1. The change in the market is represented by an increase/decrease/no change in
ID: 1142740 • Letter: 1
Question
1. The change in the market is represented by an increase/decrease/no change in the demand and an increase/decrease/no change in supply (circle one for each)
2. The change in the market will result in a a)surplus b)shortage c)Unknown
3. In the market, the price the consumer pays will a) rise b)fall c)unknown
4. Because of the price change, the quantity demanded will a) rise b)fall c)unknown
5. Because of the price change, the quantity supplied will a) rise b)fall c)unknown
What is the equilibrium Market Price and Market Quantity when it settles at equilibrium?
Explanation / Answer
Demand and Supply Basics
We all understand “demand and supply” -- or at least think we do. In reality “demand and
supply” is very useful for explaining many concepts. But it can break down where there are great
stretches of time, such as investments in public works or durables such as housing.
Demand
When economists talk about, “demand”, they can mean two different things, often causing
confusion. When they say, “demand is high for iPhones,” they mean that at current prices, lots of
people are buying iPhones. In other words, they are referring to quantity purchased. On other
occasions, they may say “as price rises demand falls.” They're really talking about a
mathematical function relating quantity purchased to price.
So to avoid confusion here, we will use the term “demand curve” for the functional relationship,
and “quantity demanded” for the amount purchased at a particular price.
All else being equal, the more something costs on the average, the less people will buy. “All else
being equal” means, at the least, in the same time and place. (Here already we encounter the
spacelessness and timelessness of conventional economics.) We can easily graph this
relationship. However, — we owe this upside down convention to the great British economist
Alfred Marshall (1842-1924) —we put the independent variable, “quantity” on the x-axis
(abscissa) and the dependent variable, “price”, on the y-axis (ordinate).
How do we build a demand curve? I'm heading for the Food Emporium with eggs on my
shopping list. If the eggs are over three dollars a dozen, I'll only buy one box. But if they're under
$2.50 I'll buy two boxes. If the eggs are over four dollars I won't buy any. These points make up
my individual demand curve. When 1000 shoppers like me hit the food Emporium on Friday,
March 13, the demand curve for eggs is the sum of our individual demand curves. If the price is
$2.89 a dozen, we buy 1328 boxes. That’s the quantity demanded at that price.
0
Quantity of eggs demanded
Price of
eggs
Figure 1.1
Demand curve for eggs on Friday
March 13 at the Food Emporium
PA is the actual price that day; QA
is the actual quantity purchased.So to avoid confusion here, we will use the term “demand curve” for the functional relationship,
and “quantity demanded” for the amount purchased at a particular price.
All else being equal, the more something costs on the average, the less people will buy. “All else
being equal” means, at the least, in the same time and place. (Here already we encounter the
spacelessness and timelessness of conventional economics.) We can easily graph this
relationship. However, — we owe this upside down convention to the great British economist
Alfred Marshall (1842-1924) —we put the independent variable, “quantity” on the x-axis
(abscissa) and the dependent variable, “price”, on the y-axis (ordinate).
How do we build a demand curve? I'm heading for the Food Emporium with eggs on my
shopping list. If the eggs are over three dollars a dozen, I'll only buy one box. But if they're under
$2.50 I'll buy two boxes. If the eggs are over four dollars I won't buy any. These points make up
my individual demand curve. When 1000 shoppers like me hit the food Emporium on Friday,
March 13, the demand curve for eggs is the sum of our individual demand curves. If the price is
$2.89 a dozen, we buy 1328 boxes. That’s the quantity demanded at that price.
Supply is the obverse of demand. In a barter economy, if I produce eggs and you produce apples,
I trade my eggs for your apples. My supply is your demand. In a modern economy, considerable
distance and time may separate my eggs from your apples. Money and credit serve to bridge that
gap, but that’s another topic. As with demand, it’s important to distinguish the quantity
supplied and the supply curve—a function relating quantity supplied to price.
How do we derive a supply curve?
Imagine Jill owns the Organic Egg Farm, where she keeps a flock of white leghorn chickens, the
best layers. Every day she feeds and waters them, and goes out with her heavy gloves to snatch
eggs from under the hens. If the price of eggs doesn’t at least cover the feed and transportation to
market, she won’t even bother to go out and get pecked. As the price gets higher, she starts
collecting the eggs; as the price gets even higher, she’ll buy more hens. But eventually she’ll run
into limits. Should she hire a helper? Can she persuade her neighbor to sell her some land so she
can expand?
Figure 3 shows a hypothetical supply curve for The Organic Egg Farm. Below a certain price,
PC, the farm produces no eggs. Then the curve is fairly flat for a range where it’s easy to expand
production. Then the curve steepens, where the farm runs into capacity limits.
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