Week 2

Competitive Market: A market in which there are many buyers and
sellers of the same good or service, none of whom can influence the
price at which the good or service is sold. This allows for the basic
supply and demand model.
demand curve a graphical representation of the demand schedule. It
shows the relationship between quantity demanded and price.
demand schedule shows how much
of a good or service consumers will
be willing and able to buy at different
prices
The quantity demanded is the actual amount of a good or service consumers are willing and able to buy at some specific price.
law of demand says that a higher price for a good or service, all other things being equal, leads people to demand a smaller
quantity of that good or service. (Negative slope)
A change in demand is a shift of the demand curve, which changes the
quantity demanded at any given price.
A movement along the demand curve is a change in the quantity
demanded of a good that is the result of a change in that goods price.
What might shift the demand curve
Changes in the prices of related goods or services
(Complements v Substitution)
Changes in income
(Normal good v inferior good)
Changes in tastes
Changes in expectations
Changes in the number of consumers
(Individual supply curvs)
Explain whether each of the following events represents
(i) a change in demand(a shift of the demand curve) or
(ii) a movement along the demand curve (a change in
the quantity demanded).
a. A store owner finds that customers are willing to pay more for
umbrellas on rainy days.
b. When XYZ Telecom, a long-distance telephone service provider,
offered reduced rates on weekends, its volume of weekend calling
increased sharply. Solutions appear at the back of the book.
c. People buy more long-stem roses the week of Valentines Day, even
though the prices are higher than at other times during the year.
d. A sharp rise in the price of gasoline leads many commuters to join
carpools in order to reduce their gasoline purchases.
Create a table with two hypothetical prices for a good and two
corresponding quantities demanded. Choose the prices and
quantities so that they illustrate the law of demand. Using your
data, draw a correctly labeled graph showing the demand
curve for the good. Using the same graph, illustrate an increase
in demand for the good.
Create a table with two hypothetical prices for a good and two
corresponding quantities demanded (1). Choose the prices and
quantities so that they illustrate the law of demand (2). Using
your data(5), draw a correctly labeled graph (3) showing the
demand curve for the good (4). Using the same graph, illustrate
an increase in demand for the good (6).
1
4
2
6
5
1
2
3
4
6
Draw a correctly labeled graph showing the demand for apples.
On your graph, illustrate what happens to the demand for
apples if a new report from the Surgeon General finds that an
apple a day really doeskeep the doctor away.
The quantity supplied is the actual amount of a good or service producers are willing to sell at some specific price.
A supply schedule shows how much of a good or service producers will supply at different prices.
A supply curve shows the relationship between quantity supplied and price.
The law of supply says that, other things being equal, the price and quantity supplied of a good are positively related
(positive slope).
Change in supply is a shift of the supply curve, which changes the quantity supplied at any given price.
A movement along the supply curve is a change in the quantity supplied of a good that is the result of a change in
that goods price.
individual supply curve illustrates the relationship between quantity supplied and price for an individual producer.
An economic situation is in equilibrium when no individual would be better off doing
something different. A competitive market is in equilibrium when price has moved to a
level at which the quantity demanded of a good equals the quantity supplied of that
good.
The price at which this takes place is the equilibrium price, also referred to as the
market-clearing price.
The quantity of the good bought and sold at that price is the equilibrium quantity.
The intersection of the Supply and Demand Curve

1. Why do all sales and purchases in a market take place at the same
price?
2. Why does the market price fall if it is above the equilibrium price?
3. Why does the market price rise if it is below the equilibrium price?
Explain whether each of the following events
represents (i) a change in supply or (ii) a
movement along the supply curve.
During a real estate boom that causes house prices to rise, more
homeowners put their houses up for sale.
Many strawberry farmers open temporary roadside stands during harvest
season, even though prices are usually low at that time.
Immediately after the school year begins, fewer young people are available
to work. Fast-food chains must raise wages, which represent the price of
labor, to attract workers.
Many construction workers temporarily move to areas that have suffered
hurricane damage, lured by higher wages.
Since new technologies have made it possible to build larger cruise ships
(which are cheaper to run per passenger),Caribbean cruise lines have offered
more cabins, at lower prices, than before.
In the following three situations, the market is
initially in equilibrium. After each event described
below, does a surplus or shortage exist at the
original equilibrium price? What will happen to
the equilibrium price as a result?
a. In 2010 there was a bumper crop of wine grapes.

b. After a hurricane, Florida hoteliers often find that many people
cancel their upcoming vacations, leaving them with empty hotel rooms.
c. After a heavy snowfall, many people want to buy second-hand
snowblowers at the local tool shop.
Draw a correctly labeled graph showing the market for tomatoes in
equilibrium. Label the equilibrium price PE and the equilibrium
quantity QE. On your graph, draw a horizontal line indicating a price,
labeled PC, that would lead to a shortage of tomatoes. Label the size
of the shortage on your graph. On your graph, draw a horizontal line
indicating a price, labeled PF, that would lead to a surplus of
tomatoes. Label the size of the surplus on your graph.
Draw a correctly labeled graph showing the market for oranges in
equilibrium. Show on your graph how a hurricane that destroys large
numbers of orange groves in Florida will affect supply and demand, if at
all.
What happens when both move
When demand increases and supply decreases, the equilibrium price
rises but the change in the equilibrium quantity is ambiguous.
When demand decreases and supply increases, the equilibrium price
falls but the change in the equilibrium quantity is ambiguous.
When both demand and supply increase, the equilibrium quantity
increases but the change in equilibrium price is ambiguous.
When both demand and supply decrease, the equilibrium quantity
decreases but the change in equilibrium price is ambiguous.
For each of the following examples, explain how
the indicated change affects supply or demand for
the good in question and how the shift you
describe affects equilibrium price and quantity.
As the price of gasoline fell in the United States during the 1990s,
more people bought large cars. (For large cars)
As technological innovation has lowered the cost of recycling used
paper, fresh paper made from recycled stock is used more frequently.
(For recycled paper)
When a local cable company offers cheaper pay-per-view films, local
movie theaters have more unfilled seats. (for theater seats)
Periodically, a computer chip maker like Intel introduces a new chip
that is faster than the previous one. In response, demand for
computers using the earlier chip decreases as customers put off
purchases in anticipation of machines containing the new chip.
Simultaneously, computer makers increase their production of
computers containing the earlier chip in order to clear out their stocks
of those chips. Draw two diagrams of the market for computers
containing the earlier chip: (a) one in which the equilibrium quantity
falls in response to these events and (b) one in which the equilibrium
quantity rises. What happens to the equilibrium price in each diagram
Draw a correctly labeled graph showing the SUV
market in equilibrium. On your graph, show the
effect on equilibrium price and quantity in the
market for SUVs if the price of gasoline increases.
Draw a correctly labeled graph showing the
market for cups of coffee in equilibrium. On your
graph, show the effect of a decrease in the price
of coffee beans on equilibrium price and
equilibrium quantity in the market for cups of
coffee.

Week 2

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Week 2

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Competitive Market: A market in which there are many buyers and

The intersection of the Supply and Demand Curve

a. In 2010 there was a bumper crop of wine grapes.

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