Demand and Supply

Read this chapter and attempt the "Try It" exercises. Also, complete the concept problems and the numerical problems at the end of the chapter. This chapter will help you gain familiarity and competencies with regard to basic demand and supply concepts. At a minimum, you should be able to list the factors that shift the demand curve and those that shift the supply curve. Make sure to carefully study the difference between demand and quantity demanded (and the difference between supply and quantity supplied).

3.4 Review and Practice

Concept Problems

  1. What do you think happens to the demand for pizzas during the Super Bowl? Why?
  2. Which of the following goods are likely to be classified as normal goods or services? Inferior? Defend your answer.

    1. Beans
    2. Tuxedos
    3. Used cars
    4. Used clothing
    5. Computers
    6. Books reviewed in The New York Times
    7. Macaroni and cheese
    8. Calculators
    9. Cigarettes
    10. Caviar
    11. Legal services
  3. Which of the following pairs of goods are likely to be classified as substitutes? Complements? Defend your answer.

    1. Peanut butter and jelly
    2. Eggs and ham
    3. Nike brand and Reebok brand sneakers
    4. IBM and Apple Macintosh brand computers
    5. Dress shirts and ties
    6. Airline tickets and hotels
    7. Gasoline and tires
    8. Beer and wine
    9. Faxes and first-class mail
    10. Cereal and milk
    11. Cereal and eggs
  4. A study found that lower airfares led some people to substitute flying for driving to their vacation destinations. This reduced the demand for car travel and led to reduced traffic fatalities, since air travel is safer per passenger mile than car travel. Using the logic suggested by that study, suggest how each of the following events would affect the number of highway fatalities in any one year.

    1. An increase in the price of gasoline
    2. A large reduction in rental rates for passenger vans
    3. An increase in airfares
  5. Children under age 2 are now allowed to fly free on U.S. airlines; they usually sit in their parents' laps. Some safety advocates have urged that they be required to be strapped in infant seats, which would mean their parents would have to purchase tickets for them. Some economists have argued that such a measure would actually increase infant fatalities. Can you say why?
  6. The graphs below show four possible shifts in demand or in supply that could occur in particular markets. Relate each of the events described below to one of them.

    1. How did the heavy rains in South America in 1997 affect the market for coffee?
    2. The Surgeon General decides french fries are not bad for your health after all and issues a report endorsing their use. What happens to the market for french fries?
    3. How do you think rising incomes affect the market for ski vacations?
    4. A new technique is discovered for manufacturing computers that greatly lowers their production cost. What happens to the market for computers?
    5. How would a ban on smoking in public affect the market for cigarettes?
  7. As low-carb diets increased in popularity, egg prices rose sharply. How might this affect the monks' supply of cookies or private retreats? (See the Case in Point on the Monks of St. Benedict's).
  8. Gasoline prices typically rise during the summer, a time of heavy tourist traffic. A "street talk" feature on a radio station sought tourist reaction to higher gasoline prices. Here was one response: "I don't like 'em [the higher prices] much. I think the gas companies just use any excuse to jack up prices, and they're doing it again now". How does this tourist's perspective differ from that of economists who use the model of demand and supply?
  9. The introduction to the chapter argues that preferences for coffee changed in the 1990s and that excessive rain hurt yields from coffee plants. Show and explain the effects of these two circumstances on the coffee market.
  10. With preferences for coffee remaining strong in the early part of the century, Vietnam entered the market as a major exporter of coffee. Show and explain the effects of these two circumstances on the coffee market.
  11. The study on the economics of obesity discussed in the Case in Point in this chapter on that topic also noted that another factor behind rising obesity is the decline in cigarette smoking as the price of cigarettes has risen. Show and explain the effect of higher cigarette prices on the market for food. What does this finding imply about the relationship between cigarettes and food?
  12. In 2004, The New York Times reported that India might be losing its outsourcing edge due to rising wages. The reporter noted that a recent report "projected that if India continued to produce college graduates at the current rate, demand would exceed supply by 20% in the main outsourcing markets by 2008". Using the terminology you learned in this chapter, explain what he meant to say was happening in the market for Indian workers in outsourcing jobs. In particular, is demand for Indian workers increasing or decreasing? Is the supply of Indian workers increasing or decreasing? Which is shifting faster? How do you know?
  13. For more than a century, milk producers have produced skim milk, which contains virtually no fat, along with regular milk, which contains 4% fat. But a century ago, skim milk accounted for only about 1% of total production, and much of it was fed to hogs. Today, skim and other reduced-fat milks make up the bulk of milk sales. What curve shifted, and what factor shifted it?
  14. Suppose firms in the economy were to produce fewer goods and services. How do you think this would affect household spending on goods and services? (Hint: Use the circular flow model to analyze this question).