When the price of oranges increases the quantity of oranges supplied?

1. a. Cold weather damages the orange crop, reducing the supply of oranges. This can be seen in Figure 4-6 as a shift to the left in the supply curve for oranges. The new equilibrium price is higher than the old equilibrium price.

Figure 4-6

b. People often travel to the Caribbean from New England to escape cold weather, so demand for Caribbean hotel rooms is high in the winter. In the summer, fewer people travel to the Caribbean, since northern climes are more pleasant. The result, as shown in Figure 4-7, is a shift to the left in the demand curve. The equilibrium price of Caribbean hotel rooms is thus lower in the summer than in the winter, as the figure shows.

Figure 4-7

c. When a war breaks out in the Middle East, many markets are affected. Since much oil production takes place there, the war disrupts oil supplies, shifting the supply curve for gasoline to the left, as shown in Figure 4-8. The result is a rise in the equilibrium price of gasoline. With a higher price for gasoline, the cost of operating a gas-guzzling automobile, like a Cadillac, will increase. As a result, the demand for used Cadillacs will decline, as people in the market for cars won't find Cadillacs as attractive. In addition, some people who already own Cadillacs will try to sell them. The result is that the demand curve for used Cadillacs shifts to the left, while the supply curve shifts to the right, as shown in Figure 4-9. The result is a decline in the equilibrium price of used Cadillacs.

Figure 4-8

Figure 4-9

3. a. If people decide to have more children (a change in tastes), they'll want larger vehicles for hauling their kids around, so the demand for minivans will increase. Supply won't be affected. The result is a rise in both price and quantity, as Figure 4-12 shows.

Figure 4-12

Figure 4-13

b. If a strike by steelworkers raises steel prices, the costs of producing a minivan rise (a rise in input prices), so the supply of minivans decreases. Demand won't be affected. The result is a rise in the price of minivans and a decline in the quantity, as Figure 4-13 shows.

c. The development of new automated machinery for the production of minivans is an improvement in technology. The reduction in firms' costs results in an increase in supply. Demand isn't affected. The result is a decline in the price of minivans and an increase in the quantity, as Figure 4-14 shows.

Figure 4-14

Figure 4-15

d. The rise in the price of station wagons affects minivan demand because station wagons are substitutes for minivans (that is, there's a rise in the price of a related good). The result is an increase in demand for minivans. Supply isn't affected. In equilibrium, the price and quantity of minivans both rise, as Figure 4-12 shows.

e. The reduction in peoples' wealth caused by a stock-market crash reduces their income, leading to a reduction in the demand for minivans, since minivans are a normal good. Supply isn’t affected. As a result, both price and quantity decline, as Figure 4-15 shows.

5. a. When a hurricane in South Carolina damages the cotton crop, it raises input prices for producing sweatshirts. As a result, the supply of sweatshirts shifts to the left, as shown in Figure 4-19. The new equilibrium has a higher price and lower quantity of sweatshirts.

Figure 4-19

b. A decline in the price of leather jackets leads more people to buy leather jackets, reducing the demand for sweatshirts. The result, shown in Figure 4-20, is a decline in both the equilibrium price and quantity of sweatshirts.

Figure 4-20

c. The effects of colleges requiring students to engage in morning calisthenics in appropriate attire raises the demand for sweatshirts, as shown in Figure 4-21. The result is an increase in both the equilibrium price and quantity of sweatshirts.

Figure 4-21

d. The invention of new knitting machines increases the supply of sweatshirts. As Figure 4-22 shows, the result is a reduction in the equilibrium price and an increase in the equilibrium quantity of sweatshirts.

Figure 4-22

7. Since ketchup is a complement for hot dogs, when the price of hot dogs rises, the quantity demanded of hot dogs falls, thus reducing the demand for ketchup, causing both price and quantity of ketchup to fall. Since the quantity of ketchup falls, the demand for tomatoes by ketchup producers falls, so both price and quantity of tomatoes fall. When the price of tomatoes falls, producers of tomato juice face lower input prices, so the supply curve for tomato juice shifts down, causing the price of tomato juice to fall and the quantity of tomato juice to rise. The fall in the price of tomato juice causes people to substitute tomato juice for orange juice, so the demand for orange juice declines, causing the price and quantity of orange juice to fall. Now you can see clearly why a rise in the price of hot dogs leads to a fall in price of orange juice! It would be clearer if there were graphs. I always expect graphs!

9

Quantity supplied equals quantity demanded at a price of $6 and quantity of 81 pizzas (Figure 4-26). If price were greater than $6, quantity supplied would exceed quantity demanded, so suppliers would reduce their price to gain sales. If price were less than $6, quantity demanded would exceed quantity supplied, so suppliers could raise their price without losing sales. In both cases, the price would continue to adjust until it reached $6, the only price at which there's neither surplus nor shortage.

Figure 4-26

1. a. Mystery novels have more elastic demand than required textbooks, because mystery novels have close substitutes and are a luxury good, while required textbooks are a necessity with no close substitutes. If the price of mystery novels were to rise, readers could substitute other types of novels, or buy fewer novels altogether. But if the price of required textbooks were to rise, students would have little choice but to pay the higher price. Thus the quantity demanded of required textbooks is less responsive to price than the quantity demanded of mystery novels.

b. Beethoven recordings have more elastic demand than classical music recordings in general. Beethoven recordings are a narrower market than classical music recordings, so it’s easy to find close substitutes for them. If the price of Beethoven recordings were to rise, people could substitute other classical recordings, like Mozart. But if the price of all classical recordings were to rise, substitution would be more difficult (a transition from classical music to rap is unlikely!). Thus the quantity demanded of classical recordings is less responsive to price than the quantity demanded of Beethoven recordings.

c. Heating oil during the next five years has more elastic demand than heating oil during the next six months. Goods have a more elastic demand over longer time horizons. If the price of heating oil were to rise temporarily, consumers couldn’t switch to other sources of fuel without great expense. But if the price of heating oil were to be high for a long time, people would gradually switch to gas or electric heat. As a result, the quantity demanded of heating oil during the next six months is less responsive to price than the quantity demanded of heating oil during the next five years.

d. Root beer has more elastic demand than water. Root beer is a luxury with close substitutes, while water is a necessity with no close substitutes. If the price of water were to rise, consumers have little choice but to pay the higher price. But if the price of root beer were to rise, consumers could easily switch to other sodas. So the quantity demanded of root beer is more responsive to price than the quantity demanded of water.

Economics 101

Fall 2001

Practice Problems #2

Objective 1: Identify the determinants of demand and supply and indicate how each must change for demand and supply to increase or decrease. (Q1-2)

Objective 2: Derive market demand and market supply curves from individual demand and supply schedules. (Q3-4)

Objective 3: Differentiate between a shift of demand curve or supply curve and a movement along a curve, and depict these cases correctly on a graph. (Q5-6)

Objective 4: Provide explanations for the slope of a typical demand curve. (Q7-8)

Objective 5: Distinguish between normal goods and inferior goods, substitute goods and complement goods. (Q9-10)

Questions:

Energizer and Duracell’s Coppertop batteries are substitutes. The Energizer Bunny cuts supply and increases the price of its batteries. Equilibrium price will______ and quantity exchanged will _______ in the market for Duracell.

Rise; rise
Fall; rise
Fall; fall
Rise; fall

As the price of oranges increases, orange growers will:

Use more-expensive methods of growing oranges.
Use less-expensive methods of growing oranges.
Decrease the supply of oranges.
Increase the supply of Oranges.

3. If the firms producing fuzzy dice for cars must obtain a higher price than they did previously to produce the same level of output as before, then we can say that there has been:

a. An increase in quantity supplied.

b. An increase in supply.

c. A decrease in supply.

d. A decrease in quantity supplied.

4. The market supply curve for wheat depends on each of the following except:

a. The price of wheat-producing land.

b. The price of production alternatives for wheat.

c. The tastes and preferences of wheat consumers.

d. The number of wheat farmers in the market.