Answers Problems Chapter 4 Principles of Economics - Mankiw

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  • Topic: Supply and demand, Inverse demand function, Economic equilibrium
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4|
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| | THE MARKET FORCES OF SUPPLY AND DEMAND|
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 OF SUPPLY AND DEMAND
 
 
 
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SOLUTIONS TO TEXT PROBLEMS:
 
Quick Quizzes
 
1.   A market is a group of buyers (who determine demand) and a group of sellers (who determine supply) of a particular good or service.  A perfectly competitive market is one in which there are many buyers and many sellers of an identical product so that each has a negligible impact on the market price.  

2.   Here is an example of a monthly demand schedule for pizza:  
Price of Pizza Slice| Number of Pizza Slices Demanded|
$  0.00| 10|
0.25| 9|
0.50| 8|
0.75| 7|
1.00| 6|
1.25| 5|
1.50| 4|
1.75| 3|
2.00| 2|
2.25| 1|
2.50| 0|
 
      The demand curve is graphed in Figure 1.
 

Figure 1
 
      Examples of things that would shift the demand curve include changes in income, prices of related goods like soda or hot dogs, tastes, expectations about future income or prices, and the number of buyers.  

      A change in the price of pizza would not shift this demand curve; it would only lead to a movement from one point to another along the same demand curve.  
3.   Here is an example of a monthly supply schedule for pizza:  
Price of Pizza Slice| Number of Pizza Slices Supplied|
$  0.00| 0|
0.25| 100|
0.50| 200|
0.75| 300|
1.00| 400|
1.25| 500|
1.50| 600|
1.75| 700|
2.00| 800|
2.25| 900|
2.50| 1000|
 
      The supply curve is graphed in Figure 2.
 

 
Figure 2
 
      Examples of things that would shift the supply curve include changes in prices of inputs like tomato sauce and cheese, changes in technology like more efficient pizza ovens or automatic dough makers, changes in expectations about the future price of pizza, or a change in the number of sellers.  

      A change in the price of pizza would not shift this supply curve; it would only lead to a movement from one point to another along the same supply curve.  
4.   If the price of tomatoes rises, the supply curve for pizza shifts to the left because there has been an increase in the price of an input into pizza production, but there is no shift in demand.  The shift to the left of the supply curve causes the equilibrium price to rise and the equilibrium quantity to decline, as Figure 3 shows.  

      If the price of hamburgers falls, the demand curve for pizza shifts to the left because the lower price of hamburgers will lead consumers to buy more hamburgers and fewer pizzas, but there is no shift in supply.  The shift to the left of the demand curve causes the equilibrium price to fall and the equilibrium quantity to decline, as Figure 4 shows.  

 
Figure 3
                          
 

Figure 4
 
 
Questions for Review
 
1.   A competitive market is a market in which there are many buyers and many sellers of an identical product so that each has a negligible impact on the market price. Another type of market is a monopoly, in which there is only one seller. There are also other markets that fall between perfect competition and monopoly.  

2.   The demand schedule is a table that shows the relationship between the price of a good and the quantity demanded. The demand curve is the downward-sloping line relating price and quantity demanded. The demand schedule and demand curve are related because the demand curve is simply a graph showing the points in the demand schedule.  

      The demand curve slopes downward because of the law of demand—other things being equal, when the price of a good rises, the quantity demanded of the good falls. People buy less of a good when its price rises, both because they cannot afford to buy as much and because they switch to purchasing other goods.  

3.   A change in consumers' tastes leads to a shift of the demand curve. A change in price leads to a movement along the demand curve.  
4.   Because Popeye buys more spinach...
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