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Chapter 2

Demand and Supply: The Basics of the Market Economy

Chapter Outline

Alternate Lecture Outline

o Prices, Buyers and Sellers  Local, National, and Global Markets  The Market Price o How Price Affects the Quantity Demanded  The Law of Demand  The Special Case of Zero Price  Our First Graph o How Price Affects the Quantity Supplied  The Law of Supply  Graphing the Supply Schedule o New Markets

o Prices, Buyers and Sellers  The Market Price o How Price Affects the Quantity Demanded  The Law of Demand  The Special Case of Zero Price o How Price Affects the Quantity Supplied  The Law of Supply o How Price Affects the Quantity Demanded  Our First Graph o How Price Affects the Quantity Supplied  Graphing the Supply Schedule o Prices, Buyers and Sellers  Local, National, and Global Markets o New Markets

Potential Stumbling Blocks Students might have difficulty correctly using the words “demand” and “supply”. Remind them that these words refer to the relationships between price and quantity. This will become more important in the next chapter, when they put supply and demand together. As you are probably well aware, many students are uncomfortable with graphing. Beginning with a demand or supply schedule is a helpful way to ease students into the demand and supply curves, as information on a table is often more easily understood by students. Finally, make sure that students know that any time you construct a demand or supply schedule or curve, it relates to a specific good, a specific group of buyers, and a specific time frame. Each can be defined as narrowly or broadly as needed. For example, you could speak of the demand for apples for Cook County, Illinois, for 2007, or the demand for Fuji apples in Hyde Park in June 2007, etc. Additional Resources


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The New York Times ran an opinion piece on the proposed “summer gasoline tax holiday” that was being much discussed by U.S. Presidential candidates in the spring of 2008. In it, the author clearly confuses the terms “demand” and “quantity demanded”. This kind of confusion leads to an awful (and unrealistic) price cycle: prices go down, which increases demand, which causes prices to go up. A Washington Post story on the same issue makes the same error. http://www.nytimes.com/2008/05/04/us/politics/04economy.html http://www.washingtonpost.com/wp-dyn/content/article/2008/04/30/AR2008043003575.html Answers to “Hot News” Questions 1. a. The buyers in this market are those people who want to drive their cars in midtown Manhattan. Many of them likely work in Manhattan or, possibly, drive for a living as a courier or delivery person. b. The buyers are purchasing the right to be able to drive in midtown Manhattan. 2. a. In 2004, the average price of oil was $36.77 per barrel, and there were 1,192 rotary rigs in use in the U.S. b. In 2005, the average price of oil was $50.28 per barrel, and there were 1,383 rotary rigs in use in the U.S. c. Yes, they do, because as the price of oil increased, there were more rotary rigs in use in the U.S., which will be linked to an increase in the quantity of oil supplied. d. See the graph below.

e. From 1998 to 1999, the price of oil increased, but the number of rigs decreased. From 2000 to 2001, the price of oil decreased, but the number of rigs increased. From 2001 to 2002, the price of oil increased, but the number of rigs decreased. All of the other years followed the law of supply.


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f. Rotary rigs are likely very expensive to make, buy, and put into operation, so it may be that it is very hard to increase the number of rigs very quickly. More importantly, though, there are only so many places in the U.S. where oil can be drilled. In order to drill for oil, you need to own land that is likely to have oil underneath it. Finally, laws may limit who can drill, where they can drill, how they can drill, etc. Answers to End-of-Chapter Problems 1. a. b. c. d. e. f. g. h. i.

False. True. False. True. False. False. True. True. False.

2. a. The family members are buyers in this market. b. The person getting the haircut is a buyer in this market. c. This cook is selling his services in the labor market, though many typical folks purchase the things he cooks. d. This person is a buyer in this market, but will very probably eventually become a seller in this market. e. This person could either be a buyer (if he or she just purchased the used car) or a seller (if he or she is looking to get rid of the used car). 3. a. Local – this service is usually produced and purchased locally. b. Global – people come from all over the world. c. National – most people flying between San Francisco and New York probably live in one of those two cities, though this good can be purchased from anywhere on the planet. d. Local – though you could browse these homes online from anywhere in the world, the transaction will take place in Dallas. e. Global – this is given away in the question. 4. a. The opportunity cost is in the form of time. You do not talk on the phone for infinite time because many other activities (like being in class, going to the movies, and sleeping) cannot be done at the same time as talking on the phone.


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b. In addition to time and forgone other activities (as in part A), the opportunity cost could be that when you drink coffee, you take up room in your stomach that you could fill with other foods that you enjoy. Eventually, you will have had enough coffee to satisfy your craving and you may want some real food. Also, as the book points out, all of that caffeine can’t be good for you. c. The opportunity cost here is primarily time. Time spent watching television is rarely spent also engaged in other more productive activities, because watching television requires one’s attention. Consuming an infinite amount of television means not bathing, working, studying, sleeping, or having a conversation that lasts longer than a commercial break. 5. a. Volume discount. b. Answers may vary. Best is volume discount—free meal because you’ve already purchased a certain number (one) of airline tickets. c. Volume discount. d. Negotiated price. e. Sale price. 6. a. Six times. b. Twenty-five times. c. This reflects the law of demand, because when the price is lower ($3), the family goes to the restaurant more times per month. d. See the graph to the right. e. Perhaps at this price, there are very few other options for feeding the entire family dinner for any less. If the price is $6, for example, it may still be cheaper (though more timeconsuming) to cook some meals. However, if the price is $3, maybe going out to eat is not only easier, but also cheaper, than cooking dinner. f. See the graph to the right.

7. a. Seven.


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b. One. c. These reflect the law of supply, because as the price fell, the quantity decreased. d. See the graph to the right.

8. Student answers to this question may vary, but will likely involve some technology that did not exist 20 years ago. Quiz Answer Key 1 – C, 2 – C, 3 – A, 4 – D, 5 – B, 6 – D, 7 – B, 8 – B, 9 – A, 10 – D


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Chapter 2 Quiz

Name: ________________________________ Date: ___________

1. Which of the following goods or services is 6. Suppose a local bowling alley offers a most likely to be bought and sold in a local membership program where games are free to market? those who pay a monthly membership fee. a) Textbooks Which of the following statements is true b) Magazine subscriptions regarding how many games members will bowl c) Dog grooming per month? d) Precious metals a) Members will bowl as many games as they have time for. 2. Suppose that a house is listed for sale at b) Members will bowl as many games as they $250,000. What can be said about the price that can until they are physically unable to bowl a homebuyer eventually pays for the house? anymore. a) The homebuyer will pay $250,000 since c) Members will bowl as many games as they this is the market price for the house. would have in the absence of a b) If the homebuyer waits for a sale, he or she membership program. may be able to buy the house for less. d) Members will bowl as many games as it c) Through negotiation, it is likely that the takes so that additional games no longer homebuyer will either pay less for the make them happier than other things they house, or have some additional items added could spend their time doing. to the purchase. d) If the homebuyer buys enough homes, he 7. What is the best way to investigate a or she may qualify for a volume discount, consumer’s demand behavior? and pay less for the house. a) Mail her a survey. b) Observe her buying behavior. 3. What are the two variables shown in a demand c) Subject her to psychological evaluations. schedule? d) Interview her in person. a) Price and Quantity Demanded b) Market Price and Sales Price 8. A supply curve is: c) Individual Quantity Demanded and Market a) downward-sloping. Quantity Demanded b) a graphical representation of the d) Demand and Supply information in a supply schedule. c) always a straight line. 4. What does the Latin phrase ceteris paribus d) All of the above. mean? a) Buyer beware. 9. The market supply schedule: b) And so on. a) combines the quantity supplied by all of c) Led by an invisible hand. the businesses in a market. d) All other things equal. b) has as many columns as the market does businesses. 5. The Law of Demand c) relates quantity demanded and supplied. a) is always and everywhere true. d) does not initially exist in new markets. b) describes a general tendency that is true in most normal situations. 10. Why do new markets arise? c) only applies to the goods and services that a) New technologies buyers want most. b) Changing needs of consumers d) has been repeatedly discredited. c) Increased incomes of developing nations d) All of the above.


Solution manual economics 1st edition michael mandel