Tips and Sample Questions for chapter 3

To determine the price of any good or service we need to study the

behavior of buyers and sellers of the goods and services in a market.
A market consists of the Demand side and Supply side. Demand
represents the behavior of buyers (consumers, demanders,
customers, etc.) who want to maximize their utility. While Supply
captures the behavior of sellers (producers, distributors, retailers,
whole-sellers, businesses, companies, etc.) that want to maximize
their economic profits.
In chapter three, start studying the concept of Demand disregarding
the supply side of the market first.

What is Demand?

Demand refers to the willingness and ability of buyers to purchase

different quantities of a well-specified good or service at different
prices during a specific period of time. Subtitles of demand include:
Table or schedule of Demand Numerical presentation of Price
and Quantity Demanded.
Demand Curve Graphical presentation of table of Demand.
The Law of Demand: There exists an inverse relationship
between the Price of a good itself at present time and the
Quantity demanded of it, Ceteris Paribus.
Individual Demand vs. Market demand.
Quantity demanded vs. Demand these similar words are two
different concepts, each meaning a different thing! (Like
number 0 and letter O which are very similar, but they cannot
be used interchangeably!)
A change in Quantity demanded is not the same as a change
in Demand.
A change in Quantity demanded is represented by a movement
from one point to another point on the same demand curve, and it
is determined by price variations. And, the determinant of
quantity demanded is the own price of the good at the present

time (One factor only.) While a change in Demand is represented

by the entire demand curve to shift. When Demand increases, the
entire demand curve shifts rightward. When, on the other hand,
Demand decreases, the entire Demand curve shifts leftward. A
change in demand has five determinants that cause the demand
to shift:

Preferences or Tastes
Income (Normal, Inferior, and Unrelated goods.)
Number of buyers
Prices of related goods or services (Substitutes,
Compliments, and Independents pairs of goods.)
Expected future prices
Students need to master the complete impact of each of
these factors in determining the rightward or leftward shifts
or changes of Demand.)
To continue in chapter three, studying the concept of Supply, now,
disregard the Demand side of the market.

What is Supply?

Supply refers to the willingness and ability of sellers to offer to sell

different quantities of a well-specified good or service at different
prices during a specific period of time. Subtitles of Supply include:
Table or schedule of Supply Numerical presentation of Price
and Quantity Supplied.
Supply Curve Graphical presentation of table of Supply.
The Law of Supply: There exists a direct (positive) relationship
between the Price of a good itself at present time and the
Quantity supplied of it, Ceteris Paribus.
Individual Supply vs. Market Supply.
Quantity supplied vs. Supply these similar words are two
different concepts, each meaning a different thing! (Like
number 0 and letter O which are very similar, but they cannot
be used interchangeably!)

 A change in Quantity supplied is not the same as a change

in Supply.
A change in Quantity supplied is represented by a movement
from one point to another point on the same supply curve, and it
is determined by price variations. And, the determinant of
quantity supplied is the own price of the good at the present time
(One factor only.) While a change in Supply is represented by the
entire supply curve to shift. When Supply increases, the entire
supply curve shifts rightward. When Supply declines, the entire
Supply curve shifts leftward. A change in supply has six general
determinants that cause the supply curve to shift:

Technology or Productivity
Input Prices
Number of sellers
Prices of other goods in production
Expected future prices
Taxes, Subsidies, and Government Restrictions

Students need to master the complete impact of each of

these factors in determining the rightward or leftward shifts
or changes of supply.)

What is Equilibrium?
The last step in determining the price (recall that the goal of chapter
three was price determination) is putting demand and supply
togetherThe Market.
A market consists of buyers and sellers through demand and supply
interactions. The price of a good or service is determined where
Demand curve intersects Supply curve. The point at which supply
curve crosses demand curve is the market equilibrium point. The
price at which Quantity demanded equals Quantity supplied is
equilibrium Price or market-clearing Price. The quantity that
corresponds to the equilibrium price is called equilibrium quantity.

Any other price is a disequilibrium price. A surplus exists if Qsupplied is greater than Q-demanded. A shortage exists if Qdemanded is greater than Q-supplied. What happens to price when
there is a surplus or shortage? The price falls to equilibrium price
when there is a surplus in the market and it rises to equilibrium price
when there is a shortage. Note that not all markets equilibrate at the
same speed!
Once the Equilibrium Price and Equilibrium Quantity for any given
good or services is determined, dont they ever change? Or, what
can change Equilibrium Price and Quantity? You guessed it right.
Since equilibrium price and quantity are jointly determined by
demand and supply, whenever one changes or both change,
equilibrium price and quantity will change.

Sample Questions for Chapter Three

Multiple Choices
Identify the choice that best completes the statement or answers the question.
____ 1. If the demand curve for a good shifts leftward,
a. quantity demanded is less at each price.
b. quantity demanded remains constant at each price.
c. quantity demanded is greater at each price.
d. demand is greater at each price.
____ 2. If people begin to favor science fiction novels to a greater degree than previously, the
demand curve for science fiction novels
a. shifts rightward.
b. shifts leftward.
c. stays constant.
d. can shift either rightward or leftward.

____ 3. Suppose the government decides that every family should own its own home. To bring
this about, the government decides to subsidize the home-construction industry by
giving the home-construction companies $10,000 for every house that they build. As a
result of this,
a. the supply curve of new houses would shift leftward, since it now costs
$10,000 more for builders to produce a house.
b. the demand curve for new houses would shift rightward, since now
every family would want to buy a house.
c. the demand curve for new houses would shift leftward.
d. the supply curve of new houses would shift rightward, since builders
would be willing to produce and sell more houses at each given price.
e. c and d
____ 4. Which of the following will not shift a supply curve?
a. a change in the price of relevant resources
b. a change in the good's own price
c. a change in the number of sellers
d. a change in per-unit costs brought about by a change in taxes.
Exhibit 3-1

____ 5. Refer to Exhibit 3-1. At a price of $2 there is a

a. shortage of 100 units.
b. shortage of 200 units.
c. shortage of 150 units.
d. surplus of 200 units..
e. surplus of 150 units.

____ 6. Refer to Exhibit 3-1. At a price of $6 there is a

a. surplus of 100 units.
b. surplus of 150 units.
c. surplus of 200 units.
d. shortage of 150 units.
e. shortage of 200 units.

Exhibit 3-3
6

Price (dollars)

4
3
2
1

D1

D2

Quantity

____ 7. Refer to Exhibit 3-3. A shift in demand from D1 to D2 can NOT occur from a change
in
a. population.
b. price of a substitute.
c. income.
d. the goods own price.
Exhibit 3-4

Price (dollars)

S
6
4
2
D

10

15

20

25

Quantity

____ 8. Refer to Exhibit 3-4. At a price of $2 _______________ units will be exchanged.

a. 5
b. 10
c. 15
d. 20

Price (dollars)

Exhibit 3-5

S1
S2

D2
D1
Quantity

____ 9. Refer to Exhibit 3-5. In the market shown, if equilibrium was originally at point Z and
the new equilibrium is now at point V, this change may have been caused by
a. a decrease in consumers income (assuming that this is an inferior
good) and a simultaneous decline in technology in the production of
this good.
b. an increase in consumers income (assuming that this is an inferior
good) and a simultaneous improvement in technology in the
production of this good.
c. a decrease in consumers income (assuming that this is an inferior
good) and no change in supply.
d. an increase in consumers income (assuming that this is an inferior

good) and no change in supply.

Exhibit 3-6

____10. Refer to Exhibit 3-6. If a decrease in income causes the demand for good X to shift
from D1 to D2, good X is
a. a normal good.
b. an inferior good.
c. a substitute good.
d. a complementary good.
e. a neutral good.
____11. Refer to Exhibit 3-6. If an increase in the price of good Y causes the demand for good
X to shift from D1 to D2, goods X and Y are
a. normal goods.
b. inferior goods.
c. substitutes.
d. complements.
e. neutral goods.
Exhibit 3-9

____12. Refer to Exhibit 3-9. Consumers view X and Y as substitutes. If the price of Y
increases, you expect a movement in the market for X from
a. F to E.
b. A to B.
c. E to F.
d. B to A.
____13. Which of the following pairs of goods would be most likely to be complements?
a. butter and margarine.
b. peanuts and peanut butter.
c. DVD's and DVD players.
d. hiking boots and tennis shoes.
e. All of the above
Exhibit 3-16

____14. Refer to Exhibit 3-16. If there are empty seats for a basketball game at the price P*,
the situation is best depicted on graph
a. (1), with P* = P1.
b. (2), with P* = P3.
c. (3), with P* = P2.
d. (3), with P* = P3.
e. (4), with P* = P1.
____15. In the supply-and-demand diagram of the market for peanut butter, the equilibrium
point has moved up and to the right. What could have caused this?
a. a fall in the price of peanuts
b. a rise in the price of peanuts
c. a rise in income, assuming that peanut butter is an inferior good
d. a shift in preferences toward peanut butter
e. none of the above
____16. If the demand for computer software rises as incomes rise, then computer software is a
(an)

a.
b.
c.
d.
e.

inferior good
substitute (good) for computers
normal good
complement (good) for computers
c and d

____17. Which of the following statements represents a correct and sequentially accurate
economic explanation?
a. X is an inferior good and Y is a substitute for X. Income rises, the
demand for X falls, the price of X falls, and the demand for Y rises.
b. X is an inferior good and Y is a substitute for X. Income rises, the
demand for X falls, the price of X falls, and the demand for Y falls.
c. X is an inferior good and Y is a substitute for X. Income falls, the
demand for X rises, the price of X rises, and the demand for Y falls.
d. X is an inferior good and Y is a substitute for X. Income rises, the
quantity demanded of X rises, the price of X rises, and the demand for
Y falls.
e. none of the above
____18. Which of the following statements is false?
a. An upward-sloping supply curve graphically represents the law of
supply.
b. A vertical supply curve graphically represents the law of supply.
c. If income rises and good X is a normal good, then the demand for good
X will rise.
d. If income falls and good Y is an inferior good, then the demand for
good Y will rise.
____19. If the demand for a good falls by less than the supply of the good rises, then
equilibrium price will __________ and equilibrium quantity will __________.
a. rise; fall
b. rise; rise
c. fall; fall
d. fall; rise

____20. In year 1 the price of good X is $10 and 100 units are bought and sold. In year 2 the
price of good X is $13 and 230 units are bought and sold. What can explain this?
a. The supply of good X was higher in year 2 than in year 1 and the
demand for good X was the same in year 2 as in year 1.
b. The demand for good X was higher in year 2 than in year 1 and the
supply of good X was the same in year 2 as in year 1.
c. Both the demand for, and supply of, good X were higher in year 2 than
year 1.
d. b or c
e. a, b, or c
____21. Blank Question. Ignore it.
____22. You can determine producers surplus if you know the minimum selling price and
a. price received.
b. price paid.
c. tax paid.
d. tax received.
e. a and c

Exhibit 3-13
Price
$5
6
7
8
9
10

Quantity Demanded..
Jose
Kaitlyn
Leah
Maria
Market
20
11
15
30
(A)
17
10
13
26
(B)
14
9
10
22
(C)
11
8
7
18
(D)
7
7
4
13
(E)
3
6
0
7
(F)

Assume that Jose, Kaitlyn, Leah, and Maria are the only buyers in this market.

____23. Refer to Exhibit 3-13. Each individual consumers demand curve is

________________ sloping and the market demand curve is _________________
sloping.
a. upward; also upward
b. downward; also downward
c. upward; downward
d. downward; upward
Essay
24. Suppose that the average prices of refrigerators have fallen over the past few years,
yet the refrigerator companies have offered more and more of them for sale. Does this
mean that the supply curve for refrigerators is downward sloping? Explain.
25. When Hurricane Katrina hit the Gulf Coast of the United States in 2005 it destroyed
5,000,000 acres of timber. Given that lumber is timber that has been sawed or split
into planks and boards, explain in terms of supply and/or demand how the hurricane
impacted each of the following markets (be sure to note the expected impact on
equilibrium price and quantity):
a. Domestic lumber
b. Imported lumber
c. New home construction

Sample Questions for Chapter Three

Answer Section
MULTIPLE CHOICES

1. ANS:
LOC:

A
PTS:
1
Supply and demand

DIF:

Moderate NAT: Analytic

2. ANS:
LOC:

A
PTS:
1
Supply and demand

DIF:

Moderate NAT: Analytic

3. ANS:
LOC:

D
PTS:
1
Supply and demand

DIF:

Moderate NAT: Analytic

4. ANS:
LOC:

B
PTS:
1
Supply and demand

DIF:

Moderate NAT: Analytic

5. ANS:
LOC:

B
PTS:
1
Supply and demand

DIF:

Moderate NAT: Analytic

NOT:
New

6. ANS:
LOC:

C
PTS:
1
Supply and demand

DIF:

Moderate NAT: Analytic

NOT:
New

7. ANS:
LOC:

D
PTS:
1
Supply and demand

DIF:

Moderate NAT: Analytic

8. ANS:
LOC:

B
PTS:
1
Supply and demand

DIF:

Moderate NAT: Analytic

NOT:
New

9. ANS:
LOC:

C
PTS:
1
Supply and demand

DIF:

Difficult
NOT:

10. ANS:
LOC:

B
PTS:
1
Supply and demand

DIF:

Moderate NAT: Analytic

NOT:
New

11. ANS:
LOC:

C
PTS:
1
Supply and demand

DIF:

Difficult

NAT: Analytic

12. ANS:
LOC:

B
PTS:
1
Supply and demand

DIF:

Difficult

NAT: Analytic

NAT: Analytic
New

13. ANS:
LOC:

C
PTS:
1
Supply and demand

DIF:

Easy NAT: Analytic

14. ANS:
LOC:

C
PTS:
1
Supply and demand

DIF:

Moderate NAT: Analytic

15. ANS:
LOC:

D
PTS:
1
Supply and demand

DIF:

Moderate NAT: Analytic

16. ANS:
LOC:

C
PTS:
1
Supply and demand

DIF:

Easy NAT: Analytic

17. ANS:
LOC:

B
PTS:
1
Supply and demand

DIF:

Difficult

18. ANS:
LOC:

B
PTS:
1
Supply and demand

DIF:

Easy NAT: Analytic

19. ANS:

DIF:

Moderate NAT: Analytic

20. ANS:
LOC:

D
PTS:
1
Supply and demand

DIF:

Difficult

PTS:

NAT: Analytic

NAT: Analytic

21. Blank Answer. Ignore it.

22. ANS:
LOC:

A
PTS:
1
Supply and demand

DIF:

Moderate NAT: Analytic

23. ANS:
LOC:

B
PTS:
1
Supply and demand

DIF:

Easy NAT: Analytic

NOT:
New

ESSAY
24. ANS:

The reason that refrigerator prices have fallen is likely a result of a change in one
of the determinants of supply. For example, a technological improvement in the
production of refrigerators may have occurred. This advance in technology would
cause the supply curve for refrigerators to shift to the right, lowering equilibrium
price and raising the equilibrium quantity. Since one of the determinants of supply,
this is not a case of a movement along a single supply curve (and thus does not
vaiolate the law of supply).
PTS: 1
demand

DIF: Difficult

NAT:Analytic

LOC:

Supply and

25. ANS:
a. The severe weather would be expected to shift the supply curve for
domestic lumber to the left, but would not automatically shift the demand
curve. This would result in a higher equilibrium price and a lower
equilibrium quantity for domestic lumber.
b. Imported lumber is a substitute for US-grown lunber, therefore the demand
curve for imported lumber would be expected to shift to the right. The
supply curve for imported lumber would not automatically shift. This
would result in a higher equilibrium price and a higher equilibrium
quantity for imported lumber.
c. An increase in the price of timber would be an increase in a resource cost
for those who are building new homes. Higher resource costs shift the
supply curve for new home construction to the left, but the demand curve
would not automatically shift. This would result in a higher equilibrium
price and a lower equilibrium quantity for new homes.
PTS: 1
demand

DIF: Difficult

NAT:Analytic

LOC:

Supply and