1. What is a competitive market?

Briefly describe a type of market that is not perfectly

competitive

A competitive market is one where many buyers and sellers are present, none of whom can
individually influence the price of the good or service. In such a market, products are typically
homogeneous (identical), and there is free entry and exit of firms. Perfect competition is an
idealized form of a competitive market where firms cannot influence prices, and there is perfect
information for all participants.

A market that is not perfectly competitive is a monopoly. In a monopoly, a single firm dominates
the market, and there are significant barriers to entry that prevent other firms from competing.
This firm has the power to set prices because it is the only supplier of the good or service.
Examples include utility companies like water or electricity providers in certain regions, where
competition is limited or non-existent.

2. What are the demand schedule and the demand curve, and how are they related?
Why does the demand curve slope downward?

The demand schedule and the demand curve are both tools used to represent the relationship
between the price of a good or service and the quantity demanded by consumers.

1. Demand Schedule: A demand schedule is a table that shows the quantity of a good or
service that consumers are willing to purchase at different prices, holding other factors
constant. For example, it might show that at a price of $10, consumers will buy 100 units,
while at $5, they will buy 200 units.
2. Demand Curve: A demand curve is a graphical representation of the demand schedule. It
plots the price on the vertical axis (y-axis) and the quantity demanded on the horizontal
axis (x-axis). Each point on the demand curve represents a combination of price and
quantity demanded.

Relationship between Demand Schedule and Demand Curve:

The demand schedule provides the data points that can be plotted on the demand curve. In
other words, the demand curve is the visual representation of the information contained in the
demand schedule. As the price changes, the quantity demanded changes, and these points are
connected to form the demand curve.

The demand curve typically slopes downward from left to right, indicating that as the price of a
good decreases, the quantity demanded increases. This negative relationship is due to two main
effects:
 1. Substitution Effect: When the price of a good falls, it becomes relatively cheaper
compared to other goods, so consumers will substitute the cheaper good for other, more
expensive alternatives. This increases the quantity demanded.
2. Income Effect: When the price of a good falls, consumers' purchasing power increases
(they can afford more with the same income), leading them to buy more of the good. This
also increases the quantity demanded.

MULTIPLE CHOICE

A change in which of the following will NOT shift the demand curve for hamburgers?
a. the price of hot dogs
b. the price of hamburgers
c. the price of hamburger buns
d. the income of hamburger consumers
answer (B)

PROBLEM AND APPLICATION

Consider the following events: Scientists reveal that eating oranges decreases the risk of
diabetes, and at the same time, farmers use a new fertilizer that makes orange trees
produce more oranges. Illustrate and explain what effect these changes have on the
equilibrium price and quantity of oranges

Let's break down the effects of these two events—increased demand for oranges (due to the
health benefits of eating oranges) and increased supply of oranges (due to the new fertilizer)—on
the equilibrium price and quantity of oranges using supply and demand analysis.

Increased Demand for Oranges (due to the health benefits)

 Effect on Demand Curve:

o When scientists reveal that eating oranges reduces the risk of diabetes, this creates
a shift in the demand curve to the right. Consumers now perceive oranges as more
valuable, and as a result, they want to buy more oranges at every price level.
 o The demand curve shifts from D₀ to D₁
 Effect on Equilibrium:
o The rightward shift in demand increases the equilibrium price and quantity of
oranges. Without any change in supply, the new equilibrium would have a higher
price and a higher quantity of oranges.

2. Increased Supply of Oranges (due to new fertilizer)

 Effect on Supply Curve:

o The new fertilizer allows farmers to produce more oranges, making it cheaper and
easier to grow them. This leads to an increase in the supply of oranges, causing
the supply curve to shift to the right (from S₀ to S₁).
o At every price level, more oranges are available for sale due to the increased
production.
 Effect on Equilibrium:
o The rightward shift in the supply curve increases the equilibrium quantity of
oranges. However, because the increase in supply lowers the price of oranges (if
demand remains constant), the equilibrium price will fall, but the equilibrium
quantity will rise.

Combined Effect on Equilibrium Price and Quantity

 We now have two factors influencing the market:

1. Increased demand (shift in the demand curve to the right), which would tend to
increase the price and quantity of oranges.
2. Increased supply (shift in the supply curve to the right), which would tend to
decrease the price but increase the quantity of oranges.

Resulting effect

 Equilibrium Quantity: Since both the demand curve and supply curve are shifting
rightward, the equilibrium quantity of oranges will definitely increase. More oranges are
being bought and sold due to both higher demand and higher supply.
 Equilibrium Price: The effect on price is uncertain without specific information about the
relative size of the shifts. However, we can describe the possible outcomes:
o If the increase in demand is greater than the increase in supply, the price of
oranges will increase.
o If the increase in supply is greater than the increase in demand, the price of
decrease
o If the increase in demand and the increase in supply are roughly equal, the price
may remain unchanged.
Explain each of the following statements using sup-ply-and-demand diagrams.
a. "When a cold snap hits Florida, the price of orange juice rises in supermarkets
throughout the country."
b. "When the weather turns warm in New England every summer, the price of hotel rooms
in Caribbean resorts plummets."
c. "When a war breaks out in the Middle East, the price of gasoline rises and the price of a
used Cadillac falls."
a. "When a cold snap hits Florida, the price of orange juice rises in supermarkets throughout the
country."

Explanation:

 Florida is a major producer of oranges, and cold weather can damage crops, reducing the
supply of oranges and orange juice.
 When supply decreases, the supply curve for orange juice shifts to the left.
 As the supply curve shifts leftward, the price of orange juice increases due to the reduced
quantity available at every price level.

b. "When the weather turns warm in New England every summer, the price of hotel rooms in
Caribbean resorts plummets."

 Warm weather in New England means more people may choose to vacation locally,
reducing the demand for vacation spots in the Caribbean.
 As demand decreases for Caribbean hotel rooms, the demand curve shifts to the left.
 A leftward shift in demand leads to a lower equilibrium price for hotel rooms.

c. "When a war breaks out in the Middle East, the price of gasoline rises and the price of a used
Cadillac falls."

 Gasoline Price Increase:

o The Middle East is a key source of oil, and a war can disrupt supply, leading to a
decrease in the supply of oil and, consequently, gasoline.
o The supply curve for gasoline shifts leftward (decreases), causing the price to rise
as the quantity decreases.
 Used Cadillac Price Decrease:
o A war may also cause economic uncertainty, reducing consumer confidence and
disposable income.
o If people are less willing or able to buy cars, the demand for used Cadillacs
decreases. The demand curve for used cars shifts leftward.
o A decrease in demand for used Cadillacs results in a lower price.