ECO101 CPA 3

for Wednesday, August 30 Name: Natalie Griffith

Read in the Essentials of Economics Chapter 3, “Where Prices Come From: The Interaction of Demand and
Supply,” pp. 82-90. The pdf of this chapter is posted on Canvas in Assignments along with CPA 3. It is
also posted on Canvas under Files in the folder Readings.

Section 3.2, The Supply Side of the Market

1. What is the supply curve? In general, do you agree with the “Law of Supply?”
The supply curve is a curve that shows the relationship between the price of a product and the quantity
of the product supplied.

I do agree with the law of supply because if nothing changed, then the results would continue to be the
same. There would never be an increase in demand or an increase in supply.

2. Five variables shift (change) market supply. State the five variables and indicate which way they would
need to change to increase (shift to the right) supply.
Prices of inputs = the price of an input would need to change.
Technology change = the productivity of the firms' workers or machines has to increase.
Prices of related goods in production = using substitutes in production; if an items price decreases
relative to another item, that company will put their attention to the item making more money for the
business.
Number of firms in the market = there needs to be a consistent number of new businesses being added
to the market to see a shift to the right.
Expected future prices = say prices are expected to be higher in the future, businesses need to decrease
supply now and increase it when that time comes.

3. Explain the difference between a change in supply and a change in quantity supplied.
A change in supply refers to a shift of the supply curve whereas a change in quantity supplied refers to
a movement along the supply curve as a result of a change in the products price.

Section 3.3, Market Equilibrium: Putting Demand and Supply Together

4. How do markets eliminate shortages? How do markets eliminate surpluses?
With a shortage, firms realize that they can raise the price without losing sales; a higher price will
increase the quantity supplied and decrease the quantity demanded which will reduce the shortage. Only
when the price rises to a price will the market be in equilibrium.

When the quantity supplied is greater than the quantity demanded, there is a surplus; when this happens,
firms will have unsold goods piling up which gives them a reason to increase their sales by cutting the
price. This will reduce the surplus. Only when the price falls to a certain price will the market be in
equilibrium.

5. Solved Problem 3.3. With a much greater demand for letters by Abraham Lincoln, how can letters by
John Wilkes Booth have a higher price?
With a much greater demand for letters by Abraham Lincoln, letters by John Wilkes Booth have a
higher price because of the situation that occurred itself. Abraham Lincoln was one of our first
presidents, but John Wilkes Booth was the man who assassinated Abraham, so it would make sense to
raise the prices of his letters because sellers know people will buy them to know what they say and
what he wrote about. This way, the market will shift right because of the difference in prices.