Transcript Ch4

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© 2013 Pearson
Demand and Supply
4
CHECKPOINTS
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Checkpoint 4.1
Problem 1
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Problem 2
Problem 3
In the News
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Checkpoint 4.2
Problem 1
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Checkpoint 4.3
Problem 1
Problem 2
Problem 3
Problem 3
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In the News
Problem 4
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In the News
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Problem 2
CHECKPOINT 4.1
Practice Problem 1
Explain the effects on the demand for cell phones of the
following events that occur one at a time:
• The price of a cell phone falls.
• The price of a cell phone is expected to fall next month.
• The price of a call from a cell phone falls.
• The price of a call from a land-line phone increases
• The introduction of camera phones makes cell phones
more popular.
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CHECKPOINT 4.1
Solution
A fall in the price of a cell phone increases the
quantity of cell phones demanded but has no effect
on the demand for cell phones.
An expected fall in the price of a cell phone next
month decreases the demand for cell phones today
as people wait for the lower price.
A fall in the price of a call from a cell phone
increases the demand for cell phones because a
cell phone call and a cell phone are complements.
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CHECKPOINT 4.1
A rise in the price of a call from a land-line phone
increases the demand for cell phones because a
land-line phone and a cell phone are substitutes.
An increase in the popularity of a cell phone
increases the demand for cell phones.
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CHECKPOINT 4.1
Study Plan Problem 1
In the market for cell phones, when the price of a cell
phone falls, the quantity of cell phones demanded
________ and the demand for cell phone ______.
A.
B.
C.
D.
E.
is unchanged; increases
decreases; is unchanged
decrease; decreases
increases; is unchanged
increases; increases
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CHECKPOINT 4.1
In the market for cell phones, when the
price of a cell phone is expected to fall next
year, ________.
A.
B.
C.
D.
E.
the demand for cell phones today decreases
the quantity of cell phones demanded today increases
the demand for cell phones today increases
the quantity of cell phones demanded today decreases
the quantity of cell phones demanded today increases
and the demand for cell phones today increases
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CHECKPOINT 4.1
Practice Problem 2
Use a graph to illustrate the effect of each of the following
events:
• The price of a cell phone falls
• The price of a cell phone is expected to fall next month.
• The price of a call from a cell phone falls.
• The price of a call from a land-line phone increases
• The introduction of camera phones makes cell phones
more popular
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CHECKPOINT 4.1
Solution
The fall in the price of a cell
phone creates a movement
along the demand curve D.
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CHECKPOINT 4.1
An increase in the demand for
cell phones is shown by the shift
of the demand curve rightward
from D0 to D1.
A decrease in the demand for
cell phones is shown by the shift
of the demand curve leftward
from D0 to D2.
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CHECKPOINT 4.1
Practice Problem 3
Do the following events illustrate the law of demand?
• The price of a cell phone falls
• The price of a cell phone is expected to fall next
month.
• The price of a call from a cell phone falls.
• The price of a call from a land-line phone increases
• The introduction of camera phones makes cell phones
more popular
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CHECKPOINT 4.1
Solution
A fall in the price of a cell phone
(other things remaining the
same), illustrates the law of
demand.
The figure illustrates the law of
demand.
The other events change
demand and do not illustrate the
law of demand.
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CHECKPOINT 4.1
Study Plan Problem
Which events illustrate the law of demand?
1. The price of a cell phone falls
2. The price of a cell phone is expected to fall next month.
3. The price of a call from a cell phone falls.
4. The price of a call from a land-line phone increases
A.
B.
C.
D.
E.
Event 1
Events 2, 3, and 4
Event 2
Events 1, 2, 3, and 4
Events 1, 3, and 4
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CHECKPOINT 4.1
In the News
Airline, now flush, fear a downturn
So far this year airline have been able to raise fares but
still fill their planes.
Source: The New York Times, June 10, 2011
Does the news clip imply that the law of demand doesn’t
work in the real world? Explain why or why not.
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CHECKPOINT 4.1
Solution
The law of demand states:
If the price of an airline ticket rises, other things remaining
the same, the quantity demanded of airline tickets will
decrease.
The demand curve for airline tickets slopes downward.
The law of demand does work in the real world.
Airlines can still fill their planes because “other things” did
not remain the same.
Some event increased the demand for air tickets..
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CHECKPOINT 4.2
Practice Problem 1
What is the effect of each of the following events on the
supply of timber beams:
• The wage rate of sawmill workers rises.
• The price of sawdust rises.
• The price of a timber beam rises.
• The price of a timber beam is expected to rise next year.
• Congress to introduce a new law that reduces the
amount of forest that can be cut for timber products.
• A new technology lowers the cost of producing a beam.
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CHECKPOINT 4.2
Solution
A rise in sawmill workers’ wage rates decreases the
supply of timber beams.
A rise in the price of sawdust increases the supply of
timber beams because sawdust and timber beams are
complements in production.
A rise in the price of a timber beam increases the quantity
of timber beams supplied but has no effect on the supply
of timber beams.
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CHECKPOINT 4.2
An expected rise in the price of a timber beam decreases
the supply of timber beams as producers hold back and
wait for the higher price.
The new law that reduces the amount of forest that can be
cut for timber products decreases the supply of timber
beams.
A new technology that lowers the cost of producing timber
beams increases the supply of timber beams.
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CHECKPOINT 4.2
Study Plan Problem
In the market for timber beams, when the wage
rate paid to sawmill workers rises, ______.
A.
B.
C.
D.
E.
the quantity of timber beams supplied decreases
the supply of timber beams increases
the quantity of timber beams supplied increases
the supply of timber beams decreases
the quantity of timber beams supplied increases and the
supply of timber beams also increases
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CHECKPOINT 4.2
Congress introduces a new law that reduces the
amount of forest that can be cut for timber products.
In the market for timber beams,
A. the supply of timber beams decreases.
B. the quantity of timber beams supplied increases and the
supply of timber beams also increases
C. the quantity of timber beams supplied decreases
D. the supply of timber beams increases.
E. the quantity of timber beams supplied increases
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CHECKPOINT 4.2
Practice Problem 2
Use a graph to illustrate the effect of each of the following
events:
• The wage rate of sawmill workers rises.
• The price of sawdust rises.
• The price of a timber beam rises.
• The price of a timber beam is expected to rise next year.
• Congress to introduce a new law that reduces the
amount of forest that can be cut for timber products.
• A new technology lowers the cost of producing a beam.
© 2013 Pearson
CHECKPOINT 4.2
Solution
An increase in the supply of
timber beams as the shift of the
supply curve rightward from S0 to
S1 .
A decrease in the supply as the
shift of the supply curve leftward
from S0 to S2.
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CHECKPOINT 4.2
A rise in the price of a timber
beam increases the quantity
supplied and creates a
movement along the supply
curve S.
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CHECKPOINT 4.2
Practice Problem 3
Which events illustrate the law of supply?
• The wage rate of sawmill workers rises.
• The price of sawdust rises.
• The price of a timber beam rises.
• The price of a timber beam is expected to rise next
year.
• Congress introduces a new law that reduces the
amount of forest that can be cut for timber products.
• A new technology lowers the cost of producing a beam.
© 2013 Pearson
CHECKPOINT 4.2
Solution
A rise in the price of a timber beam
(other things remaining the same),
illustrates the law of supply.
The figure illustrates the law of
supply.
The other events change supply
and do not illustrate the law of
supply.
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CHECKPOINT 4.2
In the News
GM, UAW reach crucial cost-cutting pact
GM and the UAW agree on restructuring workers’ jobs.
This restructuring, with no change in the wage rate, will
save GM $1 billion in labor costs a year.
Source: The Wall Street Journal, May 22, 2009
How will this cost-cutting agreement change GM’s supply
of vehicles? Explain your answer.
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CHECKPOINT 4.2
Solution
The cut in labor costs with no change in the wage rate is
an increase in productivity.
An increase in productivity will increase GM’s supply of
vehicles.
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CHECKPOINT 4.3
Practice Problem 1
The table shows the demand
and supply schedules for milk.
What is the equilibrium price
and equilibrium quantity of milk?
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CHECKPOINT 4.3
Solution
The equilibrium price is the price
at which the quantity demanded
equals the quantity supplied.
The equilibrium price is $1.50 a
carton.
The equilibrium quantity is 150
cartons a day.
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CHECKPOINT 4.3
Practice Problem 2
The table shows the demand
and supply schedules for milk.
Describe the situation in the
milk market if the price were
$1.75 a carton and explain how
the market reaches its new
equilibrium.
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CHECKPOINT 4.3
Solution
At $1.75 a carton, the quantity
demanded (125 cartons) is less
than the quantity supplied (170
cartons), so there is a surplus of
45 cartons a day.
The price begins to fall, and as it
does, the quantity demanded
increases, the quantity supplied
decreases, and the surplus
decreases.
The price will fall until the surplus is eliminated.
The price falls to $1.50 a carton.
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CHECKPOINT 4.3
Study Plan Problem
At $1.75 a carton, a _____exists.
As the price _____, the quantity
demanded _____ and the
quantity supplied ____.
A. shortage; rises; decreases;
increases
B. shortage; rises; increases;
decreases
C. surplus; falls; decreases;
increases
D. surplus; falls; increases;
decreases
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CHECKPOINT 4.3
Practice Problem 3
The table shows the demand
and supply schedules for
milk.
A drought decreases the
quantity supplied by 45
cartons a day at each price.
What is the new market
equilibrium and how does
the market adjust to it?
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CHECKPOINT 4.3
Solution
The supply decreases by 45
cartons a day. At $1.50 a carton,
the quantity demanded exceeds
the quantity supplied, so there is a
shortage of milk.
As the price begins to rise, the
quantity demanded decreases, the
quantity supplied increases, and
the shortage decreases.
The price will rise until the shortage is eliminated.
The price rises to $1.75 a carton.
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CHECKPOINT 4.3
Study Plan Problem
The quantity supplied decreases
by 45 cartons a day at each price.
At the initial equilibrium price, there
is a ________ of milk. The price
_______ and the quantity
demanded _______ as the market
moves to its new equilibrium.
A.
B.
C.
D.
E.
surplus; rises; decreases
surplus; falls; increases
shortage; falls; decreases
shortage; falls; increases
shortage; rises; decreases
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CHECKPOINT 4.3
Practice Problem 4
The table shows the demand and
supply schedules for milk.
Milk becomes more popular and
better feeds increase milk
production.
How do these events influence
demand and supply?
What is the new market
equilibrium and how does the
market adjust to it?
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CHECKPOINT 4.3
Solution
When milk becomes more
popular, demand increases.
With better feeds, supply
increases.
If supply increases by more than
demand, a surplus arises at
$1.50.
The price falls, and the quantity
increases.
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CHECKPOINT 4.3
If demand increases by more
than supply, a shortage arises.
The price rises, and the quantity
increases.
If demand and supply increase
by the same amount, there is no
shortage or surplus and the price
does not change but the quantity
increases.
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CHECKPOINT 4.3
Study Plan Problem
Milk becomes more popular and better feeds
increase milk production. If supply changes by
more demand changes, the equilibrium price of
milk _____ and the equilibrium quantity of milk
_____.
A.
B.
C.
D.
E.
falls; decreases
falls; increases
does not change; does not change
rises; increases
rises; decreases
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CHECKPOINT 4.3
In the News
After wild weather, higher food prices on horizon
After heavy rain this ear, the corn harvest will be less than
expected while the demand for corn will continue to
increase. Food prices will continue to rise.
Source: npr, June 9, 2011
Using the demand and supply model, explain why food
prices are expected to rise.
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CHECKPOINT 4.3
Solution
A fall in the corn harvest will decrease the supply of corn
and shift the supply curve of corn leftward.
The increase in the demand for corn will shifts the
demand curve for corn rightward.
The price of corn will rise.
The higher price of corn will increase the cost of
producing food made from corn, so the supply of this food
will decrease and the price of food will rise.
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