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73 Cards in this Set

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the relationship between quantities demanded for a good and the price of the good
demand for a good
2 Effects of Demand Curve?
1. The cheaper it is, the more people want it

2. Each person reacts to change in price
quantity demanded decreases with greater price, holding everything else constant
"law of demand"
Two reasons why we choose to consume fewer units of a good when its price becomes higher?
1. Substitution Effect
2. Income Effect
How do you graph market demand curve with two consumers of same product?
Add their demands together
Represents people's willingness to pay at different prices
Demand Curve
After the summer break, the population of students in the campus town increases

Population ^
Number of Consumers ?
Demand ?
Number of Consumers = ^
Demand = ^

Shifts to the right = Greater willingness to buy at any given price
People are becoming more concerned about their health and they think coffee has too much sugar and caffeine

Preference for the good = V
Demand = ?
Demand = V
goods that the richer you get, the more you want
normal goods
goods that the richer you are, the less you want
inferior goods
3 Examples of Normal Goods?
1. Clothes
2. Electronics
3. Furniture
3 Examples of Inferior Goods?
1. DVD Players
2. Cheap Food
3. Cheap Clothes
There is a recession in the economy: unemployment rate is high and wages are low

Suppose coffee is a normal good

Income = V ---> Demand = ?
Demand = V

Shifts to the left, less coffee if it is a normal good
Suppose coffee is an inferior good

Income = V ---> Demand = ?
Demand = ^

Shifts to the right.
Price of tea (a substitute for coffee) goes up by 50%

Price of a substitute good (tea) = ^

Quantity demanded for the substitute good (tea) = ?

Demand for the first good (coffee) = ?
Quantity demanded for the substitute good (tea) = V

Demand for the first good (coffee) = ^

Shifts to the right.
The price effect of substitute goods is large when goods are very close substitutes. Give three examples of very close substitute goods:
1. Pepsi vs. Coke
2. Nike vs. Addidas
3. Ruffle vs. Lays
Now, suppose the price of coffee increases by 50%. What happens with the demand for coffee creamer?

Price of a complement (coffee) = ^

Quantity demanded for the complement (coffee) = ?

Demand for the first good (creamer) = ?
Quantity demanded for the complement (coffee) = V

Demand for the first good (creamer) = V

Shifts to the left.
The price effect from complementary goods is large when goods are very close complements. Give 3 Examples of very close complement goods:
1. Peanut Butter and Jelly
2. Ping Pong Balls and Solo Cups
3. Car and Gas
There is news of bad weather in coffee producing places and expected increase in the price of coffee next week. The graph below depicts the demand for coffee this week before the announcement. What happens after the announcement? Explain.

Expected future price = ^

Current Demand = ?
Current Demand = ^

Shifts to the right.
The government announces a permanent income tax cut of $1,000 per taxpayer, starting next year. The graph below depicts the demand for coffee before the government announcement. What happens with the demand for coffee after the announcement? Explain.

Expected future income = ^

Current Demand = ?

(Assuming coffee is normal good)
Current Demand = ^

Shifts to the right.
A change in price causes a change in ________ ________, but not a change in ______.
quantity demanded; demand
Expected future changes in the price of __________ or __________ goods can also cause changes in the ______ of a good today.
substitute or complement; demand
the relationship between quantities supplied of a good/service and the price of it
supply of a good
holding everything else constant, quantity supplied increases with greater price
law of supply
Why do suppliers choose to supply more units when the price becomes higher (in other words,why is the supply curve upward sloped)? Use what you learned about how people make marginal choices (in Chapter 1).
Law of Increasing Costs

If you want to produce more, you increase the opportunity cost.
Where does the supply curve only exist in?
Perfectly competitive market where the price is determined by the market and not by each individual firm
In the 18th century, Brazil was by far the largest coffee producer. Later, other countries developed coffee production too (today, coffee is produced by many African, Asian, and Latin American countries).

Entry of new producers --> Supply = ?
Supply = ^

Shifts to the right.
obstacles that restrain the entry of new producers
"barriers to entry"
The price of coffee fertilizers doubles in price.

Price of an input = ^

Supply = ?
Supply = V

Shifts to the left.
In the past coffee was harvest by hand. In the last few decades, coffee-specific harvesting machines have been developed at affordable prices.

Productivity = ^

Supply = ?
Supply = ^

Shifts to the right.
In areas where coffee is produced, it is also possible to produce many other goods like beans or fruits. What happens with coffee supply when the price of fruits goes down for a long period without perspective of future improvement?

Price of a substitute output (fruits) = V

Production of the substitute output (fruits) = ?

Supply of the first output (coffee) = ?
Production of the substitute output (fruits) = V

Supply of the first output (coffee) = ^

Shifts to the right.
Coffee can be stored for some time. A possible future drought in one of the main coffee producing areas creates an expectation of future increase in coffee price.

Expected future price = ^

Current Supply = ?
Current Supply = V

Shifts to the left.
a situation where nobody has an incentive to do anything different than what they are already doing
equilibrium
a situation where all buyers and sellers cannot, individually, do anything better for themselves
market equilibrium
an excess demand (quantity demanded exceeds quantity supplied)
shortage
an excess supply (quantity supplied exceeds quantity demanded)
surplus
What happens to price if there is a surplus?
Decreases
What happens to price if there is a shortage?
Increases
Use demand and supply graphs to discuss how each event affected equilibrium corn price and quantity sold.

(a) Bad weather in 1996.
Supply is affected, supply goes down, price goes up.

(Corn is normal good)
Use demand and supply graphs to discuss how each event affected equilibrium corn price and quantity sold.

(b) Increasing world income in 1996.
Demand is affected, demand increases, price increases
A curve that shows the relationship between the price of a product and the quantity of the product supplied
supply curve
Use demand and supply graphs to discuss how each event affected equilibrium corn price and quantity sold.

(c) International financial crisis in 1997
Demand is affected, demand decreases, price decreases
Use demand and supply graphs to discuss how each event affected equilibrium corn price and quantity sold.

(f) Gasoline price more than doubled in 2005-2007 (corn ethanol is a partial substitute for gasoline)
Demand is affected, demand increases, price increases
During the last six-seven decades, American families' income has drastically increased. Also, health concerns lead to substitution of chicken meat for red meat. On the other hand, the technology of chicken meat production has developed very fast in the same period. How are price and quantity sold for chicken meat affected by these events?
If chicken meat is normal; Income increases making demand increase

Additional increase in demand because of health concerns that favor white meat
In the last decade, the cost of components needed to produce desktop computers has gone down drastically. On the other hand, laptop computers have become much cheaper than before, with prices that are almost as low as desktop computers. How are price and quantity sold of desktop computers affected by these events?
Supply increases, producers produce more because their costs are lower

Demand is affected, demand decreases, price decreases
In 2008, the world economy slowed down due to a credit crisis. On the other hand, OPEC decided to reduce their oil supply. How are price and quantity sold of petroleum affected by these events?
Demand is affected, demand decreases, supply goes down, quantity goes down, price goes up
In 2006, news of contamination of spinach by E. coli scared consumers. Then, spinach producers had to take extra measures to guarantee their product of safety. How should have price and quantity sold of spinach been affected by these events?
Demand is affected, demand decreases, supply decreases, price decreases
The market for energy drinks has grown rapidly over the past several years. One report predicts that energy drinks might replace coffee for the current generation of teens and young adults. This report implies that energy drinks and coffee are
substitutes
If Red Bull and Monster Energy are considered substitutes, then, other things equal, an increase in the price of Red Bull will?
increase the demand for Monster
If, in response to an increase in the price of chocolate, the quantity demanded of chocolate decreases economists would describe this as?
a decrease in quantity demanded
If the price of automobiles were to increase, then?
the demand for gasoline would decrease
Buyers rush to purchase stocks in California vineyards following a forecast of a 30 percent decline in this year's grape harvest. What happens in the California wine market as a result of this announcement?
The demand curve for California wine shifts to the right in anticipation of higher prices in the future
In January, buyers of gold expect that the price of gold will rise in February. What happens in the gold market in January, holding all else constant?
The demand curve shifts to the right
a table that shows the relationship between the price of a product and the quantity of the product supplied
supply schedule
If in the market for peaches, the supply curve has shifted to the left,
the supply of peaches has decreased
In October, market analysts predict that the price of platinum will fall in November. What happens in the platinum market in October, holding everything else constant?
The supply curve shifts to the right
In October 2005, the U.S. Fish and Wildlife Service banned the importation of beluga caviar, the most prized of caviars, from the Caspian Sea. What happened in the market for caviar in the U.S.?
The supply curve shifted to the left
George Gnat subscribes to a monthly pest control service for his home. Last week the owner of the service informed George that he will have to raise his monthly service fee because of increases in the price of gasoline used by his workers on their service trips. How is the market for pest control services affected by this?
There is a decrease in the supply of pest control services
The popularity of digital cameras has enticed large discount stores like Wal-Mart and Costco to offer digital photo printing services. How does this affect the digital photo printing market?
The supply curve for digital photo printing services shifts to the right
Which of the following would shift the supply curve for MP3 players to the right?
a decrease in the price of an input used to produce MP3 players
In 2004, hurricanes damaged a large portion of Florida's orange crop. As a result of this, many orange growers were not able to supply fruit to the market. At the pre-hurricane equilibrium price, we would expect to see
a shortage of oranges
Which of the following is evidence of a surplus of bananas?
the price of bananas is lowered in order to increase sales
Let D = demand, S = supply, P = equilibrium price, Q = equilibrium quantity. What happens in the market for tropical hardwood trees if the governments restrict the amount of forest lands that can be logged?
S decreases, D no change, P increases, Q decreases
Which of the following would cause both the equilibrium price and equilibrium quantity of cotton (assume that cotton is a normal good) to increase?
an increase in consumer income
Prices of California Merlot wine (assume that this is a normal good) have risen steadily in recent years. Over this same period, prices for French oak barrels used for wine storage have dropped and consumer incomes have risen. Which of the following best explains the rising prices of California Merlots?
The demand curve for Merlot has shifted to the right faster than the supply curve has shifted to the right
In recent years the cost of producing organic produce in the U.S. has decreased largely due to technological advancement. At the same time, more and more Americans prefer organic produce over conventional produce. Which of the following best explains the effect of these events in the organic produce market?
Both the supply and demand curves have shifted to the right. As a result, there has been an increase in the equilibrium quantity and an uncertain effect on the equilibrium price
An article in the Wall Street Journal in early 2001 noted two developments in the market for laser eye surgery. The first development concerned side effects from the surgery, including blurred vision. The second development was that the companies renting eye-surgery machinery to doctors had reduced their charges. In the market for laser eye surgeries, these two developments
decreased demand and increased supply, resulting in a decrease in the equilibrium price and an uncertain effect on the equilibrium quantity of laser eye surgeries
What happens in this market if there is a substantial increase in the price of bicycles?
Supply remains the same, demand decreases
Assume that both the demand curve and the supply curve for MP3 players shift to the right but the demand curve shifts more than the supply curve. As a result
both the equilibrium price and quantity of MP3 players will increase
"The price of compact fluorescent light bulbs fell because of improvements in production technology. As a result, the demand for incandescent light bulbs decreased. This caused the price of incandescent light bulbs to fall; as the price of incandescent light bulbs fell the demand for incandescent light bulbs decreased even further." Evaluate this statement.
The statement is false. A decrease in the price of compact fluorescent light bulbs would decrease the demand for incandescent light bulbs, but a decrease in the price of incandescent light bulbs would not cause the demand for incandescent light bulbs to decrease
The following appeared in a Florida newspaper a week after a hurricane hit the state. "Floridians are relieved that the storm produced no fatalities but homeowners face weeks, if not months, of rebuilding. Matters are made worse by the soaring prices of plywood and other building materials that always follow in a hurricane's path. Complaints of profiteering and price gouging have not deterred firms from raising their prices by over 100 percent." Which of the following offers the best explanation for the price increases referred to in the article?
The hurricane caused an increase in the demand for building materials
As more insurance companies cover part of the price of lap band surgery, and as more Americans consider this surgery due to the health risks resulting from obesity, what will happen in the market for lap band surgery as a result of these two factors?
Demand will increase, but these two factors will not shift the supply curve
"Because apples and oranges are substitutes, an increase in the price of oranges will cause the demand for apples to increase. This initial shift in demand for apples results in a higher price for apples; this higher price will cause the demand curve for apples to shift to the right." Which of the following correctly comments on this statement?
The statement is false because a change in the price of apples would not change the demand for apples