process, including the informational costs. By providing readers with detailed testing data, Car and Driver substantially lowers transactions costs for car buyers. In general, the more organized the market, the lower the transaction costs. Middlemen specialize in lowering transaction costs. Middlemen, also known as intermediaries, specialize in linking ultimate sellers and buyers and lowering these parties’ transaction costs. A key feature of the price system is voluntary exchange, which involves trades between between individuals that they both perceive to raise their well-being. 4.1 CHANGES IN DEMAND AND SUPPLY We can be certain that when demand decreases and supply increases at the same time, the equilibrium price will fall. There are simultaneous changes in the demand for and supply of global-positioning-system (GPS) devices, with the consequences being an unambiguous increase in the market clearing price of these devices but no change in the equilibrium quantity. What changes in the demand for and supply of GPS devices could have generated these outcomes? Demand increase and supply decrease Suppose that you are investigating the market for aluminum The price of steel, a substitute good, has decreased. Which of the following would best describe the market reaction to this event? The demand for aluminum decreases, which creates a surplus of aluminum, causing the price of aluminum to decrease. As buyers substitute the cheaper steel for the now relatively more expensive aluminum, the demand for aluminum declines. At the current aluminum price there now emerges asurplus, which will begin to put downward pressure on this price. Thus, we will end up with lower steel and aluminum prices. When demand decreases and the (upward sloping) supply curve remains in the same position, price falls and equilibrium quantity falls The new demand curve sits to the left of the original, thus yielding a new equilibrium point with both a lower price and a lower equilibrium quantity. When supply increases and the (downward-sloping) demand curve remains in the same position, price falls and equilibrium quantity rises. An increase in supply with a constant and downward sloping demand will bring about a lower price and a higher equilibrium quantity. Other things remaining equal, a decrease in the world oil supply like those that occurred in 1973- 74 and 1979 would increase the price of airline travel and decrease its equilibrium quantity. The two upward oil price shocks of the 1970's made jet fuel more expensive, and this more expensive input shifted the supply of airline travel leftward. Givendemand, the market for airline travel would have a higher price and a lower equilibrium quantity. What happens in the market with an upward sloping supply curve when there is a shift in the demand curve due to an external shock? A new equilibrium price will be achieved over some period of time. Markets do not always reach a new equilibrium immediately. If the shift in demand results in an excess supply (surplus), producers will begin to reduce production and prices charged. Consumers will buy more at the lower prices but small surpluses might remain. The process continues until the surplus has been eliminated. Economists assume that when there is a change in demand and/or supply, that prices reach a new equilibrium after an adjustment period that varies. Even in situations in which there are no restrictions on changes in prices and quantities, temporary surpluses and shortages may appear. There may be a significant adjustment time. People often complain about price gouging after a natural disaster. Suppose the government imposed limitations on price increases in the aftermath of a disaster. One would expect reconstruction to take longer because the quantity supplied of new materials would increase more slowly. Since price increases will be restrained, increases in the quantity supplied of rebuilding necessities will be less than if prices were more flexible The more flexible prices are, the more quickly a shock to the economy can be absorbed. Flexible prices are prices that respond quickly to changing market conditions. As a result, surpluses and shortages disappear quickly as equilibrium is restored. If demand increases while supply remains unchanged, the equilibrium price of the product will increase and the equilibrium quantity will increase. When both supply and demand decrease, the equilibrium price change is uncertain and the equilibrium quantity decreases. When the demand curve shifts outward or inward with an unchanged supply curve, equilibrium price and quantity increase or decrease, respectively. When the supply curve shifts outward or inward given an unchanged demand curve, equilibrium price moves in the direction opposite to equilibrium quantity. 4.3 THE RATIONING FUNCTION OF PRICES Scarcity implies that a way of rationing supplies of goods must be found. In a market-based economy, what is the role of a system of prices? To address the problem of scarcity. The price system, political power, and waiting in line (queuing) are some of the alternative rationing mechanisms. Government-enforced prices such as price ceilings disrupt the rationing function performed by prices in a market system. Government regulations that set prices below (or above) the market clearing level will produce prolonged mismatches between the quantities demanded and supplied. In the absence of such price controls markets can be expected to clear. Rationing by the price system leads to the most efficient use of available resources. Prices in a market economy perform a rationing function because they reflect relative scarcity, allowing the market to clear. Other ways to ration goods in an economy include: First come, first served Political power Physical force Random assignment Coupons Even when businesspeople can change prices, some rationing by waiting may occur. Such queuing arises when there are large changes in demand coupled with high costs of satisfying those changes immediately. 4.4 PRICE CEILINGS What is the economic effect of price ceilings? An effective price ceiling will lead to a shortage. As long as the price ceiling is below the market clearing price, imposing a price ceiling creates a shortage. Black markets usually arise when there are price ceilings. Normally, whenever quantity demanded exceeds quantity supplied — that is, when a shortage exist— there is a tendency for the price to rise to its equilibrium level. But with a price ceiling, this tendency cannot be fully realized because everyone is forbidden to trade at the equilibrium price. The result is fewer exchanges and the emergence of black markets. A black market is a market in which the price- controlled good is sold at an illegally high price through various methods. A price ceiling is a government-imposed maximum price that may be charged for a good or service, which can lead to shortages. A price ceiling is the maximum price that may be allowed in an exchange. Thisgovernment-mandated maximum will cause a shortage if it is placed below the market clearing price. In a rent controlled market, we would expect to observe renters moving into the market to take advantage of the lower rents. Because controlled rents are usually below market clearing levels, there will be an excess demand for rentable units. This excess demand will appear in the form of tenants having greater difficulty finding a place to rent. Price ceilings, such as rent controls - lead to the deterioration of existing housing. - reduce tenant mobility as people may be reluctant to change apartments. - discourage the construction of new housing. In the short run, rent controls have led to a lower quality housing stock and a higher degree of tenant stationarity. In the long run, rent controls have been observed to hinder the construction of new housing. Which of the following statements is true concerning the consequences of rent controls? Upper income earners are big winners due to the fact that they can better exploit nonprice rationing devices. Ample evidence indicates that upper-income professionals benefit the most. These people can use their mastery of the bureaucracy and their large network of friends and connections to exploit the rent control system. A black market is a market in which a price-controlled good is sold at an illegally high price. As long as a price ceiling is below the market clearing price, imposing a price ceiling creates a shortage Governments sometimes impose price controls in the form of price ceilings and floors An effective price ceiling is an enforced regulation that sets the legal price below the market clearing price, which often leads to nonprice rationing devices and black markets. Relative prices perform three functions: (1) allocating existing scarce housing among competing claimants, (2) promoting efficient maintenance of existing houses and stimulating new housing construction, and (3) rationing the use of existing houses by current demanders. Effective rent controls impede the functioning of rental prices. Construction of new rental units is discouraged. 4.5 PRICE FLOORS AND & QUANTITY RESTRICTIONS In 2011, the government of a nation established a price support for wheat. The government’s support price has been above the equilibrium price each year since, and the government has purchased all wheat over and above the amounts that consumers have bought at the support price. Every year since 2011, there has been an increase in the number of wheat producers in the market. No other factors affecting the market for wheat have changed. Predict what has happened every year since 2011 to each of the following: The quantity of wheat supplied by wheat producers has increased The quantity of wheat demanded by wheat consumers has stayed the same The quantity of wheat purchased by the government has increased What is the economic effect of price floors? Surpluses Effective price floors give rise to an excess of quantity supplied over quantity demanded. More is available for sale than buyers wish to purchase. Suppose the market price of corn is $5 a bushel but the government sets a price of $7. As a result, the government must purchase the surplus to maintain the price. Because production exceeds the amount that consumers want to buy at the support price, the government has to buy the surplus— the difference between quantity demanded and quantity supplied — if the price support program is to work. The minimum wage is an example of a price floor The minimum wage is a government legislated wage floor that sets the lowest hourly rate that firms may legally pay workers. An above-equilibrium minimum wage will result in a decrease in the quantity of labor demanded and an increase in the quantity of labor supplied. Labor is a key input at fast-food restaurants. Suppose that the government boosts the minimum wage above the equilibrium wage of fast-food workers. Which of the following best describes the response of the quantity of labor employed at restaurants? Fewer workers will be employed since the wage increase will induce managers to seek to substitute other inputs for the now relatively more expensive labor. The higher wage makes labor a relatively more expensive input and encourages firms to substitute other inputs for labor. Thus fewer workers will be employed. Opponents of minimum wage legislation argue that higher minimum wages serve to increase unemployment, particularly among unskilled minority teenagers. One of several arguments advanced by opponents of higher minimum wages holds that the economy's least skilled (lower wage) workers will experience higher unemployment from a minimum wage boost. All of the following are government imposed quantity restrictions except a. rent controls b. licensing certain activates c. import quotas d. a ban on a good making it illegal to own When a government imposes controls on rental rates, it merely places a cap on the maximum price that may be charged for rental housing. The price ceiling will certainly impact the quantity supplied, but there are no government imposed physical restrictions on the amount of housing made available for sale. The effect of a quantity restriction is a higher price By reducing supply, quantity restrictions result in higher prices and lower equilibrium quantities. Import quotas are an example of government-imposed quantity restrictions. One of the most common quantity restrictions is an import quota. An import quota is a supply restriction that prohibits the importation of more than a specified quantity of a particular good in a one-year period. Most of the benefits from agricultural price supports have gone to small, family-owned farms. FALSE As long as a price floor is above the market clearing price, imposing a price floor creates a surplus. An import quota is a supply restriction that prohibits the importation of more than a specified quantity of a particular good in a one-year period. With a price support system the government sets a minimum price at which, say, qualifying farm products can be sold. Any farmers who cannot sell at that price in the market can "sell" their surplus to the government. The only way this system can survive is for the government or some other entity to buy up the excess quantity supplied at the support price. When a floor is placed on wages at a rate that is above market equilibrium, the result is an excess quantity of labor supplied at that minimum wage. Quantity restrictions may take the form of import quotas which are limits on the quantity of specific foreign goods that can be brought into the United States for resale purposes.
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