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90 PART TWO SUPPLY AND D E M A N D I: HOW M A R K E T S W O R K

Key Concepts

market, p. 66 complements, p. 68 supply curve, p. 76

competitive market, p. 66 demand schedule, p. 69 equilibrium, p. 80
quantity demanded, p. 67 demand curve, p. 70 equilibrium price, p. 80
law of demand, p. 68 ceteris paribus, p. 70 equilibrium quantity, p. 80
normal good, p. 68 quantity supplied, p. 75 surplus, p. 81
inferior good, p. 68 law of supply, p. 75 shortage, p. 81
substitutes, p. 68 supply schedule, p. 76 law of supply and demand, p. 81

Questions for Review

1. What is a competitive market? Briefly describe the 7. What are the supply schedule and the supply curve, and
types of markets other than perfectly competitive how are they related? Why does the supply curve slope
markets. upward?
2. What determines the quantity of a good that buyers 8. Does a change in producers' technology lead to a
demand? movement along the supply curve or a shift in the
3. What are the demand schedule and the demand curve, supply curve? Does a change in price lead to a
and how are they related? Why does the demand curve movement along the supply curve or a shift in the
slope downward? supply curve?

4. Does a change in consumers' tastes lead to a movement 9. Define the equilibrium of a market. Describe the forces
along the demand curve or a shift in the demand curve? that move a market toward its equilibrium.
Does a change in price lead to a movement along the 10. Beer and pizza are complements because they are often
demand curve or a shift in the demand curve? enjoyed together. When the price of beer rises, what
5. Popeye's income declines and, as a result, he buys happens to the supply, demand, quantity supplied,
more spinach. Is spinach an inferior or a normal quantity demanded, and the price in the market for
good? What happens to Popeye's demand curve for pizza?
spinach? 11. Describe the role of prices in market economies.
6. What determines the quantity of a good that sellers
supply?

Problems and Applications

\2s Explain each of the following statements using supply- 2. "An increase in the demand for notebooks raises
and-demand diagrams. the quantity of notebooks demanded, but not the
a. When a cold snap hits Florida, the price of quantity supplied." Is this statement true or false?
orange juice rises in supermarkets throughout Explain.
the country. ^ Consider the market for minivans. For each of the
b. When the weather turns warm in New England events listed here, identify which of the determinants
every summer, the prices of hotel rooms in of demand or supply are affected. Also indicate
Caribbean resorts plummet. whether demand or supply is increased or decreased.
c. When a war breaks out in the Middle East, the price Then show the effect on the price and quantity of
of gasoline rises, while the price of a used Cadillac minivans.
falls. a. People decide to have more children.
 CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 91

b. A strike by steelworkers raises steel prices. Graph the demand and supply curves. What is the
c. Engineers develop new automated machinery for equilibrium price and quantity in this market? If the
the production of minivans. actual price in this market were above the equilibrium
d. The price of station wagons rises. price, what would drive the market toward the
e. A stock-market crash lowers people's wealth. equilibrium? If the actual price in this market were below
During the 1990s, technological advance reduced the \4
the equilibrium price, what would drive the market
C ^y
cost of computer chips. How do you think this affected toward the equilibrium?
the market for computers? For computer software? For 10. because bagels and cream cheese are often eaten
typewriters? ^> 'together, they are complements.

© Using supply-and-dernand diagrams, show the effect of

the following events on the market for sweatshirts.
a. We observe that both the equilibrium price
of cream cheese and the equilibrium quantity of
a. A hurricane in South Carolina damages the cotton bagels have risen. What could be responsible for
crop. this pattern—a fall in the price of flour or a fall in
b. The price of leather jackets falls. the price of milk? Illustrate and explain your
c. All colleges require morning calisthenics in answer.
appropriate attire. b. Suppose instead that the equilibrium price of
d. New knitting machines are invented. cream cheese has risen but the equilibrium quantity
Suppose that in the year 2005 the number of births is of bagels has fallen. What could be responsible for
temporarily high. How does this baby boom affect the this pattern—a rise in the price of flour or a rise
price of baby-sitting services in 2010 and 2020? (Hint: lt»QX
W\«&^L- ^-
in tne price of milk? Illustrate and explain your
5-year-olds need baby-sitters, whereas 15-year-olds can answer.
be baby-sitters.) ( 1 1 . /Suppose that the price of basketball tickets at your
IcfeJt yll 7J Ketchup is a complement (as well as a condiment) for college is determined by market forces. Currently, the
hot dogs. If the price of hot dogs rises, what happens to demand and supply schedules are as follows:
the market for ketchup? For tomatoes? For tomato juice?
For orange juice? PRICE QUANTITY DEMANDED QUANTITY SUPPLIED
VU !The case study presented in the chapter discussed
$4 10,000 8,000
cigarette taxes as a way to reduce smoking. Now think
8 8,000 8,000
about the markets for other tobacco products such as
12 6,000 8,000
cigars and chewing tobacco.
16 4,000 8,000
a. Are these goods substitutes or complements for
20 2,000 8,000
cigarettes?
b. Using a supply-and-demand diagram, show what
happens in the markets for cigars and chewing a. Draw the demand and supply curves. What is
tobacco if the tax on cigarettes is increased. unusual about this supply curve? Why might this
c. If policymakers wanted to reduce total tobacco be true?
consumption, what policies could they combine b. What are the equilibrium price and quantity of
with the cigarette tax? tickets?
c. Your college plans to increase total enrollment next
vsjl \fll! ( 9.) The market for pizza has the following demand and
" supply schedules: year by 5,000 students. The additional students will
have the following demand schedule:
PRICE QUANTITY DEMANDED QUANTITY SUPPLIED
PRICE QUANTITY DEMANDED
135 26
5 104 53 4 4,000
6 81 81 8 3,000
7 68 98 12 2,000
8 53 110 16 1,000
9 39 121 20 0
92 PART TWO SUPPLY AND DEMAND I: HOW M A R K E T S W O R K

Now add the old demand schedule and the The article noted that "many executives felt giddy about
demand schedule for the new students to calculate the stratospheric champagne prices. But they also feared
the new demand schedule for the entire college. that such sharp price increases would cause demand to
What will be the new equilibrium price and decline, which would then cause prices to plunge."
quantity? What mistake are the executives making in their
12. An article in The New York Times described a successful analysis of the situation? Illustrate your answer with
marketing campaign by the French champagne industry. a graph.