ECON 2001.02 Chapter Notes - Chapter 3: Escherichia Coli, Inferior Good, Demand Curve

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Published on 5 Oct 2018
School
Ohio State University
Department
Economics
Course
ECON 2001.02
Professor
to End-of-Chapter Questions and Problems
Review Questions
1. Think about a competitive market in which you participate regularly. For each of the
characteristics of a competitive market, explain how your market meets these requirements.
[LO 3.1]
Answer: The market for eggs in my city (New York) is competitive. Here, there are lots of
small markets (called bodegas) for groceries and various convenience items. Bodegas are
everywhere. They are located on almost every street and some intersections have a bodega
at every corner! So when I want to buy eggs, I go to a bodega. Standardized good: Eggs are a
standardized good. There are different kinds of eggs, of course, but each unit of a particular
type of egg will be standardized. Full information: The ubiquity of bodegas makes it easy for
buyers and sellers to gather information about the price of eggs. No transaction costs:
There are no transaction costs or other limits to buying and selling eggs. Buyers and sellers
can easily find each other. Participants are price takers: I am one consumer among millions
in my city and my purchase patterns have no effect on the market price. Likewise, there are
so many places to buy eggs that sellers are also price takers. Given that eggs are
standardized, if I go into a bodega where a dozen eggs are more expensive than they are
the next street over, I’ll just walk an extra block. Therefore, I do not see a wide range of
prices for eggs in a given neighborhood.
2. Think about a noncompetitive market in which you participate regularly. Explain which
characteristic(s) of competitive markets your market does not meet. [LO 3.1]
Answer: I take the subway to work every day. Public transportation is not a competitive
market. There is only one subway system, so there is no competition. The subway is a
natural monopoly (students will learn about monopolies in a later chapter). For now, it is
enough to know that without competition, the MTA (Metropolitan Transportation
Authority)--which operates the subway system--is not a price taker. The passengers are
certainly price takers, but the operator is not.
3. Explain why a demand curve slopes downward. [LO 3.2]
Answer: The demand curve slopes downward because as prices increase, quantity
demanded decreases. Price and quantity move in opposite directions and have a negative
relationship for demand. Think about your incentives when the price of a good you want to
purchase increases. The quantity you demand of that good is likely to move in the other
direction and decrease. When price and quantity move in opposite directions, the result is a
downward sloping curve.
4. In each of the following examples, name the factor that affects demand and describe its
impact on your demand for a new cell phone. [LO 3.2]
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a. You hear a rumor that a new and improved model of the phone you want is coming out
next year.
b. Your grandparents give you $500.
c. A cellular network announces a holiday sale on a text-messaging package that includes the
purchase of a new phone.
d. A friend tells you how great his new cell phone is and suggests that you get one, too.
Answer:
a. Expectations. Your current demand will decrease in the present as you postpone
purchasing under the expectation that a new model will be released next year.
b. Incomes. Your purchasing power has increased due to the money given to you by your
grandparents. Your demand will increase.
c. Price of Related Goods. When the price of text messaging package (a complementary
good) goes down due to the sale, demand for cell phones increases.
d. Consumer Preferences. Your friend influences your interest in purchasing a cell phone.
Your friend’s enjoyment of his phone and suggestion that you also purchase a phone
increases your demand.
5. Consider the following events:
a. The price of cell phones goes down by 25 percent during a sale.
b. You get a 25 percent raise at your job.
Which event represents a shift in the demand curve? Which represents a movement along the
curve? What is the difference? [LO 3.3]
Answer: The relationship between price and quantity demanded is directly reflected in the
demand curve. A change in price will mean a movement along an existing curve. Factors of
demand that are held constant, such as income, cause a shift in the demand curve when
they change.
a. When the price of cell phones goes down by 25 percent, this is a movement along the
demand curve for cell phones.
b. When your income increases by 25 percent, there is a shift in the demand curve, as
income is a factor of demand held constant in any given demand curve.
6. What is the difference between a change in demand and a change in quantity demanded?
[LO 3.3]
Answer: When we refer to a change in demand, we are referring to a shift of the entire
curve. This happens when a non-price factor changes--such as income, expectations, prices
of related goods, consumer preferences or the number of buyers. A change in quantity
demanded refers to a change in the specific numerical quantity demanded due to a change
in price.
7. Explain why a supply curve slopes upward. [LO 3.4]
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Answer: The supply curve slopes upward because as prices increase, quantity supplied also
increases. Price and quantity move in the same direction and have a positive relationship
for supply. Think about the incentives facing a producer when the price of the good she is
producing increases. The quantity she is willing and able to supply of that good is likely to
also increase. When price and quantity move in the same direction, the result is an upward
sloping curve.
8. In each of the following examples, name the factor that affects supply and describe its
impact on the supply of cell phones. [LO 3.4]
a. Economic forecasts suggest that the demand for cell phones will increase in the future.
b. The price of plastic goes up.
c. A new screen technology reduces the cost of making cell phones.
Answer:
a. Expectations. If demand for cell phones is expected to increase in the future, then the
price of cell phones is expected to increase in the future. Current supply of cell phones may
decrease if supplies are able to withhold inventory waiting on prices to increase. Supply of
cell phones will eventually increase as prices do rise.
b. Prices of Inputs. Plastic is an input in the production of cell phones. If the price of plastic
increases production costs increase and supply decreases.
c. Technology. If advancement in screen technology reduces the cost of making cell phones,
supply of cell phones will increase.
9. Consider the following events:
a. A maggot infestation ruins a large number of apple orchards in the state of Washington.
b. Demand for apples goes down, causing the price to fall.
Which event represents a shift in the supply curve? Which represents a movement along the
curve? What is the difference? [LO 3.5]
Answer: Factors of supply that are held constant, such as number of suppliers, cause a shift
in the supply curve when they change. The relationship between price and quantity
supplied is directly reflected in the supply curve. A change in price will mean a movement
along an existing curve.
a. A maggot infestation will cause a shift in the supply of apples, as the number of orchards
(sellers) able to supply to the market will decrease.
b. When demand decreases and prices fall, there is a movement along the supply curve.
10. What is the difference between a change in supply and a change in quantity supplied? [LO
3.5]
Answer: When we refer to a change in supply, we are referring to a shift of the entire curve.
This happens when a non-price factor changes--such as technology, expectations, prices of
related goods, prices of inputs or the number of sellers. A change in quantity supplied refers
to a change in the specific numerical quantity supplied due to a change in price.
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Document Summary

Review questions: think about a competitive market in which you participate regularly. For each of the characteristics of a competitive market, explain how your market meets these requirements. Answer: the market for eggs in my city (new york) is competitive. Here, there are lots of small markets (called bodegas) for groceries and various convenience items. They are located on almost every street and some intersections have a bodega at every corner! So when i want to buy eggs, i go to a bodega. There are different kinds of eggs, of course, but each unit of a particular type of egg will be standardized. Full information: the ubiquity of bodegas makes it easy for buyers and sellers to gather information about the price of eggs. There are no transaction costs or other limits to buying and selling eggs. Buyers and sellers can easily find each other.

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