CHECK YOUR UNDERSTANDING >> Supply and Demand Krugman/Wells CHECK YOUR UNDERSTANDING

Check Your Understanding 3-1 Question 1 Explain whether each of the following events represents (i) a shift of the demand curve or (ii) a movement long the demand curve.

This represents a shift of the demand curve. 1a) A store owner finds that customers are willing to pay more for umbrellas on rainy days. This represents a shift of the demand curve. This represents a movement along the demand curve. Changes in the weather, which is a non-price determinant of demand, causes a change in demand, which is a shift in the demand curve. In this case, demand increases and the demand curve shifts to the right.

This represents a shift of the demand curve. 1b) When XYZ Telecom, a long distance provider, offered reduced rated on weekends, the volume of weekend calling increased sharply. This represents a shift of the demand curve. This represents a movement along the demand curve. A change in the price of the service causes a change in quantity demanded, which is shown as a movement along the demand curve.

This represents a shift of the demand curve. 1c) People buy more long-stem roses the week of Valentine’s Day, even though the prices are higher than at other times during the year. This represents a shift of the demand curve. This represents a movement along the demand curve. This is a favorable change in tastes and preferences which causes an increase in the demand for roses, which is shown by a shift in the demand curve

This represents a shift of the demand curve. 1d) The sharp rise in the price of gasoline leads many commuters to join carpools in order to reduce their gasoline purchases. This represents a shift of the demand curve. This represents a movement along the demand curve. An increase in the price of gasoline causes a decrease in the quantity demanded, which is represented by a movement up the demand curve.

Check Your Understanding 3-2 Question 1

This represents a shift of the supply curve. 1a) More homeowners put their houses up for sale during a real estate boom that causes prices to rise. This represents a shift of the supply curve. This represents a movement along the supply curve. When prices are higher during a real estate boom, the quantity supplied of houses increases, which is represented by a movement along the supply curve.

This represents a shift of the supply curve. 1b) Many strawberry farmers open temporary roadside stands during harvest season, even though prices are usually low at that time. This represents a shift of the supply curve. This represents a movement along the supply curve. When the number of strawberry producers increases at harvest time, the supply of strawberries increases, which is shown by a shift of the supply curve.

This represents a shift of the supply curve. 1c) Immediately after the school year begins, fast-food chains must raise wages to attract workers. This represents a shift of the supply curve. This represents a movement along the supply curve. The number of workers decreases when school starts, which is a change in supply shown by a shift of the supply curve to the left.

This represents a shift of the supply curve. 1d) Many construction workers temporarily move to areas that have suffered hurricane damage, lured by higher wages offered. This represents a shift of the supply curve. This represents a movement along the supply curve. When the wage (the price of construction work) increases, the quantity supplied of workers increases. This is shown by a movement along the supply curve.

This represents a shift of the supply curve. 1e) Since new technologies have made it possible to build larger ships (which are cheaper to run per passenger), Caribbean cruise lines have offered more berths, at lower prices, than before. This represents a shift of the supply curve. This represents a movement along the supply curve. Improvements in technology cause an increase in supply, which shifts the supply curve to the right.

Check Your Understanding 3-3 Question 1* Price Quantity Demanded Quantity Supplied $5 200 500 $4 400 $3 600 300 $2 800 $1 1000 100 Given the demand and supply of pounds of coffee, answer the following questions.

1a*) The equilibrium price is $_____, and the equilibrium quantity is _____ pounds. Quantity Demanded Quantity Supplied $5 200 500 $4 400 $3 600 300 $2 800 $1 1000 100 $5; 500 $4; 400 $3; 300 $2; 800 Equilibrium is where the quantity demanded and quantity supplied are equal, which occurs at a price of $4 when 400 pounds are demanded and supplied.

1b*) At a price of $5, there is a ______ of ______ pounds. Quantity Demanded Quantity Supplied $5 200 500 $4 400 $3 600 300 $2 800 $1 1000 100 surplus; 100 surplus; 300 shortage; 400 shortage; 600 At $5, quantity supplied is 500, and quantity demanded is 200, so there is a surplus of 300.

1c*) At a price of $2, there is a ______ of ______ pounds. Quantity Demanded Quantity Supplied $5 200 500 $4 400 $3 600 300 $2 800 $1 1000 100 surplus; 100 surplus; 300 shortage; 400 shortage; 600 At $2, quantity demanded is 800 and quantity supplied is only 200, so there is a shortage of 600.

Check Your Understanding 3-3 Question 1 In the following three situations, the market is initially in equilibrium.

a shortage of grapes and prices rise. 1a) 1997 was a very good year for California wine-grape growers, who produced a bumper-sized crop. This causes: a shortage of grapes and prices rise. a shortage of grapes and prices fall. a surplus of grapes and prices rise. a surplus of grapes and prices fall. The large crop is an increase in supply, which creates a surplus at the original equilibrium price. Prices fall to eliminate the surplus.

a shortage of hotel rooms and prices rise. 1b) After a hurricane, Florida hoteliers often find that people cancel their upcoming vacations, leaving them with empty hotel rooms. This causes: a shortage of hotel rooms and prices rise. a shortage of hotel rooms and prices fall. a surplus of hotel rooms and prices rise. a surplus of hotel rooms and prices fall. The hurricane causes a decrease in demand so that at the original equilibrium price there is a surplus. Prices will decrease as a result of the surplus.

a shortage of secondhand snow blowers and prices rise. 3) After a heavy snowfall, many people want to buy secondhand snow blowers at the local tool shop. This causes: a shortage of secondhand snow blowers and prices rise. a shortage of secondhand snow blowers and prices fall. a surplus of secondhand snow blowers and prices rise. a surplus of secondhand snow blowers and prices fall. The increase in demand causes a shortage, which causes prices to increase.

Check Your Understanding 3-4 Question 1 Directions: Read the scenarios and then answer the questions

1ai) As the price of gasoline fell in the United States during the 1990s, more people bought large cars. What is the market in question in this scenario? gasoline cars The market is the market for cars.

1aii) As the price of gasoline fell in the United States during the 1990s, more people bought large cars. Did supply or demand shift, and which way? supply shifted left supply shifted right demand shifted left demand shifted right Demand for large cars increased because the price of gasoline, a complement, decreased.

quantity and price fell quantity and price rose 1aiii) As the price of gasoline fell in the United States during the 1990s, more people bought large cars. What is the effect on prices and quantity? quantity and price fell quantity and price rose quantity fell and price rose quantity rose and price fell The increase in demand causes an increase in price and quantity.

fresh paper made from recycled paper 1bi) As technological innovation has lowered the cost of recycling used paper, fresh paper made from recycled stock is used more frequently. What is the market in question in this scenario? recycled paper fresh paper made from recycled paper The market is fresh paper.

1bii) As technological innovation has lowered the cost of recycling used paper, fresh paper made from recycled stock is used more frequently. Does supply or demand shift, and which way? supply shifts left supply shifts right demand shifts left demand shifts right The technological innovation has increased the supply, shifting it to the right.

quantity and price fall quantity and price rise 1biii) As technological innovation has lowered the cost of recycling used paper, fresh paper made from recycled stock is used more frequently. What is the effect on price and quantity? quantity and price fall quantity and price rise quantity falls and price rises quantity rises and price falls When supply increases, quantity increases and price falls.

movies at a local movie theater 1ci) As a local cable company offers cheaper pay-per-view films, local movie theaters have more unfilled seats. What is the market in question in this scenario? pay-per-view movies movies at a local movie theater The market is the market for movies at the theater.

1cii) As a local cable company offers cheaper pay-per-view films, local movie theaters have more unfilled seats. Does supply or demand shift, and which way? supply shifts left supply shifts right demand shifts left demand shifts right The demand for movies at the theater decreases (shifts left) because the price of a substitute, the pay-per-view movies, has decreased.

quantity and price fall quantity and price rise 1ciii) As a local cable company offers cheaper pay-per-view films, local movie theaters have more unfilled seats. What is the effect on prices and quantity? quantity and price fall quantity and price rise quantity falls and price rises quantity rises and price falls A decrease in demand causes a decrease in price and quantity.

Check Your Understanding 3-4 Question 2 Periodically, a computer chip maker like Intel introduces a new chip that is faster than the previous one. In response, demand for computers using the earlier chip decreases as customers put off purchases in anticipation of machines containing the new chip. Simultaneously, computer makers increase their production of computers containing the earlier chip in order to clear out their stocks of those chips.

2a) What happens to the supply curve for computers using the earlier chip? it shifts left it shift right If the computer makers increase production of the computers using the old chip, their supply will increase, which is a shift to the right.

2b) What happens to the demand curve for computers using the earlier chip? it shifts left it shifts right Consumer expectations cause them to decrease demand for the computers with the old chip in anticipation of the new chip.

2c) The equilibrium quantity for computers using the earlier chip must fall. True False False. In order for the quantity to decrease, the decrease in demand must be larger than the increase in supply.

2d) The equilibrium price for computers using the earlier chip must fall. True False A decrease in demand and an increase in supply both cause price to decrease, so the relative sizes of the changes in demand and supply don’t matter.