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Demand and Supply 4 CHECKPOINTS

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© 2013 Pearson 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. CHECKPOINT 4.1

© 2013 Pearson 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. CHECKPOINT 4.1

© 2013 Pearson 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. CHECKPOINT 4.1

© 2013 Pearson 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 ______. CHECKPOINT 4.1 A.is unchanged; increases B.decreases; is unchanged C.decrease; decreases D.increases; is unchanged E.increases; increases

© 2013 Pearson In the market for cell phones, when the price of a cell phone is expected to fall next year, ________. CHECKPOINT 4.1 A.the demand for cell phones today decreases B.the quantity of cell phones demanded today increases C.the demand for cell phones today increases D.the quantity of cell phones demanded today decreases E.the quantity of cell phones demanded today increases and the demand for cell phones today increases

© 2013 Pearson 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 CHECKPOINT 4.1

© 2013 Pearson Solution The fall in the price of a cell phone creates a movement along the demand curve D. CHECKPOINT 4.1

© 2013 Pearson An increase in the demand for cell phones is shown by the shift of the demand curve rightward from D 0 to D 1. A decrease in the demand for cell phones is shown by the shift of the demand curve leftward from D 0 to D 2. CHECKPOINT 4.1

© 2013 Pearson 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 CHECKPOINT 4.1

© 2013 Pearson 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. CHECKPOINT 4.1

© 2013 Pearson 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 CHECKPOINT 4.1 A.Event 1 B.Events 2, 3, and 4 C.Event 2 D.Events 1, 2, 3, and 4 E.Events 1, 3, and 4

© 2013 Pearson 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. CHECKPOINT 4.1

© 2013 Pearson 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.. CHECKPOINT 4.1

© 2013 Pearson 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. CHECKPOINT 4.2

© 2013 Pearson 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. CHECKPOINT 4.2

© 2013 Pearson 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. CHECKPOINT 4.2

© 2013 Pearson Study Plan Problem In the market for timber beams, when the wage rate paid to sawmill workers rises, ______. CHECKPOINT 4.2 A.the quantity of timber beams supplied decreases B.the supply of timber beams increases C.the quantity of timber beams supplied increases D.the supply of timber beams decreases E.the quantity of timber beams supplied increases and the supply of timber beams also increases

© 2013 Pearson Congress introduces a new law that reduces the amount of forest that can be cut for timber products. In the market for timber beams, CHECKPOINT 4.2 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

© 2013 Pearson 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. CHECKPOINT 4.2

© 2013 Pearson Solution An increase in the supply of timber beams as the shift of the supply curve rightward from S 0 to S 1. A decrease in the supply as the shift of the supply curve leftward from S 0 to S 2. CHECKPOINT 4.2

© 2013 Pearson A rise in the price of a timber beam increases the quantity supplied and creates a movement along the supply curve S. CHECKPOINT 4.2

© 2013 Pearson 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. CHECKPOINT 4.2

© 2013 Pearson 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. CHECKPOINT 4.2

© 2013 Pearson 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. CHECKPOINT 4.2

© 2013 Pearson 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. CHECKPOINT 4.2

© 2013 Pearson Practice Problem 1 The table shows the demand and supply schedules for milk. What is the equilibrium price and equilibrium quantity of milk? CHECKPOINT 4.3

© 2013 Pearson 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. CHECKPOINT 4.3

© 2013 Pearson 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. CHECKPOINT 4.3

© 2013 Pearson 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. CHECKPOINT 4.3 The price will fall until the surplus is eliminated. The price falls to $1.50 a carton.

© 2013 Pearson Study Plan Problem At $1.75 a carton, a _____exists. As the price _____, the quantity demanded _____ and the quantity supplied ____. CHECKPOINT 4.3 A.shortage; rises; decreases; increases B.shortage; rises; increases; decreases C.surplus; falls; decreases; increases D.surplus; falls; increases; decreases

© 2013 Pearson 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? CHECKPOINT 4.3

© 2013 Pearson 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. CHECKPOINT 4.3 The price will rise until the shortage is eliminated. The price rises to $1.75 a carton.

© 2013 Pearson 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. CHECKPOINT 4.3 A.surplus; rises; decreases B.surplus; falls; increases C.shortage; falls; decreases D.shortage; falls; increases E.shortage; rises; decreases

© 2013 Pearson 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? CHECKPOINT 4.3

© 2013 Pearson 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. CHECKPOINT 4.3

© 2013 Pearson 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. CHECKPOINT 4.3

© 2013 Pearson 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 _____. CHECKPOINT 4.3 A.falls; decreases B.falls; increases C.does not change; does not change D.rises; increases E.rises; decreases

© 2013 Pearson 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. CHECKPOINT 4.3

© 2013 Pearson 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. CHECKPOINT 4.3