econ homework questions

Chapter 3: Demand and Supply

Demand and Supply

· In our market-based economy, the interaction of demand and supply in markets determines the prices of goods and services and the quantity produced and consumed.

· Changes in demand and/or supply lead to changes in the price of the good or service and in the quantity produced and consumed.

· Markets vary in the intensity of competition. This chapter studies a competitive market, which is a market that has many buyers and sellers, so no single buyer or seller can influence price.

· The money price of a good or service is the number of dollars that must be given up for it. The ratio of one (money) price to another is called a relative price. A relative price is an opportunity cost. The theory of demand and supply determines relative prices and so when we use the word “price” we mean “relative price.”

I. Demand

· The price of a good or service affects the quantity people plan to buy. The quantity demanded of a good or service is the amount that consumers plan to buy during a given time period at a particular price.

· The law of demand states that other things remaining the same, the higher the price of a good, the smaller is the quantity demanded; and the lower the price of a good, the greater the quantity demanded. The law of demand occurs for two reasons:

· Substitution Effect: When the relative price of good changes, the opportunity cost of the good changes. An increase in the price increases the opportunity cost of buying the good and people respond by buying less of the good and buying more of its substitutes.

· Income Effect: A change the price of a good changes the amount that a person can afford to buy. When the price of a good rises, people cannot afford to buy the same quantities that they purchased before, so the quantities bought of some goods and services must decrease. Normally the good whose price rises is one of the goods for which less is purchased.

Chapter 3 Homework (SHOW YOUR WORK)

Two point questions:

1. What is the effect on the equilibrium price and equilibrium quantity of orange juice if the price of apple juice increases and the wage rate paid to orange grove workers increases?

2. The table below contains the demand and supply schedules for potato chips.

Price	Quantity Demanded	Quantity Supplied
(cents per bag)	(millions of bags per week)
50	200	160
60	190	170
70	180	180
80	170	190
90	160	200
100	150	210

a. What is the equilibrium price and quantity?

b. Explain how the market adjusts if chips are $.60 per bag.

3. If a new dip increases the quantity of potato chips demand by 40 million bags per week at each price, how does the equilibrium price and quantity of chips change?

4. If a virus destroys some potato crops and the quantity of potato chips supplied decreases by 20 million bags per week at each price at the same time the new dip comes onto the market, how does the equilibrium price and quantity of chips change?