Solution Manual for Understanding Economics 7th Edition

Understanding Economics 7th Ed

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economics-7th-edition/

Chapter 2

Teaching Tips
The Graphical Properties of Demand and Supply
Students' comfort in using demand and supply may be aided by having them review the mathematical properties of straight
linesoutlined in the Connect resource's Graphing Module. Through a review of the algebraic notions of slope and axis intercepts,
the module helps studentsappreciate the differences between negatively sloped demand curves and positively sloped supply
curves so essential in understanding the graphical explanations outlined in this chapter.

Demand and Supply Shifts

Changes in demand are easier to visualize than changes in supply. This is because of the graphical properties of demand curves.
An increase in demand, for example, is graphedas a rightward (when seen horizontally) or upward (when seen vertically) shift.
Similarly a decrease in demand is graphed as a leftward or downward shift. Shifts in demand therefore look the same whether
viewed horizontally or vertically. Still, it is best to refer to an increase in demand as a rightward shift, rather than an upward shift.
Similarly, refer to a decrease in demand as a leftward shift. Doing so helps circumvent confusion when students come to study
supply. For in this case a rightward shift of the curve appears downward when viewed vertically. Meanwhile a leftward shift
appears to be vertically upward. As with demand, always refer to supply changes in horizontal terms, so thata supply increase is
described asa rightward not downward shift, while a decrease is described as a leftward not upward shift.

Demand Factors
In presenting this material, you may find students perplexed over the workings oftwo factors --prices of other products and
consumer expectations. If so, extend your treatment with the following points.

Prices of Other ProductsThe easiest way to recall the negative relationship between quantity demanded and price of a
complementis by remembering that this relationship parallels that between quantity demanded and the product's own price. If two
products are complements, the direction of the movement in quantity demanded is the same regardless of which product's price
changes, the product's own price or the price of its complement. In contrast, with a change in a substitute's price, the direction of
the movement in quantity demanded is opposite to the impact of a change in the product's own price.

Consumer ExpectationsConsumer expectations about future prices on the one hand and incomes on the other are best covered
separately. For expected changes in price, the effect on quantity demanded is opposite to what would happen if it were the current
changeprice that were changing. That's because, if consumers are affected by expected price changes, they viewfuture purchases
and current purchases of the same item as substitute options. For example, an expected rise in price causes current quantity
demanded to increase, since consumers are choosing to purchase now rather than in the future. Now let's consider the impact of
consumer expectations about future income. Here the key point is whether the product in question is normal or inferior. In either
case, the effect of an expected change in income is in the same direction as the effect if it were current income that were
changing. For example, an expected rise in future income raises quantity demanded for normal products, just as a rise in current
income does. That's because expected changes in income, just like current income changes, tend to affect how well off consumers
feel at the present moment.

Supply Factors
As in the case of demand factors, two supply factors may prove particularly challenging to students: prices of related products
and producer expectations. If necessary, supplement your explanationswith the following points.

Prices of Related ProductsIt is crucial to be clear on whether the price of another product that is changing is affecting consumers
or producers. (Note the difference in the names of the two factors: prices of other products for the demand factor, prices of
related products for the supply factor.) In the case of supply, quantity always moves in the opposite direction to the change in the
price of a related product. That's because producers are choosing to substitute the supply of one product for another.

Producer ExpectationsThe impact on quantity of producer expectations concerning future prices is always in an opposite
direction to the way the price is expected to move. That's because producers are viewing current sales and future sales of their

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product as substitute options. For example, an expected rise in the price of an item causes its producers to decrease current
quantity supplied so they can gain the extra revenue from selling it after the expected price rise.

Effects of Demand and Supply Shifts on Equilibrium

There are several shorthand methods for quickly ascertaining the impact of demand and supply shifts on equilibrium price and
quantity. If only demand is shifting, the results on price and quantity are straightforward since both values move in the same
direction as the demand change. For example, if demand increases then so doequilibrium price and quantity. If only supply is
shifting, then the change in equilibrium quantity is in the same direction as the supply change, while the change in equilibrium

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 price is in the opposite direction. For example, if supply increases then so does equilibrium quantity, while equilibrium price
decreases. If both curves shift simultaneously, then the most straightforward cases are if both increase or decrease
simultaneously. Then quantity moves in the same direction as demand and supply while the change in price is indeterminate. On
the other hand, if demand is shifting one way and supply the other, then it is the direction of the price change that can be
ascertained, while the change in quantity is indeterminate. In these cases, it is the vertical movements in demand and supply that
determine the direction of the price change. If both shift vertically upwards, price rises; in the case of a simultaneous downward
shift, price falls.

Answers to Thinking About Economics Questions

Page 36: Rolex watches are a specific example of such a product, since their high price is one of this product's attractive features
to those consumers who can afford to buy them.

Page 44: As e-commerce increases competition by giving consumers a greater opportunity to purchase these products wherever
in the world where price is lowest, the spreads that currently exist when comparing US dollar prices of the same products in various
countries should gradually fall.

Page 50: A decrease in supply causes a leftward movement along the demand curve, pushing down quantity demanded. Again,
the supply change drives quantity demanded in the same direction.

Answers to Chapter Problems

2.1 Practice Problems

1. a. D1 and D2 both satisfy the law of demand since both illustrate an inverse relationship between price and quantity demanded. As
the price of milkshakes falls, as from $2 to $1.80, for example, the quantity demanded for Student 1 rises from 4 to 5 milkshakes,
and the quantity demanded for Student 2 rises from 5 to 7 milkshakes.
b. The market demand curve is found by adding together the quantities demanded by Student 1 and Student 2 at each possible
price.
c. At a price of $2, quantity demanded in the market is 9 (= 5 + 4) milkshakes; at a price $1.80 it is 12 (= 7 + 5) milkshakes, at
$1.60 it is 15 (= 9 + 6) milkshakes, and at $1.40 it is 18 (= 11 + 7) milkshakes.
d.

In this graph the quantities demanded by Student 1 and Student 2 and in the market are highlighted at a price of $1.60.

2. a. Because ebooks are a normal product, demand increases due to higher incomes.
b. Ebooks and ebook readers are complementary products, so a drop in the price of readers increases not just the quantity
demanded of readers but also the demand for ebooks.
c. A sudden expectation by consumers of a fall in ebook prices means they will delay ebook purchases, decreasing current
demand.
d. Because ebooks and print books are substitute products, a rise in the price of print books increases the demand for ebooks.

2-3
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