What is a competitive market?

Briefly describe a type of market that is not perfectly

competitive.

A competitive market is one in which there are many buyers and many sellers so that each has a
negligible impact on the market price. If a seller were to change their price, their buyers are
likely to switch sellers. No single seller can impact the market price in a competitive market.
Monopolies and oligopolies can create imperfect competitive markets. Along with this, imperfect
competitive markets can be caused by only having one seller where this seller sets the price, such
as a local television station.

What are the demand schedule and the demand curve, and how are they related? Why
does the demand curve slope downward?

A demand schedule is a table that shows the relationship between the price of a good and the
quantity demanded, while a demand curve is a graph of that same information. Because a lower
price increases the quantity demanded, the demand curve slopes downward.

Does a change in consumers’ tastes lead to a movement along the demand curve or a shift
in the demand curve? Does a change in price lead to a movement along the demand curve
or a shift in the demand curve?

A change consumers' taste will only shift the demand curve, while a change in the price of the
good itself will represent a movement along the demand curve. A curve shifts when there is a
change in a relevant variable that is not measured on either axis. Because price is on the vertical
axis, a change in price represents a movement along the demand curve.

Popeye’s income declines, and as a result, he buys more spinach. Is spinach an inferior or a
normal good? What happens to Popeye’s demand curve for spinach?

In this case, spinach juice is an inferior good. A rise in quantity demanded at any given price will
shift the demand curve to the right

What are the supply schedule and the supply curve, and how are they related? Why does
the supply curve slope upward?

The supply schedule is the table that shows the relationship between the quantity supplied and
the price while the supply curve is the graph of this relationship.

Does a change in producers’ technology lead to a movement along the supply curve or a
shift in the supply curve? Does a change in price lead to a movement along the supply
curve or a shift in the supply curve?
The supply curve is very similar to the demand curve in that anything not measured on the axis
(technology, input prices, expectations, number of sellers) will result in a shift in the supply
curve. At the same time a change in price (on the vertical axis) will results in movement along
the supply curve.

Define the equilibrium of a market. Describe the forces that move a market toward its
equilibrium.

Equilibrium of a market is where supply and demand have been brought into balance. At this
price, the quantity of a good that buyers are willing and able to buy balances with the quantity
sellers are willing and able to sell. The activity of many buyers and sellers automatically pushes
the market price toward the equilibrium price. Increase in demand and shortage of supply can
also move the equilibrium price, but how quickly equilibrium is reached thereafter varies from
market to market

Coke and pizza are complements because they are often enjoyed together. When the price
of Coke rises, what happens to the supply, demand, quantity supplied, quantity demanded,
and the price in

As soon as the demand for pizza drops the demand curve for pizza shifts to the left.

Supply curve for pizza is not affected.

By a shift to the left in the demand curve, the equilibrium price and quantity both declines.

Therefore, the quantity of pizza supplied and demanded both falls.

9. Describe the role of prices in market economies

Prices are great signals that guide economic decisions and bring the market into equilibrium.
Prices can signal surplus or shortage and guide economists. Prices different from equilibrium can
show a difference in supply and demand and can lead to a change in price until equilibrium is
reached.

10. Explain each of the following statements using supply-and-demand diagrams.

“When a cold snap hits Florida, the price of orange juice rises in supermarkets throughout
the country.”
Cold weather damages the orange crop, reducing the supply of oranges. This can be seen in
diagram as a shift to the left in the supply curve for oranges. The new equilibrium price is higher
than the old equilibrium price.

“When the weather turns warm in New

England every summer, the price of
hotel rooms in Caribbean resorts
plummets.”
People often travel to the Caribbean
from New England to escape cold weather, so
the demand for Caribbean hotel rooms is
high in the winter. In the summer, fewer
people travel to the Caribbean, because
northern climes are more pleasant.
The result, as shown in diagram is a shift to the left in the demand curve.

“When a war breaks out in the Middle East,

the price of gasoline rises, and the price of a used Cadillac falls.”
When a war breaks out in the Middle East, many markets are affected. Because a large
proportion of oil production takes place there, the war disrupts oil supplies, shifting the supply
curve for gasoline to the left, as shown in Figure. 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 will not 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. The result is a decline in the
equilibrium price of used Cadillacs.

GASOLINE CADILLAC

11. “An increase in the demand for notebooks raises the quantity of notebooks demanded but not
the quantity supplied.” Is this statement true or false? Explain.

The statement that "an increase in the demand for notebooks raises the quantity of notebooks
demanded, but not the quantity supplied," in general, is false. The increase in demand for
notebooks results in an increased quantity supplied. The only way the statement would be true is
if the supply curve was a vertical line

12. Consider the market for minivans. For each of the events listed here, identify which of
the determinants of demand or supply are affected. Also indicate whether demand or
supply increases or decreases. Then draw a diagram to show the effect on the price and
quantity of minivans.

People decide to have more children.

If people decide to have more children, they will want larger vehicles for hauling their kids
around, so the demand for minivans will increase. Supply will not be affected. The result is a rise
in both the price and the quantity sold

A strike by steelworkers raises steel prices.

If a strike by steelworkers raises steel prices, the cost of producing a minivan rises and the supply
of minivans decreases. Demand will not be affected. The result is a rise in the price of minivans
and a decline in the quantity sold.
Engineers develop new automated machinery for the production of minivans.
The development of new automated machinery for the production of minivans is an
improvement in technology. This reduction in firms' costs will result in an increase in supply.
Demand is not affected. The result is a decline in the price of minivans and an increase in the
quantity sold

The price of sports utility vehicles rises.

The rise in the price of sport utility vehicles affects minivan demand because sport utility
vehicles are substitutes for minivans. The result is an increase in demand for minivans. Supply is
not affected. The equilibrium price and quantity of minivans both rise
A stock-market crash lowers people’s wealth.
The reduction in peoples' wealth caused by a stock-market crash reduces their income, leading to
a reduction in the demand for minivans, because minivans are likely a normal good. Supply is
not affected. As a result, both the equilibrium price and the equilibrium quantity decline

13. Over the past 30 years, technological advances have reduced the cost of computer chips.
How do you think this has affected the market for computers? For computer software? For
typewriters?

Technological advances that reduce the cost of producing computer chips represent a
decline in an input price for producing a computer. The result is a shift to the right in the
supply of computers, as shown in Figure. The equilibrium price falls and the equilibrium
quantity rises, as the figure shows.

Since computer software is a complement to computers, the lower equilibrium price of

computers increases the demand for software. As Figure shows, the result is a rise in
both the equilibrium price and quantity of software.

Since typewriters are substitutes for computers, the lower equilibrium price of computers
reduces the demand for typewriters the result is a decline in both the equilibrium price
and quantity of typewriters.
 14. Using supply-and-demand diagrams, show the
effect of the following events on the market for sweatshirts.

a. A hurricane in South Carolina damages the cotton crop.

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 the figure. The
new equilibrium price is higher and the new equilibrium quantity of sweatshirts is lower.

b. The price of leather jackets falls.

A decline in the price of leather jackets leads more people to buy leather jackets, reducing the
demand for sweatshirts. The result, shown in the figure, is a decline in both the equilibrium price
and quantity of sweatshirts
c. All colleges require morning exercise in appropriate attire.
The effects of colleges requiring students to engage in morning exercise in appropriate attire
raises the demand for sweatshirts, as shown in the figure. The result is an increase in both the
equilibrium price and quantity of sweatshirts.

d. New knitting machines are invented.

The invention of new knitting machines increases the supply of sweatshirts. As the figure shows,
the result is a reduction in the equilibrium price and an increase in the equilibrium quantity of
sweatshirts
15. A survey shows an increase in drug use by young people. In the ensuing debate, two
hypotheses are proposed:

• Reduced police efforts have increased the availability of drugs on the street.
• Cutbacks in education efforts have decreased awareness of the dangers of drug addiction.
a. Use supply-and-demand diagrams to show how each of these hypotheses could lead to
an increase in quantity of drugs consumed.
b. How could information on what has happened to the price of drugs help us to distinguish
between these explanations?

Reduced police efforts would lead to an increase in the supply of drugs. As Figure 1
shows, this would cause the equilibrium price of drugs to fall and the equilibrium
quantity of drugs to rise. On the other hand, cutbacks in education efforts would lead to a
rise in the demand for drugs. This would push the equilibrium price and quantity up, as
shown in Figure 2

Figure 1 Figure 2
b. A fall in the equilibrium price would lead us to believe the first hypothesis. If the equilibrium
price rose, we would believe the second hypothesis.