Test Bank Chapter 4 – The Market Forces Of Supply And Demand - Principles of Microeconomics ANZ Edition Test Bank by Joshua Gans. DOCX document preview.
CHAPTER 4 – The market forces of supply and demand
TRUE/FALSE
1. Supply and demand are the concepts that economists use most often.
DIF: Easy TOP: What is a market?
2. Supply and demand determine prices and prices allocate the economy’s scarce resources.
DIF: Easy TOP: What is a market?
3. A competitive market is a market in which there are enough buyers and sellers that each has a negligible impact on the market price.
DIF: Easy TOP: What is competition?
4. If the market for a good or service is dominated by one seller, then it is called a monopoly.
DIF: Easy TOP: What is competition?
5. A market with many sellers offering slightly different products is called a monopoly.
DIF: Easy TOP: What is competition?
6. The computer software industry is an example of a perfectly competitive industry.
DIF: Easy TOP: What is competition?
7. In Australia, a public transport operator might be a monopolist.
DIF: Easy TOP: What is competition?
8. The law of demand states that, other things being equal, when the price of a good rises, the quantity demanded of the good falls.
DIF: Easy TOP: What is competition?
9. Demand curves are often upward sloping when prices are very high.
DIF: Easy TOP: What is competition?
10. The quantity demanded of a product is the amount that buyers are willing and able to purchase at a particular price.
DIF: Easy TOP: What is competition?
11. Tastes and expectations are not determinants of individual demand.
DIF: Easy TOP: The demand curve: The relationship between price and quantity demanded
12. The quantity demanded of a product is positively related to the price.
DIF: Easy TOP: What is competition?
13. If the demand for movies falls when income falls, then movies must be an inferior good.
DIF: Easy TOP: Income
14. If a rise in the price of a visit to the gym causes an increase in the demand for movie tickets, visits to the gym and trips to the movies are complements.
DIF: Easy TOP: Prices of related goods
15. When an increase in the price of one good lowers the price of another good, the two goods are called substitutes.
DIF: Easy TOP: Prices of related goods
16. The market demand is the average of all of the individual demands for a particular good or service.
DIF: Easy TOP: Market demand versus individual demand
17. Individual demand curves are summed horizontally to obtain the market demand curve.
DIF: Moderate TOP: Market demand versus individual demand
18. If the price of a good changes, its demand curve shifts.
DIF: Easy TOP: Shifts in the demand curve
19. An increase in the number of buyers in the market will cause a rightward shift in the demand curve if the good is a normal good.
DIF: Moderate TOP: Shifts in the demand curve
20 If mad cow disease causes a beef-scare in Europe, demand for wild meat like deer or kangaroo is likely to shift to the right in that market.
DIF: Moderate TOP: Shifts in the demand curve
21. Jack usually eats a lot of noodles. He reads an article saying that rice has twice the health benefits of noodles. His demand curve for noodles is likely to shift right.
DIF: Moderate TOP: Shifts in the demand curve
22. A reduction in the price of a product and an increase in the number of buyers in the market affect the demand curve in the same general way.
DIF: Moderate TOP: Number of buyers
23. A demand schedule shows how much will be demanded of a good in the future.
DIF: Easy TOP: Demand
24. If crocodile leather handbags are a normal good, then consumers will buy less of them as their incomes rise.
DIF: Easy TOP: Income
25. The Latin phrase ceteris paribus means ‘other things changing’.
DIF: Easy TOP: Summary
26. The quantity supplied of a good or service is the amount that sellers are willing and able to sell at a particular price.
DIF: Easy TOP: Supply
27. In addition to price, the determinants of individual supply include input prices, technology and expectations.
DIF: Easy TOP: The supply curve: The relationship between price and quantity supplied
28. The supply curve has a negative slope.
DIF: Easy TOP: The supply curve: The relationship between price and quantity supplied
29. The law of supply states that, other things being equal, when the price of a good rises, the quantity supplied of the good falls.
DIF: Easy TOP: The supply curve: The relationship between price and quantity supplied
30. If a company producing plastic cookware discovers that the price of plastic has risen by 10 per cent, the company will decide to supply more cookware to the market.
DIF: Moderate TOP: Shifts in the supply curve
31. Increasing the number of sellers in a market is demonstrated by a movement along the supply curve.
DIF: Moderate TOP: The supply curve: The relationship between price and quantity supplied
32. Improvements in technology is demonstrated by a shift in the supply curve.
DIF: Moderate TOP: The supply curve: The relationship between price and quantity supplied
33. Equilibrium in a market is found where the supply curve and the demand curve intersect.
DIF: Easy TOP: Supply and demand together
34. At the equilibrium price, quantity demanded is equal to quantity supplied.
DIF: Easy TOP: Supply and demand together
35. The market-clearing price will always be lower than the equilibrium price.
DIF: Easy TOP: Equilibrium
36. If the market price is below the equilibrium price, there will be a surplus and the price will rise.
DIF: Easy TOP: Equilibrium
37. Surpluses drive price up, whereas shortages drive price down.
DIF: Easy TOP: Equilibrium
38. A shortage will occur at any price below equilibrium price and a surplus will occur at any price above equilibrium price.
DIF: Moderate TOP: Equilibrium
39. It is not possible for demand and supply to shift at the same time.
DIF: Moderate TOP: Example: A change in both supply and demand
40. The price of any good adjusts until quantity demanded equals quantity supplied.
DIF: Easy TOP: Equilibrium
41. If demand and supply both increase, quantity demanded will always increase, no matter how big the changes in supply and demand.
DIF: Moderate TOP: Equilibrium
42. The concept of the slope is the best way to measure the responsiveness of demand to changes in its determinants.
DIF: Easy TOP: The price elasticity of demand and its determinants
43. The demand for a good is said to be elastic if a small price decrease leads to a substantial increase in the quantity demanded.
DIF: Easy TOP: The price elasticity of demand and its determinants
44. Necessities tend to be price inelastic, whereas luxuries tend to be price elastic.
DIF: Easy TOP: The price elasticity of demand and its determinants
45. Goods with close substitutes tend to be more price elastic demand than goods without close substitutes.
DIF: Easy TOP: Availability of close substitutes
46. The demand curve for a market may be different depending on how widely the market is defined.
DIF: Easy TOP: Definition of the market
47. The demand for apples is generally more price elastic than the demand for Australian apples.
DIF: Moderate TOP: Availability of close substitutes
48. Over three years the elasticity of demand for oil heaters will be greater than over ten years.
DIF: Moderate TOP: Time horizon
49. The midpoint method will often give you two different values of elasticity depending on whether you calculate the price elasticity from point A to point B rather than from point B to point A.
DIF: Moderate TOP: Computing the price elasticity of demand
50. The price of a hamburger increases by 25 per cent and the quantity of hamburgers demanded per week falls by 50 per cent. The price elasticity of demand is two.
DIF: Easy TOP: Computing the price elasticity of demand
51. Demand is unit elastic if the elasticity is greater than one.
DIF: Easy TOP: Total revenue and the price elasticity of demand
52. If the measured elasticity is less than one it means that the demand for this good is inelastic.
DIF: Easy TOP: Total revenue and the price elasticity of demand
53. A good experiences a shift of the demand curve so that it is now flatter than before. Suppose that the market price and quantity demanded does not change. This means that the good has now become inelastic.
DIF: Easy TOP: The variety of demand curves
54. A perfectly vertical demand curve means that demand is perfectly inelastic. The price elasticity of demand will be zero.
DIF: Easy TOP: The variety of demand curves
55. A linear demand curve always has the same elasticity over its entire length.
DIF: Moderate TOP: The variety of demand curves
56. Price elasticity over any range of a demand curve is measured by the slope of the demand curve over that range.
DIF: Moderate TOP: Total revenue and the price elasticity of demand
57. If the price elasticity of demand is elastic, reduced demand for a good will create a greater fall in revenue than the increase in revenue created by the increase in price.
DIF: Moderate TOP: Total revenue and the price elasticity of demand
58. If the price elasticity of demand is 1.5, a price decrease will cause total revenue to increase.
DIF: Moderate TOP: Total revenue and the price elasticity of demand
59. Price elasticity of supply measures how much the quantity supplied responds to changes in demand.
DIF: Easy TOP: The price elasticity of supply and its determinants
60. Supply is said to be inelastic if the quantity supplied responds substantially to changes in the price and elastic if the quantity supplied responds only slightly to price.
DIF: Easy TOP: The price elasticity of supply and its determinants
61. If the price of forest-products rises, the price elasticity of supply will be more responsive in the long run than in the short run.
DIF: Easy TOP: Can good news for farming be bad news for farmers?
62. Price elasticity of supply is defined as the percentage change in quantity supplied divided by the percentage change in price.
DIF: Easy TOP: The price elasticity of supply and its determinants
63. Suppose a coffee plantation in Colombia increases the quantity of coffee beans it supplies by 5 per cent when it learns that the price of coffees at cafes in Melbourne has risen by 25 per cent. The Colombian producer’s price elasticity of supply of coffee beans is 0.2.
DIF: Easy TOP: Computing the price elasticity of supply
64. If a supply curve is horizontal, it is said to be perfectly elastic, and the price elasticity of supply approaches infinity.
DIF: Easy TOP: The variety of supply curves
65. A government program that reduces land under cultivation hurts farmers but helps consumers.
DIF: Moderate TOP: Can good news for farming be bad news for farmers?
66. Market prices are an efficient and impersonal way to ration goods.
DIF: Easy TOP: Controls on prices
67. Taxes are employed by policy makers for two reasons. The first is to raise revenue. The second is to adjust market outcomes.
DIF: Easy TOP: Controls on prices
68. If a price ceiling is non-binding, it will have no effect on the market.
DIF: Easy TOP: How price ceilings affect market outcomes
69. A binding price ceiling allows consumers to buy all the goods they demand at a lower price.
DIF: Moderate TOP: How price ceilings affect market outcomes
70. Suppose the market equilibrium price for cigarettes is $20 before the government introduced a $22 price floor. This price floor will not be binding as it is above market price.
DIF: Moderate TOP: How price floors affect market outcomes
71. Suppose the State government decides to implement rent controls. The housing shortage in the short run is likely to be less severe than the housing shortage in the long run.
DIF: Moderate TOP: Case Study: Rent control in the short run and long run
72. Suppose a price floor on alcohol is set above the equilibrium price. This will increase the supply of alcohol, leading to an increase in sales of alcohol.
DIF: Moderate TOP: How price floors affect market outcomes
73. Suppose that the equilibrium wage rate in an industry is $10 per hour. The government then sets a minimum wage of $12 per hour. The result will be a surplus of labour supply.
DIF: Easy TOP: How price floors affect market outcomes
74. Rent control reduces the incentive for landlords to properly maintain their properties.
DIF: Easy TOP: Case Study: Rent control in the short run and long run
75. The minimum wage creates the most benefits for teenage workers as their wages are typically much lower than adult workers.
DIF: Easy TOP: Evaluating price controls
76. Opponents of the minimum wage note that a high minimum wage creates unemployment, causes teenagers to drop out of school and prevents some unskilled workers from getting the on-the-job training that they need.
DIF: Moderate TOP: Evaluating price controls
77. Price controls often help those in need.
DIF: Easy TOP: Evaluating price controls
MULTIPLE CHOICE
1. The behaviour of firms to different market conditions is known as:
A. | supply |
B. | demand |
C. | incomes |
D. | taxation |
DIF: Easy TOP: Markets and competition
2. Generally, the market for water in Australia would be considered:
A. | a monopolistic market |
B. | more organised than an auction |
C. | a competitive market |
D. | a monopsonistic market |
DIF: Easy TOP: Markets and competition
3. In a free market, the relationship between price and quantity demanded of a good can be called:
A. | supply and demand |
B. | the law of demand |
C. | the law of supply |
D. | market demand |
DIF: Easy TOP: Markets and competition
4. The ultimate source of demand for most products in australia is?
A. | advertisers |
B. | consumers |
C. | producers |
D. | the government |
DIF: Easy TOP: What is competition?
5. A market where there is only one seller is called a:
A. | monopoly market |
B. | competitive market |
C. | monopolistic competition |
D. | oligopoly |
DIF: Easy TOP: What is competition?
6. If a seller in a competitive market chooses to charge more than the market price, then:
A. | buyers will tend to make their purchases elsewhere |
B. | the prices in factor markets would also rise |
C. | other sellers would also raise their price |
D. | buyers would tend to buy more from this seller |
DIF: Easy TOP: What is competition?
7. If sellers are price makers, then individually:
A. | their production decisions can affect the market price |
B. | their production decisions do not determine the market price |
C. | their production decisions have no effect on the market price |
D. | people will not buy their product whatever price they set |
DIF: Easy TOP: What is competition?
8. Which of the following would be an example of a monopoly?
A. | local cement companies |
B. | a petrol station in a country town |
C. | a bakery in a large city |
D. | a potato farmer |
DIF: Easy TOP: What is competition?
9. In a competitive market, buyers cannot influence the price because:
A. | each buyer purchases a small amount of the product |
B. | each buyer purchases a large amount of the product |
C. | each buyer is a monopoly |
D. | prices are determined by advertisers |
DIF: Easy TOP: What is competition?
10. An increase in the price of a product will reduce the amount of it purchased because:
A. | supply curves are up sloping |
B. | the higher price means that real incomes have risen |
C. | consumers will substitute other products for the one where price has risen |
D. | consumers substitute relatively high-priced products for relatively low-priced products |
DIF: Moderate TOP: What is competition?
11. A demand curve is:
A. | the upward-sloping line relating the price of the good with the quantity demanded |
B. | the upward-sloping line relating price with quantity supplied |
C. | the downward-sloping line relating the price of the good with the quantity demanded |
D. | the downward-sloping line relating price with quantity supplied |
DIF: Easy TOP: Demand
12. The law of demand states that:
A. | price and quantity demanded are inversely related |
B. | the larger the number of buyers in a market, the lower product price |
C. | price and quantity demanded are directly related |
D. | consumers will buy more of a given product at high prices than they will at low prices |
DIF: Easy TOP: What is competition?
13. Graphically, the market demand curve is:
A. | the vertical sum of individual demand curves |
B. | steeper than any individual demand curve that comprises it |
C. | greater than the sum of the individual supply curves |
D. | the horizontal sum of individual demand curves |
DIF: Moderate TOP: The demand curve: The relationship between price and quantity demanded
14. Which of the following would not shift the demand curve for beef?
A. | a reduction in the price of cattle farm fencing |
B. | a change in the incomes of beef consumers |
C. | an effective advertising campaign by pork producers |
D. | a widely publicised study that indicates beef increases one’s cholesterol |
DIF: Moderate TOP: Shifts in the demand curve
15. Which one of the following is not a determinant of demand?
A. | the price of a close-substitute good |
B. | income levels of consumers |
C. | tastes |
D. | the prices of raw materials |
DIF: Easy TOP: Shifts in the demand curve
16. If a good is ‘normal’, then an increase in income will result in:
A. | no change in the demand for the good |
B. | a decrease in the demand for the good |
C. | an increase in the demand for the good |
D. | a lower market price |
DIF: Easy TOP: Shifts in the demand curve
17. If good Z is ‘inferior’, then an increase in income will cause:
A. | demand for good Z to increase |
B. | market price of good Z to increase |
C. | demand for good Z to decrease |
D. | demand for good Z will not change |
DIF: Easy TOP: Shifts in the demand curve
18. Suppose that a decrease in the price of X results in more of good Y sold. This would mean that X and Y are:
A. | complementary goods |
B. | substitute goods |
C. | inferior goods |
D. | normal goods |
DIF: Moderate TOP: Shifts in the demand curve
19. Suppose Lee likes chicken curry a little bit more than fish and chips. Lee eats chicken curry twice as often as fish and chips. Now suppose the price of chicken rises. How would Lee’s demand for fish and chips change, assuming everything else was constant?
A. | it would decrease |
B. | it would increase |
C. | it would be unaffected |
D. | there is insufficient information |
DIF: Moderate TOP: Shifts in the demand curve: Related products
20. A higher price for batteries would tend to:
A. | increase the demand for torches |
B. | decrease the demand for electricity |
C. | increase the demand for electricity |
D. | increase the demand for batteries |
DIF: Easy TOP: Shifts in the demand curve
21. Suppose that the demand for crocodile leather falls after a decrease in price of snake skin. This would mean that crocodile leather is:
A. | a substitute good |
B. | a normal good |
C. | a complementary good |
D. | an inferior good |
DIF: Easy TOP: Prices of related goods
22. In 1989 an international trade ban was announced for ivory. If people expected the price of ivory to rise after the ban, then their demand before the ban would:
A. | increase |
B. | decrease |
C. | be unchanged |
D. | cannot tell |
DIF: Moderate TOP: Shifts in the demand curve
23. Holding all else constant, a decrease in the price of mobile phones will:
A. | increase the quantity supplied of mobile phones |
B. | increase the demand for other types of telecommunications devices |
C. | decrease the demand for other types of telecommunications devices |
D. | decrease the quantity supplied of mobile phones |
DIF: Easy TOP: The demand curve: The relationship between price and quantity demanded
24. Which of the following would NOT shift the demand curve for a good or service?
A. | a change in income |
B. | a change in the price of a related good |
C. | a change in expectations about the price of the good or service |
D. | a change in the price of the good or service |
DIF: Easy TOP: The demand curve: The relationship between price and quantity demanded
25. Demand for fish is higher in India than Australia because:
A. | the cost of supplying fish in India is lower than in Australia |
B. | there are more buyers in the Australian market |
C. | there are more buyers in the Indian market |
D. | the cost of supplying fish in India is higher than in Australia |
DIF: Easy TOP: The demand curve: The relationship between price and quantity demanded
26. Sally tells you that she thinks the price of her favourite stationery will increase in the near future. In the short run she will probably respond by:
A. | decreasing her current demand for the stationery |
B. | increasing her current demand for the stationery |
C. | decreasing her future demand for the stationery |
D. | increasing her future demand for the stationery |
DIF: Moderate TOP: Shifts in the demand curve
27. In general, price elasticity of demand is:
A. | a measure of how much buyers and sellers respond to changes in market conditions |
B. | a measure of how much government intervention is prevalent in a market |
C. | a measure of how much buyers respond to changes in market conditions |
D. | a measure of how much sellers respond to changes in market conditions |
DIF: Easy TOP: The price elasticity of demand and its determinants
28. Economists use the concept of price elasticity of demand to measure how much:
A. | sellers respond to changes in the price of the good |
B. | worse off consumers are when the price of the good rises |
C. | demand responds to changes in the incomes of buyers |
D. | buyers respond to changes in the price of the good |
DIF: Easy TOP: The price elasticity of demand and its determinants
29. The concept of elasticity is used to:
A. | analyse how much the economy is capable of expanding |
B. | analyse supply and demand with greater precision |
C. | determine the level of government invention in the economy |
D. | calculate consumer credit purchases |
DIF: Easy TOP: The price elasticity of demand and its determinants
30. Demand is said to be elastic if:
A. | the price of the good responds substantially to changes in demand |
B. | the supply of the good responds weakly to changes in demand |
C. | the quantity demanded responds substantially to changes in the quantity supplied of the good |
D. | the quantity demanded responds substantially to changes in the price of the good |
DIF: Easy TOP: The price elasticity of demand and its determinants
31. Demand is said to be inelastic if:
A. | the price of the good responds only slightly to changes in demand |
B. | demand shifts only slightly when the price of the good changes |
C. | buyers respond substantially to changes in the price of the good |
D. | the quantity demanded changes only slightly when the price of the good changes |
DIF: Easy TOP: The price elasticity of demand and its determinants
Graph 4-1
32. In Graph 4-1, a price ceiling that is not binding is shown in:
A. | panel a |
B. | panel b |
C. | both panel a and panel b |
D. | neither panel a nor panel b |
DIF: Moderate TOP: How price ceilings affect market outcomes
33. In which panel(s) in Graph 4-1 would there be a shortage for a good at the market price?
A. | panel a |
B. | panel b |
C. | panel a and panel b |
D. | neither panel a nor panel b |
DIF: Moderate TOP: How price ceilings affect market outcomes
34. Price controls are:
A. | usually enacted when policymakers believe that the market price of a good or service is unfair to buyers or sellers |
B. | used to make markets more efficient |
C. | nearly always effective in eliminating inequities |
D. | established by firms with monopoly power |
DIF: Easy TOP: Controls on prices
35. Suppliers of a good are likely to favor a binding:
A. | price floor, as the quantity sold will be higher than in a competitive market |
B. | price floor, as the price received will be higher than in a competitive market |
C. | price ceiling, as the quantity demanded will be higher than in a competitive market |
D. | price ceiling, as the price received will be higher than in a competitive market |
DIF: Easy TOP: Controls on prices
36. A legal maximum price at which a good can be sold is a price:
A. | floor |
B. | stabilisation |
C. | support |
D. | ceiling |
DIF: Easy TOP: How price ceilings affect market outcomes
37. A legal minimum price at which a good can be sold is a price:
A. | floor |
B. | stabilisation |
C. | ceiling |
D. | cut |
DIF: Easy TOP: How price floors affect market outcomes
38. If a price ceiling is binding:
A. | the equilibrium price is above the ceiling and there will be a shortage |
B. | the equilibrium price is above the ceiling and there will be a surplus |
C. | the equilibrium price is below the ceiling and there will be a shortage |
D. | the equilibrium price is below the ceiling and there will be a surplus |
DIF: Easy TOP: How price ceilings affect market outcomes
39. If a price ceiling is leading to a shortage then:
A. | supply must be greater than demand |
B. | the equilibrium price must be below the price ceiling |
C. | the equilibrium price must be above the price ceiling |
D. | market forces will restore the price to equilibrium |
DIF: Easy TOP: How price ceilings affect market outcomes
Graph 4-2
40. According to Graph 4-2, if the government imposes a binding price floor in this market at a price of $8.00, the result will be a:
A. | shortage of 20 units |
B. | shortage of 40 units |
C. | surplus of 30 units |
D. | surplus of 40 units |
DIF: Moderate TOP: How price floors affect market outcomes
41. According to Graph 4-2, a binding price ceiling would exist at:
A. | any price above $8.00 |
B. | any price below $6.00 |
C. | any price above $5.00 |
D. | any price below $8.00 |
DIF: Moderate TOP: How price ceilings affect market outcomes
42. Some developing countries have used price ceilings to keep rice cheap to assist the poor. At the ceiling price:
A. | the quantity demanded will be greater than the quantity supplied and a shortage will result |
B. | the quantity demanded will be greater than the quantity supplied and a surplus will result |
C. | the quantity demanded will be less than the quantity supplied and a shortage will result |
D. | the quantity demanded will be less than the quantity supplied and a surplus will result |
DIF: Moderate TOP: How price ceilings affect market outcomes
43. A hot summer’s day can lead to dramatic increases in the demand for electricity. Suppose the government decides a binding price ceiling is necessary so pensioners can continue to afford their power bills. The effect of this policy will be such that:
A. | the quantity of electricity supplied will be unchanged |
B. | electricity producers will increase supply, leading to a decrease in price |
C. | electricity producers will supply less than demanded, leading to a shortage |
D. | demand will decrease, leading to a decrease in price |
DIF: Moderate TOP: How price ceilings affect market outcomes
44. After a natural disaster, a binding price ceiling on bottled water will lead to:
A. | a shortage of bottled water |
B. | an increase in supply of bottled water |
C. | supplied surplus of bottled water |
D. | a decrease in the supply of bottled water |
DIF: Easy TOP: How price ceilings affect market outcomes
45. Suppose the equilibrium price of bananas is $5 and a price ceiling of $7 is implemented. This will result in:
A. | a shortage, as the price ceiling is above the equilibrium price |
B. | a surplus, as the price ceiling is above the equilibrium price |
C. | no change in the quantity of bananas sold |
D. | the demand for bananas to exceed the supply of bananas |
DIF: Moderate TOP: How price ceilings affect market outcomes
46. Water shortages caused by droughts can be lessened by:
A. | allowing price to equate the demand for water with the supply of water |
B. | restricting water usage of consumers |
C. | arresting anyone who wastes water |
D. | imposing tight price controls on water |
DIF: Moderate TOP: How price ceilings affect market outcomes
SHORT ANSWER
1. What are two types of markets? What are their characteristics?
DIF: Easy TOP: Markets and competition
2. For each of the following products and industries, determine whether the market structure is perfect competition, monopolistic competition, oligopoly or monopoly.
a. mobile phone services
b. soft drinks
c. local water
d. the automobile industry
e. fast food in a city
f. the textbook industry
g. television networks
h. market for second hand cars
DIF: Difficult TOP: What is competition?
3. Given the following demand schedule, graph Lee’s weekly demand curve for coffee.
Price of Coffee ($) | Cups of Coffee |
5.00 | 0 |
4.00 | 4 |
3.00 | 8 |
2.00 | 12 |
1.00 | 16 |
.00 | 20 |
DIF: Easy TOP: The demand curve: The relationship between price and quantity demanded
4. For each of the following situations in the wheat market, determine whether the quantity demanded changes, or the demand curve shifts and determine the direction of the change.
a. consumer income increases
b. the price of wheat increases
c. scientists determine that eating wheat causes high blood pressure
d. the price of oats increases
e. in June, insects destroy part of the country’s wheat crop
DIF: Moderate TOP: The demand curve: The relationship between price and quantity demanded
5. What is a normal good? Give an example. How is a normal good different from an inferior good?
DIF: Easy TOP: Shifts in the demand curve
6. Given the following information about the monthly demand of three consumers, construct a market demand curve for potato chips. What would happen to demand if Ryan decided to buy popcorn and not to buy chips? Show this change on your graph.
Price per bag ($) | Ryan’s demand | Rusty’s demand | Regan’s demand |
.25 | 7 | 10 | 6 |
.50 | 6 | 8 | 5 |
.75 | 5 | 6 | 4 |
1.00 | 4 | 4 | 3 |
1.25 | 3 | 2 | 2 |
1.50 | 2 | 0 | 1 |
DIF: Moderate TOP: Market demand versus individual demand
7. What is the difference between a change in demand and a change in quantity demanded? Graph your answer.
DIF: Moderate TOP: Shifts in the demand curve
8. For each of the following changes, determine whether there will be a movement along the demand curve (a change in quantity demanded) or a shift in the demand curve (a change in demand).
a. a change in the price of a related good
b. a change in tastes
c. a change in the number of buyers
d. a change in price
e. a change in expectations
f. a change in income
DIF: Moderate TOP: Shifts in the demand curve
9. For each of the following situations in the Australian crocodile market, determine whether the quantity supplied changes, or whether the supply curve shifts and determine the direction of the change.
a. a number of crocodile farms and ranches closes, ceteris paribus
b. Professor Webb develops an antibiotic that ensures more hatchlings survive on ranches
c. the cost of meat to feed crocodiles rises
d. Thailand announces it is going to increase the number of crocodile farms in the next five years
DIF: Moderate TOP: The supply curve: The relationship between price and quantity supplied
10. What will happen to supply or quantity supplied under each of the following situations?
a. the price of the product falls
b. technology improves
c. input prices rise
d. expectations change – you expect the price of your product to rise next month
DIF: Moderate TOP: Shifts in the supply curve
11. Given the following table, graph the demand and supply curves for torches. Be sure to label equilibrium price and equilibrium quantity.
Price/flashlight ($) | Quantity demanded/month | Quantity supplied/month |
5 | 2000 | 12 000 |
4 | 4000 | 10 000 |
3 | 7000 | 7000 |
2 | 11 000 | 4000 |
1 | 15 000 | 1000 |
DIF: Easy TOP: Equilibrium
12. What does the term ‘equilibrium’ mean when applied to a market?
DIF: Easy TOP: Equilibirum
13. Given the graph shown, what will be the result in the market if the price was $6, or $5 or $4?
DIF: Easy TOP: Equilibrium
14. The following table shows the demand and supply of backpacks made by a Melbourne designer whose products sell exclusively to a youth market. Graph both the demand and supply curves and label the equilibrium price and quantity. Now assume that a famous celebrity starts wearing the backpack everywhere, making it very popular with young people. Young people are now willing to purchase 300 more backpacks per year at every price. Show this change on your graph and explain what has happened to equilibrium price and quantity as a result.
Price of Backpack ($) | Quantity demanded per year | Quantity supplied per year |
210 | 800 | 5100 |
180 | 2000 | 4300 |
130 | 3000 | 3000 |
100 | 5000 | 1200 |
70 | 6000 | 800 |
50 | 8000 | 500 |
DIF: Moderate TOP: Equilibrium
15. Why do we aspire to achieve the equilibrium for a market? What happens when supply and demand are not equal? Give two examples of events that could cause the equilibrium of a market to shift.
DIF: Moderate TOP: Equilibrium
16. Other things being equal, explain the effect each of the following situations will have on either the demand or supply of corn. Explain also what the effect will be on equilibrium price and quantity.
a. corn is now considered by doctors to be the most healthy vegetable
b. there is a decline in the amount of land used to grow corn
c. producers expect the price of corn to fall in the future
d. the price of peas, a substitute for corn, goes up
e. corn is a normal good and incomes fall
f. the price of fertiliser rises
DIF: Moderate TOP: Equilibrium
17. Fill in the accompanying table, showing whether equilibrium price and equilibrium quantity go up, down or stay the same.
No change in supply | An increase in supply | A decrease in supply | |
No change in demand | |||
An increase in demand | |||
A decrease in demand |
No change in supply | An increase in supply | A decrease in supply | |
No change in demand | P same Q same | P down Q up | P up Q down |
An increase in demand | P up Q up | P ambiguous Q up | P up Q ambiguous |
A decrease in demand | P down Q down | P down Q ambiguous | P ambiguous Q down |
DIF: Moderate TOP: Equilibrium
18. What are the determinants of price elasticity of demand and how does each affect elasticity?
DIF: Easy TOP: The price elasticity of demand and its determinants
19. Use the graph below to answer the following questions. Put the correct letter in the blank space.
a. The elastic section of the graph is represented by section _____.
b. The inelastic section of the graph is represented by section _____.
c. The unit elastic section of the graph is represented by section _____.
d. The portion of the graph in which a decrease in price would cause total revenue to fall is _____.
e. The portion of the graph in which a decrease in price would cause total revenue to rise is _____.
f. The portion of the graph in which a decrease in price would not cause a change in total revenue is _____.
g. The section of the graph in which total revenue would be at a maximum is _____.
h. The section of the graph in which elasticity is greater than one is _____.
i. The section of the graph in which elasticity is equal to one is _____.
j. The section of the graph in which elasticity is less than one is _____.
DIF: Moderate TOP: The variety of demand curves
20. Consider the following pairs of goods. Which would you expect to have the more elastic demand? Why?
a. water or diamonds
b. insulin or nasal decongestant spray
c. food in general or breakfast cereal
d. petrol over the course of a week or petrol over the course of a year
e. personal computers or IBM personal computers
DIF: Difficult TOP: The price elasticity of demand and its determinants
21. If two demand curves with different slopes pass through the same point, which demand curve will have the greater price elasticity of demand if the price falls from that point?
DIF: Moderate TOP: The variety of demand curves
22. List the following goods in order of increasing price elasticity of demand and explain why they are ranked that way: a first class ticket to your dream holiday destination, a two-day ferry cruise, a local bus ticket to work, hiring a sports car for a day.
DIF: Moderate TOP: The price elasticity of demand and its determinants
23. When the price of digital SLR cameras was $2000, consumers bought 4000. When the price fell to $1200, consumers bought 5000. What was the price elasticity of demand between these two prices, calculated with the midpoint method? Is demand elastic or inelastic?
DIF: Moderate TOP: Computing the price elasticity of demand
24. Sketch three demand curves. Curve A should be perfectly elastic, curve B should be perfectly inelastic and curve C should be unit elastic.
DIF: Easy TOP: The variety of demand curves
25. Using the midpoint method, compute the elasticity of demand between points A and B. Is this portion of the curve elastic or inelastic? Interpret your answer with regard to price and quantity demanded. Now compute the elasticity of demand between points B and C. Is this portion of the curve elastic or inelastic?
DIF: Moderate TOP: Computing the price elasticity of demand
26. Andy has discovered a new way to make clothes pegs more cheaply than his competitors. He believes that since he can now sell his clothes pegs at a lower prices than other clothes peg providers on the market, he will be able to increase his revenue by attracting more customers. He estimates the price elasticity of demand for clothes pegs to be 0.7. What will happen to his total revenue if he decreases the price of his clothes pegs? What should Andy do?
DIF: Difficult TOP: Total revenue and the price elasticity of demand
27. Suppose you are the manager of a theatre. You currently charge the same admission price to all customers, regardless of age. You hire an economist to determine the price elasticity of demand for admissions by age and he tells you that at the current price, demand by adults is inelastic and demand by children is elastic. If you want to increase your total revenue by adjusting admission prices, how should they be adjusted?
DIF: Difficult TOP: Total revenue and the price elasticity of demand
28. Why is the demand for luxury goods generally more elastic than for necessities?
DIF: Easy TOP: The price elasticity of demand and its determinants
29. Suppose the government imposes a binding price ceiling on interest rates in the mortgage lending market. Who would benefit from such actions and who would bear the costs?
DIF: Difficult TOP: How price ceilings affect market outcomes
30. A coffee-producing country requires all its growers to sell to a single, government-owned marketing board. This marketing board sells the coffee on behalf of the growers into the world market. Suppose the marketing board puts a price ceiling of $3.00 on the coffee it buys from its growers while the market equilibrium price is $5.00. What effect will this have on coffee production in this country? Quantity is given in kilograms.
DIF: Moderate TOP: How price ceilings affect market outcomes
31. Using a demand-supply diagram, show how OPEC’s raising of oil prices in the 1970s combined with a government-imposed price ceiling on petrol created a shortage of petrol.
DIF: Moderate TOP: Case study: Lines at the petrol station
32. Rent controls create shortages in housing markets, however, the magnitude of these shortages differs between the long run and short run. What explains these differences?
DIF: Moderate TOP: Case study: Rent control in the short run and long run
33. Some countries use price floors for their domestic farmers to guarantee them a high return on their production. Suppose there is a price floor on wool that is binding. What will be the effect on the wool market? Identify who benefits from this policy and who bears the cost. Are there instances of this occurring in Australia’s history?
DIF: Difficult TOP: How price floors affect market outcomes
34. What are common arguments offered for and against the minimum wage?
DIF: Moderate TOP: How price floors affect market outcomes
35. Many advocates of raising the minimum wage argue that the adverse effects of such a move, for example higher unemployment, are likely to be small. Suppose the minimum wage is binding. Under what conditions will an increase in the minimum wage lead to only a small increase in unemployment?
DIF: Difficult TOP: Evaluating price controls