Term: / Due:
Exercises for Gwartney, Stroup, Sobel, and Macpherson, Chapter 3, “Supply, Demand, and the Market Process.”
You will work through three workbooks. The first introduces demand, the second supply, and the third the market process.
Open the workbook GSSM3_demand.xls.The bold names before the descriptive material below is the name of the sheet to which you are to refer when answering a question.
Individuals and Market. This spreadsheet shows how the market demand curve is derived from individuals' demand. The horizontal distance from the vertical (price) axis shows the quantity that Chris and Dean are willing and able to purchase at each price. Adding these two quantities results in a market demand curve. The process is the same when the number of people are in the millions.
- This sheet does not have a counterpart in the text It is here for your information You need not answer any questions related to this sheet
Individuals and Market(2). This spreadsheet shows the market quantity demanded and the quantity demanded by Chris and Dean for any given price. Each of the two buys more when the price falls, so the quantity demanded in the market increases when price decreases. Both the individual demand curves and the market demand curve obey the law of demand.
- This sheet does not have a counterpart in the text It is here for your information You need not answer any questions related to this sheet
A Demand Curve. This spreadsheet shows different price quantity combinations along a demand curve. Other things constant, as the price increases, consumers are willing and able to demand a lower quantity. This is the “Law of Demand.” This “demand curve” differs from the one in the text in that it is linear. The functional form does not matter for anything considered in this chapter. This corresponds to Exhibit 1 in the text.
1. According to the text, what behavior on the part of consumers accounts for the Law of Demand?
2.By how many units does the quantity demanded change per one dollar change in the price of this good? Show a computation.
Changed Quantity. This spreadsheet shows how the quantity demanded responds to a change in price of the good. By using the scroll bar, you can see the quantity for each price between $0 and $300, in increments of $10. This corresponds to Exhibit 1 in the text.
3. Use the scroll bar to examine how quantity demanded changes as the price goes up or down. Choose two prices and record the resulting quantities. Calculate Q/P (see page 25 for notation).
Consumer Surplus. Consumer Surplus is the difference between what consumers are willing and able to pay for a unit of a good and what they must pay to get that unit. For all units for which the amount consumers are willing and able to pay exceeds the price, they will buy the units and will receive surplus value. For the “marginal” unit price equals what some consumer is willing and able to pay; for this unit, the consumer is indifferent between buying it or not. The area between the amount consumers are willing and able to pay (the height of the demand curve) and the price is the Consumer Surplus. This corresponds to Exhibit 2 in the text.
4Click on the cell beneath the “Click below for price” instruction Select a price. Record the resulting quantity and Consumer Surplus. Select a second price, and record the resulting quantity and Consumer Surplus.
P1 = _____Q1 = _____CS1 = _____
P2 = _____Q2 = _____CS2 = _____
Elasticity. Elasticity is a measure the responsiveness of quantity demanded to price. At this point, the computation of elasticity is not important Just realize that a larger value mean “more elastic.” The sheet allows you to choose an elasticity value and it shows you how much the quantity demanded changes when price increases from $150 to $200 per unit. The curves are constructed so that for each one Q = 30 when P = $150. This corresponds to Exhibit 3 in the text.
5Select two values by clicking on the cell below the “Click below to select elasticity” instruction. Record the change in quantity. In the table below E1 is the first elasticity value that you choose, and E2 is the second value.
For E1, when P = $200, Q = ______. Over the price range $150 to $200, Q/P = ______.
For E2, when P = $200, Q = ______. Over the price range $150 to $200, Q/P = ______.
Changed Demand. This spreadsheet shows how the demand curve responds to a change in any of the determinants of demand other the good’s own price. The quantity demanded at each price becomes different from the values on the initial demand curve. This corresponds to Exhibits 4 and 5 in the text.
6. Use the scroll bar to examine how the demand curve shifts. The initial demand curve P-intercept is 300. (The P-intercept is the price at which Q = 0.) The new P-intercept is ______. Identify some factors that might cause a shift in this direction. Refer to the text, pages 64.
Changed Demand (2). This spreadsheet shows how the quantity demanded at each price responds to a change in any the determinants of demand other than the good’s own price. It shows the quantity demanded at a specified price with the initial demand curve and with the new demand curve. This corresponds to Exhibits 4 and 5 in the text.
7.Shift the demand curve as you did in question number 3. Compare the quantity demanded at the initial price as indicated by the initial and the new demand curve. Use the scroll bar to choose a price. The price is ______. At that price the quantity demanded on the initial demand curve is ______; on the new demand curve, the quantity demanded is ______.
Demand Shifters. This spreadsheet shows three of the determinants of demand. A change in any of these shifts the demand curve. This corresponds to Exhibits 4 and 5 in the text.
6.Use the scroll bars to determine how changes in the determinants of demand affect the position of the demand curve.
a.Increasing the price of a substitute good shifts the demand curve to the ______(right/left).
b.Increasing the price of a complementary good shifts the demand curve to the ______(right/left).
c.Decreasing the income level shifts the demand curve to the ______(right/left).
Refer to GSSM3_supply.xls” in answering the questions below.
Individuals and Market. This spreadsheet shows how the market supply curve is derived from individuals' supply decisions. The horizontal distance from the vertical (price) axis shows the quantity that Kelley and Lee are willing and able to sell at each price. Adding these two quantities results in a market supply curve. The process is the same when the number of sellers are in the thousands.
- This sheet does not have a counterpart in the text It is here for your information You need not answer any questions related to this sheet
Individuals and Market(2). This spreadsheet shows the market quantity supplied and the quantity supplied by Kelley and Lee for any given price. Each of the two offers to sell more when the price increases, so the quantity supplied in the market increases when price increases. Both the individual supply curves and the market supply curves obey the law of supply.
- This sheet does not have a counterpart in the text It is here for your information You need not answer any questions related to this sheet
A Supply Curve. This spreadsheet shows different price quantity combinations along a supply curve. Other things constant, as the price increases, the supplier chooses to supply a higher quantity.
7.By how many units does the quantity demanded change per one dollar change in the price of this good? Show a computation.
Producer Surplus.
Changed Quantity. This spreadsheet shows how the quantity supplied responds to a change in price of the good.
8.Use the scroll bar to examine how quantity supplied changes as the price goes up or down. Choose two prices and record the resulting quantities. Calculate Q/P (see page 25 for notation).
Producer Surplus. Producer Surplus is the difference between what sellers are willing and able to accept for a unit of a good and what they are paid for that unit. For all units for which the amount producers are willing and able to accept is lower than the price, they will sell the units and will receive surplus value. For the “marginal” unit price equals what some producer is willing and able to accept; for this unit, the producer is indifferent between selling it or not. The area between the amount producers are willing and able to accept (the height of the supply curve) and the price is the Producer Surplus. This corresponds to Exhibit 7 in the text.
4Click on the cell beneath the “Click below for price” instruction Select a price. Record the resulting quantity and Producer Surplus. Select a second price, and record the resulting quantity and Producer Surplus.
P1 = _____Q1 = _____PS1 = _____
P2 = _____Q2 = _____PS2 = _____
Elasticity. Elasticity is a measure the responsiveness of quantity supplied to price. At this point, the computation of elasticity is not important Just realize that a larger value mean “more elastic.” The sheet allows you to choose an elasticity value and it shows you how much the quantity demanded changes when price increases from $150 to $200 per unit. The curves are constructed so that for each one Q = 30 when P = $150. This corresponds to Exhibit 8 in the text.
5Select two values by clicking on the cell below the “Click below to select elasticity” instruction. Record the change in quantity. In the table below E1 is the first elasticity value that you choose, and E2 is the second value.
For E1, when P = $200, Q = ______. Over the price range $150 to $200, Q/P = ______.
For E2, when P = $200, Q = ______. Over the price range $150 to $200, Q/P = ______.
Changed Supply. This spreadsheet shows how the supply curve responds to a change in any of the determinants of supply other the good’s own price. This corresponds to Exhibit 9 in the text.
10. Use the scroll bar to examine how the supply curve shifts. The initial supply curve Y-intercept (called min. price in the worksheet) is 60. The new Y-intercept is ______. What might cause this shift?
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11.Shift the supply curve as you did in question number 10. Compare the quantity supplied at the initial price as indicated by the initial and the new supply curve. Use the scroll bar to choose a new price. The new price is ______. What happens to the quantity supplied as indicated by the new supply curve?
Supply Shifters. This spreadsheet shows the determinants of supply other than the good’s own price. These are factors that shift the supply curve. This corresponds to Exhibit 9 in the text.
12.Use the scroll bars to determine how changes in the determinants of supply affect the position of the supply curve.
a.An increased wage rate causes the supply curve to shift to the ______(right/left); that is, it causes supply to ______(decrease/increase).
b.Improved technology (increase in the “technology” coefficient) causes the supply curve to shift to the ______(right/left); that is, it causes supply to ______(decrease/increase).
c.An decreased number of potential sellers (maybe due to regulation) causes the supply curve to shift to the ______(right/left); that is, it causes supply to ______(decrease/increase).
Refer to “GSSM3_market.xls” in answering the questions below.
Demand and Supply. This spreadsheet shows the demand curve and the supply curve from the previous workbooks.
No question for this sheet.
Equilibrium. This spreadsheet shows how the demand and supply curves determine the equilibrium price and quantity. If the price is above the equilibrium price, the quantity that sellers are willing and able to provide exceeds the quantity that buyers are willing and able to purchase. The resulting surplus will put downward pressure on the price, pushing it back toward the equilibrium. Likewise, if the price falls below the equilibrium price, the quantity demanded exceeds the quantity supplied. The resulting shortage pushes the price back toward the equilibrium price. This sheet provides the point of departure for the remainder of the sheets in the workbook.
No question for this sheet.
Disequilibrium. This spreadsheet shows quantity demanded and quantity supplied at prices other than the equilibrium price. Demand and Supply are the same as in the previous workbook, but the price is not the one that results in equality of the quantity demanded and the quantity supplied.
13.Choose a price below the equilibrium price. If the price is $_____, then the quantity demanded is ______units while the quantity supplied is ______units. Thus, this price results in a shortage of ______units.
14.Choose a price above the equilibrium price. If the price is $_____, then the quantity demanded is ______units while the quantity supplied is ______units. Thus, this price results in a surplus of ______units.
Efficiency. The area between the horizontal price line and the demand curve is Consumer Surplus. The area between the horizontal price line and the demand curve is Producer Surplus. Market forces result in a price/quantity combination such that the sum of Consumer Surplus and Producer Surplus is as large as possible. Other prices could result in either more Consumer Surplus or more Producer Surplus, but the total would be diminished.
15.Use the area formula, A = ½(base x height) to determine the values of Consumer Surplus and Producer Surplus given the demand and supply curves in this sheet. Consumer Surplus = $______. Producer Surplus = $______.
Shifts. This spreadsheet shows how shifting the demand and/or the supply curves affects the equilibrium price and quantity.
16.Increase demand by increasing the price at which the quantity demanded equals zero. The demand curve shifts to the ______(right/left). The new price is $______. The quantity demanded on the new demand curve is ______units. The higher price causes a movement along the unchanged supply curve such that the new quantity supplied is ______units.
17.Reset the demand curve to its original position. Increase supply by decreasing the price at which the quantity supplied equals zero. The supply curve shifts to the ______(right/left). The new price is $______. The quantity supplied on the new supply curve is ______units. The higher price causes a movement along the unchanged demand curve such that the new quantity supplied is ______units.
SupplyShifts_SR&LR. This sheet shows the effect of a shift in the supply curve in the short run and in the long run. In the short run, the demand curve is relatively inelastic (steeper). In the long run, buyers have more time to find substitutes for the good, and the demand curve becomes more elastic (flatter).
18.a.Shift the supply curve to the right (increase supply). The equilibrium price in the short run is ______, and the equilibrium quantity in the short run is ______. The equilibrium price in the long run is ______, and the equilibrium quantity in the long run is ______.
b.Shift the supply curve to the left (decrease supply). The equilibrium price in the short run is ______, and the equilibrium quantity in the short run is ______. The equilibrium price in the long run is ______, and the equilibrium quantity in the long run is ______.
DemandShifts_SR&LR. This sheet shows the effect of a shift in the demand curve in the short run and in the long run. In the short run, the supply curve is relatively inelastic (steeper). In the long run, sellers have more time to adjust to the price change. Part of this adjustment might be new sellers coming into the market if demand increases, and leaving the market if demand decreases. Thus, the supply curve becomes more elastic (flatter) with the passage of time.
19.a.Shift the demand curve to the right (increase demand). The equilibrium price in the short run is ______, and the equilibrium quantity in the short run is ______. The equilibrium price in the long run is ______, and the equilibrium quantity in the long run is ______.
b.Shift the demand curve to the left (decrease demand). The equilibrium price in the short run is ______, and the equilibrium quantity in the short run is ______. The equilibrium price in the long run is ______, and the equilibrium quantity in the long run is ______.
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