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Embed code for: macroeconomcs 12 assigment 2
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Instructor: Prof. Ben Cancel
Student: Edith Colon
Discussion Questions (Pg. 72)
2. What are the determinants of demands? What happens to the demand curve when any of these determinants change? Distinguish between a change in demand and a movement along a fixed demand curve, noting the cause(s) of each.
The fundamental determinant of demand is the price of the commodity under consideration: a change in price causes movement along the commodity’s demand curve. This movement is called a change in quantity demanded. Decreased price leads to movement down the demand curve: There is an increase in quantity demanded. Increased price leads to movement up the demand curve: There is a decrease in quantity demanded. In addition, there are determinants of demand, which are factors that may shift the demand curve, i.e., cause a “change in demand.” These are the number of buyers, the tastes (or desire) of the buyers for the commodity, the income of the buyers, the changes in price of related commodities (substitutes and complements), and expectations of the buyers regarding the future price of the commodity under discussion. The following will lead to increased demand: more buyers, greater desire for the commodity, higher incomes (assuming a normal good), lower incomes (assuming an inferior good), an increased price of substitutes, a decreased price of complements, and an expectation of higher future prices or incomes. This increased demand will show as a shift of the entire demand curve to the right. The reverse of all the above will lead to decreased demand and will show as a shift of the entire demand curve to the left.
4. What are the determinants of supply? What happens to the supply curve when each of these determinants changes? Distinguish between a change in supply and a change in the quantity supplied, noting the cause(s) of each.
The fundamental determinant of supply is the price of the commodity. As price increases, the quantity supplied increases. An increase in price causes a movement up a given supply curve. A decrease in price causes a movement down a given supply curve. The non-price determinants of supply are: resource (input) prices, technology, taxes and subsidies, prices of other related goods, expectations, and the number of sellers. If one or more of these change, there will be a change in supply and the whole supply curve will shift to the right or the left. The following will cause an increase in supply: a decrease in resource (input) prices; improved (lower cost) technology; a decrease in business taxes, an increase in subsidies to business; a decrease in the price of another commodity that this firm was making, provided that commodity is a substitute in production (the firm can switch from the now lower priced one to our commodity); an expectation of lower prices in the future; and an increase in the number of sellers. The increase in supply caused by the noted change in one or more of the above will cause the entire supply curve to shift to the right. More will now be supplied at any given price. Alternatively expressed, any given amount will now be supplied at a lower price. The reverse of any or all the above changes in the determinants of demand will cause a decrease in demand and will be shown as a shift of the supply curve to the left. Less will now be supplied at any given price. Alternatively expressed, any given amount will now be supplied at a higher price.
Review Questions (Pg. 72)
1. What effect will each of the following have on the demand for small automobiles such as the Mini-Cooper and Fiat 500?
a. Small automobiles become more fashionable.
b. The price of large automobiles rises (with the price of small autos remaining the same).
c. Income declines and small autos are an inferior good.
d. Consumers anticipate that the price of small autos will greatly come down in the near future.
e. The price of gasoline substantially drops.
This is ambiguous. As autos and gas are complements, one could argue that the decrease in gas prices would stimulate demand for all cars, including small ones. However, one could also argue that small cars are attractive to consumers because of fuel efficiency, and that a decrease in gas prices effectively reduces the price of the “gas guzzling” substitutes. That would encourage consumers to switch from smaller to larger cars (SUVs), and demand for small automobiles would fall. This presents a good illustration of the complexity of many of these changes.
3. What effect will each of the following have on the supply of automobile tires?
a. A technological advance in the methods of producing tires.
b. A decline in the number of firms in the tire industry.
c. An increase in the price of rubber used in the production of tires.
d. The expectation that the equilibrium price of auto tires will be lower in the future than it is currently.
e. A decline in the price of large tires used for semi-trucks and earth hauling rigs (with no change in the price of auto tires).
f. The levying of a per-unit tax in each auto tire sold.
g. The granting of a 50-cent-per-unit subsidy for each auto tire produced.
Problems (Pg. 74)
3. Refers to the expanded table below from review question 8.
a. What is the equilibrium price? At what price is there neither a shortage nor a surplus? Fill in the surplus-shortage column and use it to explain why your answers.
Thousands Thousands Surplus (+)
Of Bushels Price per of Bushels or
Demanded Bushel Supplied Shortage (-)
85 $3.40 72 -13
80 3.70 73 -7
75 4.00 75 0
70 4.30 77 7
65 4.60 79 14
60 4.90 81 21
P= $4.00; Q= 75,000. Equilibrium occurs where there is neither a shortage nor surplus of wheat. At the immediately lower price of $3.70, there is a shortage of 7,000 bushels. At the immediately higher price of $4.30, there is a surplus of 7,000 bushels
b. Graph the demand for wheat and the supply of wheat. Be sure to label the axes of your graph correctly. Label equilibrium price P and the equilibrium quantity Q.
Answered on a separate sheet of paper.
c. How big is the surplus or shortage at $3.40? At $4.90? How big is a surplus or shortage results if the price is 60 cents higher than the equilibrium price? 30 cents lower than the equilibrium price?
$3.40 there will be a 13,000 bushel shortage which will drive price up. At $4.90 there will be a 21,000 bushel surplus which will drive the price down. If the price increases by 60 cents from the equilibrium price, a surplus of 14 units will be the result. On the other hand if the price falls by 30 cents from the equilibrium price, there will be a shortage of 7 units.
4. How will each of the following changes in demand and/or supply affect equilibrium price and equilibrium quantity in a competitive market; that is do price and quantity rise, fall, remain unchanged, or are the answers indeterminate because they depend on the magnitudes of the shifts? Use supply and demand diagrams to verify your answers.
a. Supply decreases and demand is constant.
Price up; quantity down
b. Demand decreases and supply is constant.
Price down; quantity down
c. Supply increases and demand is constant.
Price down; quantity up
d. Demand increases and supply increases.
Price indeterminate; quantity up
e. Demand increases and supply is constant.
Price up; quantity up
f. Supply increases and demand decreases.
Price down; quantity indeterminate
g. Demand increases and supply decreases.
Price up, quantity indeterminate
h. Demand decreases and supply decreases.
Price indeterminate and quantity downof gasoline substantially drops.
This is ambiguous. As autos and gas are complem