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ECN 001A Lecture Notes - Lecture 6: Economic Equilibrium, Equilibrium Point, Demand Curve

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School
UC-Davis
Department
Economics
Course
ECN 001A
Professor
David Rapson

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ECN 001A Lecture Notes - Lecture 5: Canola, Peanut Butter, Fidgeting

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ECN 001A Lecture Notes - Lecture 6: Economic Equilibrium, Equilibrium Point, Demand Curve

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ECN 001A Lecture Notes - Lecture 7: Demand Curve, Jeans, Insulin

Document Summary

The quantity supplied is very high, but the quantity demanded is very low: a firm in this case should lower the price so they can rid of the good more quickly. Then, continue lowering the price of the good until it drops to the equilibrium price, where surplus is zero: when the price is below the equilibrium price, pl we have a shortage. We would produce a small amount and the demand would be very high. Generally, people would be willing to pay more just so they can go home. It is not always easy to change the point of equilibrium due to the marginal cost(s) associated with making one more unit of a good: suppose we have a market for hybrids (cars that can run on electricity). Increase in price of gasoline: the demand for hybrids will increase; thus, the demand curve will shift to the right.

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Related Questions

What happens to a market in equilibrium when there is an increase in supply?

A. Quantity supplied will exceed quantity demanded, so the price will drop.
B. Quantity demanded will exceed quantity supplied, so the price will drop.
C. Excess supply means that producers will make less of the good.
D. Undersupply means that the good will become very expensive.

Considering the demand side of a market for a good, it is reasonable to expect that:
i. demand curves for a given good are identical between consumers
ii. demand curves for a given good differ between consumers
iii. an individual has identical demand curves for different goods
iv. an individual has different demand curves for different goods

i
ii
iii
iv
i and iii
ii and iv

Suppose the market demand curve for a good is represented by the linear equation Q = 60 - 0.75P. If the market price were to increase from P = $20 to P = $40, then holding all other factors constant:

the quantity demanded would decrease by 10 units and total expenditures on the good would decrease by $400
the quantity demanded would decrease by 15 units and total expenditures on the good would increase by $300
the quantity demanded would decrease by 30 units and total expenditures on the good would increase by $1200
the quantity demanded would increase by 20 units and total expenditures on the good would decrease by $800
the quantity demanded would increase by 10 units and total expenditures on the good would increase by $100
the quantity demanded would increase by 25 units and total expenditures on the good would increase by $1000

A perfectly competitive firms supply curve for a good identifies the:
i. minimum quantity supplied at each price, holding all other factors constant
ii. firms minimum willingness to accept for each incremental unit of the good (e.g., the first unit, second unit, etc.), holding all other factors constant
iii. maximum quantity supplied at each price, holding all other factors constant
iv. firms maximum willingness to accept for each incremental unit of the good (e.g., the first unit, second unit, etc.), holding all other factors constant

i and ii
i and iv
ii and iii
iii and iv

Considering the supply side of a market for a good, if a firms supply curve were vertical, then:

the law of supply holds, and quantity supplied is completely insensitive to changes in price
the law of supply holds, and quantity supplied is highly sensitive to changes in price
the law of supply fails to hold, and quantity supplied is completely insensitive to changes in price
the law of supply fails to hold, and quantity supplied is highly sensitive to changes in price
none of the above

The determinants of supply are:
i. factors other than price that will affect the quantity of a good or service a firm is willing and able to purchase
ii. factors that affect a producers maximum willingness-to-accept to produce various quantities of a good
iii. factors that affect a producers minimum willingness-to-accept to produce various quantities of a good

i
ii
iii
i and ii
i and iii

The market supply curve for a good is derived by:
i. horizontally summing the supply curves of the individual firms in the market
ii. vertically summing the supply curves of the individual firms in the market
iii. summing the quantity supplied by each firm at a given price and then repeating this over the range of prices

i
ii
iii
i and ii
i and iii

If the level of technology used in the production of a good improves, and assuming the quality of the good does not change, then:
i. more output may be obtained with a given amount of inputs compared to before the technological improvement
ii. a given amount of output may be obtained with fewer inputs compared to before the technological improvement
iii. the firm will increase its use of other inputs, such as the number of workers it employs
iv. market demand for the good will increase

i
ii
iii
iv
i and ii
i, ii, and iii
i, ii, and iv
i, ii, iii, and iv

Considering the market for gasoline, which of the following would result in an increase in market supply?
i. a decrease in the price of gasoline
ii. an improvement in oil extraction and refining technologies
iii. an increase in the wage rates paid to gasoline refinery workers
iv. a decrease in the price of crude oil, a key input used to produce gasoline
v. the imposition of a federal gasoline tax aimed a decreasing the emission of greenhouse gases

i
ii
iii
iv
v
ii and iv
i, ii, and iv
i, ii, iii, and iv
i, ii, iii, iv and v

Suppose a market has two identical sellers. If each sellers supply function is given by P = 20 + Q, then the market supply function is:

P = 20 + 0.5Q
P = 20 + 2Q
P = 40 + Q
P = 40 + 2Q

From the market framework discussed in class and the readings, it may be concluded that in order for a good to be exchanged between a seller and a buyer, it must be that:

buyer maximum willingness-to-pay is greater than seller minimum willingness-to-accept
buyer maximum willingness-to-pay is greater than or equal to seller minimum willingness-to-accept
buyer minimum willingness-to-pay is greater than or equal to seller maximum willingness-to-accept
buyer minimum willingness-to-pay is greater than seller maximum willingness-to-accept

If the market demand function is given by P = 80 - 0.3Q and the market supply is given by P = 20 + 0.1Q, then the equilibrium price and quantity are:

P = $35 and Q = 150
P = $65 and Q = 150
P = $26 and Q = 60
P = $28 and Q = 80

Of concern are the affects of sustained summer droughts on the domestic supply of wheat. Noting that wheat is a primary ingredient in the production of bread and that potatoes are a substitute for bread, if the supply of wheat declines then it is reasonable to expect:

the price of wheat to fall, the supply of bread to increase, and the demand for potatoes to increase
the price of wheat to fall, the supply of bread to increase, and the demand for potatoes to decrease
the price of wheat to rise, the supply of bread to decrease, and the demand for potatoes to decrease
the price of wheat to rise, the supply of bread to decrease, and the demand for potatoes to increase
the price of wheat to rise, the supply of bread to increase, and the demand for potatoes to increase

the price of wheat to rise, the supply of bread to increase, and the demand for potatoes to decrease

Suppose a perfectly competitive market is initially in equilibrium. If market demand and supply decrease simultaneously, then equilibrium:

price will rise, but the equilibrium quantity may either rise, fall, or remain unchanged
quantity will rise, but the equilibrium price may either rise, fall, or remain unchanged
price will fall, but the equilibrium quantity may either rise, fall, or remain unchanged
quantity will fall, but the equilibrium price may either rise, fall, or remain unchanged

Considering the demand side of a market for a good, the consumer surplus derived by an individual:
i. is the difference between the maximum amount the consumer is willing to pay on each unit and the minimum prices that producers are willing to accept
ii. is the difference between the minimum amount the consumer is willing to pay on each unit and the price he/she
actually pays
iii. is the difference between the maximum amount the consumer is willing to pay on each unit and the price he/she actually pays
iv. will decrease if price increases

i
ii
iii
i and iv
ii and iv
iii and iv

Suppose the market demand for a good is described by the equation P = 120 - 2Q. If a change in market supply results in price decreasing from P0 = $80 to P1 = $70, then the resulting change in consumer surplus is:

$225
$400
$575
$625
$750

1)The law of demand states that as the price of a good rise, _____.

A. buyers purchase more of the good because the price of a substitute has risen.

B. buyers purchase less of the good because their real income decreases with an increase in price.

C. buyers purchase more of the good because they expect prices to be even higher in the future

D. buyers purchase less of the good because they expect prices to fall in the future.

 

2) A movement along a demand curve can be attributed to a change in:

A. the quantity demanded of a good.

B. the demand for a good.

C. the substitution effect of consuming a good.

D. the opportunity cost of producing a good.

 

3) If we say that demand for a good has increased, we mean that there has been:

A. a leftward shift of the demand curve.

B. a rightward shift of the demand curve.

C. a leftward movement along the demand curve.

D. a rightward movement along the demand curve.

 

4) Which of the following will cause the demand curve for a normal good to shift to the right?

A. An increase in the price of a complementary good.

B. A decrease in income.

C. A decrease in the price of the good.

D. An increase in the price of a substitute good.

 

5)Which of the following best defines supply?

A. The amount of a good that is produced at the least possible cost, other things constant

B. The amount of a good that producers are willing and able to sell at each possible price, other things constant.

C. The amount of a good that consumers want to buy at different income levels

D. The amount of a good that producers want to sell at a fixed price

 

6)The market supply curve of a particular product indicates the total quantities:

A. that are actually sold during a given time period.

B. that sellers are willing to offer for sale at a fixed price.

C. that buyers are willing to purchase at alternative prices.

D. that sellers are willing and able to offer at alternative prices.

 

7)When quantity demanded of a good exceeds the quantity supplied at the prevailing market price, _____.

A. the demand curve shifts rightward until the surplus is eliminated

B. the market is in equilibrium.

C. the price of the good will tend to increase.

D. the price of the good will decrease

 

8)A shortage of textbooks is most likely to cause:

A. an increase in the price of textbooks.

B. a decrease in the supply of textbooks.

C. a decrease in the price of paper.

D. an increase in the cost of printing.

 

9)The most important characteristic of the equilibrium price is that it:

A. maximizes the quantity demanded.

B. clears the market, leaving neither a surplus nor a shortage.

C. minimizes the quantity demanded.

D. guarantees that producers earn the profit.

 

10)If both demand and supply increases in a market that is initially in equilibrium, the price will:

A. increase only if demand increases more than supply.

B. increase only if supply increases more than demand.

C. remain unchanged while quantity will increase.

D. remain unchanged while quantity will decrease.