ECON 20A Lecture Notes - Lecture 4: Market Clearing, Shortage, Economic Equilibrium

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20 Jul 2016

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Supply quantity supplied: the amount of a good that sellers are willing and able to sell in the market. Law of supply: other things being equal, when price of a good rises, quantity supplied increases and vice versa. Supply schedule and supply curve: represents relationship between price and quantity supplied (table, graph) Market supply: sum of quantity supplied by each seller of the good in the market (at each price level) Market supply curve: horizontal summation of an individual supply curve (see graph) S1: a fall in supply at every price (leftward shift of the supply curve) Input prices: raw materials, labor, machines: technology, expectations, number of sellers. Understand the difference between a shift versus a movement along the supply curve. Demand and supply buyers and sellers interact in the market (see graph) intersections (of supply and demand): equilibrium: where demand = supply (dd=ss) Qe: equilibrium quantity (quantity at the equilibrium price) equilibrium price: market clearing price (see graph)

Related Questions

6. The demand for a tennis racket is given by P = 300 - 2QD. The supply is P = 60 + QS. What are the equilibrium price and output?

A. $80, 140

B. $140, 80

C. $300, 240

D. $250, 100

E. $300, 160

7. Assume that at the current market price is $4 per cup of coffee, you are willing and able to buy 30 cups. Last month at a price of $4 per cup, you would have purchased 20 cups. What has most likely happened over the last month?

A. Supply has decreased

B. Quantity supplied has increased

C. Demand has decreased

D. Supply has increased

E. Demand has increased

8. In the figure below, which graph represents what would happen if there was an increase in the price of the metal used in the production of a bike?

A. A

B. B

C. C

D. D

E. Both [C] and [E] would happen

9. If the price elasticity of supply = 2.5 and price decreases by 3 percent, then

A. supply will decrease by 75 percent

B. total output will increase

C. quantity supplied will increase by 83 percent

D. quantity supplied will increase by 1.2.

E. quantity supplied will decrease by 7.5 percent

10. When the price increases from $4 to $6 and the quantity demanded decreases by 2 units, the price elasticity of demand is

A. -25

B. -1.5

C. -1

D. -2.5

E. Cannot be determined from the information given

periwinkleclam60

1 an imperfect market, individual firms

A.are always able to set the price of their product.

B.are able to influence the price of their product.

C.have no influence over the price of their product.

D.take the market price as given.

1 Which of the following is NOT characteristic of a market economy?

Significant government intervention

Little or no government intervention

Buyers and sellers motivated by self-interest

Prices determined by demand and supply

2 In a competitive market, the price of the product is

independently set by each competing seller.

set by the market leader and then copied by other sellers.

jointly set after a meeting of all sellers in the market.

set by market supply and demand.

3 Which of the following firms participates in a competitive market?

A new car manufacturer, such as Ford, Honda, Toyota, or GMC

A software producer, such as Microsoft

A corn farmer

A local electric utility company

4 In an imperfect market, individual firms

are always able to set the price of their product.

are able to influence the price of their product.

have no influence over the price of their product.

take the market price as given.

5 Which of the following firms operates as a monopoly?

A car manufacturer

A local water utility

A corn farmer

A fish vendor at a neighborhood market

6 According to the law of demand, what is the relationship between price and quantity demanded?

Direct

No relationship

Inverse

7 Refer to the following graph. The demand curve slopes downward because
Click to view graphic. (Links to an external site.)

prices and quantity demanded move in opposite directions.

prices and quantity demanded move in the same direction.

prices and quantity demanded have no relationship.

prices and quantity demanded remain unchanged.

8 A change in which of the following will cause a change in the quantity demanded of coffee?

Consumer income

The price of green tea, a substitute for coffee

The number of coffee consumers

The price of coffee

9 Suppose that burgers and fries are complements in consumption. If the price of fries increases

overall demand for burgers will increase.

overall demand for burgers will decrease.

quantity demanded for burgers will increase.

quantity demanded for burgers will decrease.

10 Suppose that Coca Cola and Pepsi are substitutes in consumption. If the price of Coca Cola decreases, then

both the equilibrium price and the quantity of Pepsi demanded will decrease.

both the equilibrium price and the quantity of Pepsi demanded will increase.

the equilibrium price of Pepsi will increase and the quantity demanded of Pepsi will decrease.

the equilibrium price of Pepsi will decrease and the quantity demanded of Pepsi will increase.

11 According to the law of supply, what is the relationship between price and quantity supplied?

Direct

No relationship

Inverse

It depends on the change in price

12 Refer to the graph below. The supply curve is _______________ driven by the law of supply.
Click to view graphic. (Links to an external site.)

13 A change in which of the following will cause a change in the quantity supplied of coffee?

The technology or the production process of making coffee

Anticipation of a change in the price of coffee

The wages of coffee bean pickers

The price of coffee

14 Which of the following will cause a rightward shift in the supply curve for tobacco?

A fall in the number of tobacco farmers in the market

An increase in taxes on tobacco

Removal of government subsidies to tobacco farmers

An improvement in the technology used in the production of tobacco

15 Flour is a factor of production of cupcakes. How will an increase in the price of flour affect the market for cupcakes?

Overall supply will increase

Overall supply will decrease

Quantity supplied will increase

Quantity supplied will decrease

16 Refer to the following image. When a market is in equilibrium, which of the following is true?
Click to view graphic. (Links to an external site.)

Quantity supplied exceeds quantity demanded

Quantity supplied is less than quantity demanded

Quantity supplied is equal to quantity demanded

There is no relationship between quantity supplied and quantity demanded

17 Refer to the following figure. At a price of $15, this market is experiencing a(n)
Click to view graphic. (Links to an external site.)

equilibrium.

shortage.

surplus.

none of the above are true.

18 Refer to the following figure. At a price of $5, this market is experiencing
Click to view graphic. (Links to an external site.)

equilibrium.

a shortage.

a surplus.

None of the above are true.

19 Suppose pasta salad is a normal good. If the price of pasta (a major ingredient in pasta salad) increases and income also increases, the

equilibrium quantity and equilibrium price of pasta salad will increase.

equilibrium quantity of pasta salad will decrease and the equilibrium price of pasta salad may either increase or decrease.

equilibrium quantity of pasta salad may either increase or decrease and the equilibrium price of pasta salad will increase.

equilibrium quantity and equilibrium price of pasta salad will both decrease.

20. What must happen to the market price in order for a shortage to be eliminated?

Price must fall.

Price must rise.

Price must stay the same.

Price may rise or fall depending on the size of the shortage.

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

iii

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

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

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

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

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

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

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:

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

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:

ECON 20A Lecture Notes - Lecture 4: Market Clearing, Shortage, Economic Equilibrium

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