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UTK Notes


HW4: Homework - Ch. 4: Supply

Question 1

Answer the two questions relating to supply and the law of supply.

Hint Supply is defined as the amounts of a good sellers are willing to offer for sale at different possible prices, holding all other factors constant. What does the law of supply say?

What causes supply curves to shift? What causes movements along supply curves?

Which would cause a shift in the supply curve?

A. The demand curve shifted.
B. Buyers’ incomes changed.
C. The price of an input changed.
D. The price of a good changed.

Answer C. The price of an input changed.

What would happen if the price of kayaks increased?

A. The supply of kayaks would decrease.
B. The quantity of kayaks supplied would decrease.
C. The quantity of kayaks supplied would increase.
D. The supply of kayaks would increase.

Answer C. The quantity of kayaks supplied would increase.
Explanation A change in one of the determinants of supply causes a shift in the supply curve. These determinants include things like the cost of inputs into the production process, changes in production technology, and the number of sellers. A change in the price of the good does not change supply or shift the supply curve. A change in the price of a good causes a movement along the supply curve.

The law of supply says that as the price of a good increases, sellers are willing to offer more of the good for sale, or the quantity of kayaks supplied would increase. The opposite is true, too. As the price of a good decreases, sellers offer fewer units for sale.

Question 2

The graph contains individual supply curves for the only two firms in a hypothetical market for stuffed animals. Place the market supply curve at the correct location on the graph. Then, consider what would happen to the market if a third supplier enters the market, holding all else constant.

Hint Market supply is the total number of stuffed animals sellers are willing and able to sell at each price. Since there are only two suppliers in this market, the market supply is the sum of their quantity supplied at each price.

Question02.jpg

Answer Answer02.jpg

A third firm would mean

A. Firm 1 and Firm 2 would lower output to accommodate the new supplier in order to keep market supply constant.
B. market supply decreases.
C. market supply increases.
D. higher prices of stuffed animals.

Answer C. market supply increases.
Explanation An individual supply curve depicts the quantity supplied an individual producer will provide the market for a particular good or service at each price.

To find the market supply curve, add up what every producer is willing to sell at each price. Given that there are only two firms in the hypothetical market depicted in the graph, add together what each firm is willing to sell at the endpoints of their supply curves.

At a price of \$1 per stuffed animal, Firm 1 is willing to sell 1,000 stuffed animals and Firm 2 is willing to sell 4,000 stuffed animals. Therefore, the market supply at \$1 is $1\text{,}000\text{ stuffed animals}+4\text{,}000\text{ stuffed animals}=5\text{,}000\text{ stuffed animals}$

At a price of \$8 per stuffed animal, Firm 1 is willing to sell 3,000 stuffed animals and Firm 2 is willing to sell 6,000 stuffed animals. Therefore, the market supply at \$8 is $3\text{,}000\text{ stuffed animals}+6\text{,}000\text{ stuffed animals}=9\text{,}000\text{ stuffed animals}$

An increase in the number of suppliers increases the total number of stuffed animals supplied at every price. Another way of saying this is that market supply increases. Graphically, market supply shifts to the right.

Question 3

The accompanying graph represents the supply of printer ink cartridges. The current price of ink (per cartridge) is \$20 and indicated by the point on the supply curve. Suppose the price of cartridges increases to \$24. Illustrate on the graph how the market for Ink Cartridges changes.

Hint What is the difference between a shift in the supply curve and movement along a supply curve?

Question03.jpg

Answer Answer03.jpg

The ________ of ink cartridges has ________ by ________ billion.

A. quantity supplied
B. supply

A. increased
B. decreased

A. 7
B. 3
C. 2
D. 5 E. 4

Answer The A. quantity supplied of ink cartridges has A. increased by C. 2 billion.
Explanation A change in the price of a good causes movement along the supply curve, not a shift in the supply curve. In this case, the suppliers were originally supplying 5 billion cartridges at \$20 per cartridge; now they will supply 7 billion cartridges at \$24 per cartridge.

A shift in the supply curve, or change in quantity supplied at any price, occurs when something besides price changes. For example, more producers enter the market or the cost of an input into the production process changes.

Question 4

For each of the scenarios indicate what happens in the market for tablet computers.

Hint What factors shift the demand curve? What factors shift the supply curve?

A. If a tsunami wipes out a warehouse containing thousands of tablet computers, the ________ tablet computers will ________.

A. supply of
B. demand for

A. rise
B. fall

Answer If a tsunami wipes out a warehouse containing thousands of tablet computers, the A. supply of tablet computers will B. fall.

B. Suppose the price of gorilla glass, the material used to make tablet screens, drops by 50%. The ________ of tablet computers will ________.

A. supply of
B. demand for

A. rise
B. fall

Answer Suppose the price of gorilla glass, the material used to make tablet screens, drops by 50%. The A. supply of tablet computers will A. rise.

C. Due to the portability and light weight of tablets, more students are using them instead of conventional laptops. The ________ of tablet computers will ________.

A. supply of
B. demand for

A. rise
B. fall

Answer Due to the portability and light weight of tablets, more students are using them instead of conventional laptops. The B. demand for tablet computers will A. rise.

D. If netbooks—small, lightweight laptops that are substitutes for tablets—fall in price, the ________ of tablet computers will ________.

A. supply of
B. demand for

A. rise
B. fall

Answer If netbooks—small, lightweight laptops that are substitutes for tablets—fall in price, the B. demand for tablet computers will B. fall.
Explanation Demand is affected by various factors including an individuals' income, the price of related goods, personal tastes, expectations, and the number of buyers. When tastes shift towards a new product, like students using tablets more than traditional laptops, demand shifts rightward or increases. When the price of netbooks, a substitute for tablets, decreases, more students will likely buy them instead of tablets, making demand for tablets shift to the left.

Supply is influenced by similar factors including input prices, technology changes, expectations, and the number of sellers. When gorilla glass prices decline, it means the screens used to produce the tablets become cheaper, allowing more to be produced, increasing supply. The number of sellers also affects the market so when a tsunami wipes out a large warehouse of tablets, the total number of tablets decreases significantly, and thus the physical total able to be supplied decreases.

Question 5

The law of supply explains

A. the positive relationship between price and quantity supplied.
B. the positive relationship between price and quantity demanded.
C. the negative relationship between price and quantity supplied.
D. the negative relationship between price and quantity demanded.

Hint How would price changes impact a seller's decision about how much to produce?
Answer A. the positive relationship between price and quantity supplied. The law of supply explains the positive relationship between price and the quantity sellers are willing and able to produce.

Increases in price increase the profitability to the seller. As a result, this leads to an increase in the quantity sellers are willing and able to produce and bring to market.

Question 6

For each scenario, determine whether the resulting changes will affect the supply curve, the demand curve, or both.

Hint Consider whether each scenario affects the cost of production (the supply curve) or the quantity that consumers are willing and able to purchase (the demand curve).

The price of goose feathers, an input for pillows, increases sharply. In the market for pillows,

A. the demand curves shifts.
B. both curves shift.
C. the supply curve shifts.

Answer C. the supply curve shifts.

Researchers develop a higher yielding, insect-repellant strain of rice. In the market for rice,

A. the demand curves shifts.
B. both curves shift.
C. the supply curve shifts.

Answer C. the supply curve shifts.

Michael is fired from his job after working there for over 20 years, and eats out less as a result. In the market for restaurants,

A. the demand curves shifts.
B. both curves shift.
C. the supply curve shifts.

Answer A. the demand curves shifts.
Explanation Changes in input prices directly affect the cost of production, which is represented by the supply curve. When goose feathers become more expensive, the supply curve shifts to the left.

The innovation of an insect-repellant strain of rice leads to a higher yield. This is represented by a right shift of the supply curve.

Michael's decision to eat out is one contribution to the demand curve for restaurants. Michael choosing to eat out less often can be thought of as a reduction in the number of consumers. This is represented as a left shift of the demand curve.

Question 7

Classify each scenario according to whether the change in quantity is caused by a shift of the supply curve or movement along it.

Question07.jpg

Hint Many variables impact supply, but only one impacts quantity supplied. Consider which two variables are related along a supply curve.
Answer Answer07.jpg Shifts of a supply curve reflect changes in the quantity supplied of a particular good at all prices. There are multiple reasons why a supply curve might shift. Some of the more common include a change in technology or in the number of producers in a market, as exemplified by tuna extraction processes and Amplitude joining the phone market.

Movements along a supply curve, on the other hand, reflect changes in the quantity supplied of a product as a result of price changes. The soap producers, and gold and silver suppliers alter the quantity of their respective products supplied in response to price changes. In the market for construction workers, the wage is the price. Higher wages draw more workers to Toronto, which is a movement up along the construction worker supply curve.

Quesiton 8

Determine how each scenario will impact either supply or demand in the given market.

Hint What factors cause shifts in the demand and supply curves, respectively?

The price of goose feathers, an input for pillows, increases sharply. In the market for pillows,

A. the supply curve changes.
B. the demand curve changes.

Answer A. the supply curve changes.

Researchers develop a higher-yielding, insect-repellant strain of rice. In the market for rice,

A. the supply curve changes.
B. the demand curve changes.

Answer A. the supply curve changes.

During the Great Recession, the average income for an American worker fell sharply. During that time, families began preparing more of their own meals. In the market for meals from restaurants,

A. the supply curve changes.
B. the demand curve changes.

Answer B. the demand curve changes.

Spam unveils a new flavor, barbeque, which has students intrigued. The students transition from buying ham to Spam. In the market for Spam,

A. the supply curve changes.
B. the demand curve changes.

Answer B. the demand curve changes.

iDecide, a consulting firm, joins the market for accounting. In the market for accounting services,

A. the supply curve changes.
B. the demand curve changes.

Answer A. the supply curve changes.
Explanation

There are a number of reasons why the demand curve can shift. Among them are:

  • Income changes.    
      Holding all else equal, if consumers' incomes change, then the demand curve will shift. For example, if incomes fall, people tend to eat out at restaurants less and instead cook at home. In the market for restaurants, this means that the demand for restaurant meals falls. The direction of the shift is dependent on whether the good is normal or inferior.
    •  
  • Tastes change.    
      As strange a meat as it is, when Spam introduces a new flavor, people are enticed to try it. This results in a shift to the right of the demand curve.
    •  
  • The prices of substitutes and complements change.    
      If the price of one substitute increases, the demand for the other increases by definition. For example, hair gel and hair wax are substitutes. Consumers usually use one product or the other, not both, so if the price is increased on one, the demand for the other would likely go up. A decrease in price of one good can lead consumers to buy another good; this is called a complement, an example of which is spaghetti and pasta sauce. Complements make logical sense to be consumed together, and as demand increases for one good, so does the demand for the other.

There also many reasons why the supply curve shifts. Among them are:

  • The number of producers changes.    
      More producers means more people who can supply a certain good or service. Here, iDecide adds another company to the consulting market, which gives consumers more choice as to who they want their consultants to be.
    •  
  • Technology changes.    
      Better technology reduces the cost of producing a good or service, and lower costs make producers more inclined to supply more of their good or service. Here, research has developed a better-yielding and more resilient strain of rice, which would make farmers more inclined to supply the rice at any price.
    •  
  • Input prices change.    
      Inputs are goods or services used to produce other goods or services. Changes in their prices directly impact the other goods and services later down the line. Here, when the price of feathers rises, pillows become more costly to make, which decreases the supply.

Quesiton 9

Below is the market for hair conditioner. Draw the total producer surplus (PS) on the graph using the shaded area labelled PS.

Question09.jpg

Hint Think about the gain to the producers. What is this gain? How is it calculated? How do you translate an individual gain to an individual producer to that of the market?
Answer Answer02.jpg The individual producer surplus is the difference between the price a producer receives for a good and their cost, whereas the total producer surplus represents the sum of all surpluses for all the individual producers of hair conditioner.

The market price is determined by the equilibrium point between the supply and demand curve. The supply curve denotes the costs to all the individual firms. Hence, the total producer surplus is the area above the supply curve up to the market price (a triangle, in this case). More specifically, the first point of this triangle is the equilibrium point, the second point of the triangle is the market price on the y axis and the third point can be found by following the second point down the y axis to where it meets the supply curve.

Question 10

Alice, Amber, and Andi make and sell pottery. Alice is willing to sell a 5 inch pot for \$35, Amber is willing to sell a 5 inch pot for \$38, and Andi is willing to sell a 5 inch pot for \$68.

Hint Producer surplus is the difference between the willingness to sell and the price received.

If each of the ladies is able to sell one 5 inch pot for \$70, what is their combined producer surplus?

combined producer surplus: \$ ________.

Answer The combined producer surplus is \$69.

If the price of a 5 inch pot is \$45, what is the combined producer surplus?

A. Alice, Amber, and Andi
B. Alice only
C. Andi only
D. Alice and Amber

Answer D. Alice and Amber
Explanation Producer surplus is the difference between the willingness to sell and the price received. Because Alice is willing to sell her pots for \$35, her producer surplus is \$35 if she sells a pot for \$70. Amber is willing to sell her pot for \$38 , but she actually sells it for \$70, so her producer surplus is \$32. Andi is willing to sell her pot for \$68, but she actually sells it for \$70, so her producer surplus is \$2. Added together, the total producer surplus is \$69.

Alice: \$70 − \$35 = \$35

Amber: \$70 − \$38 = \$32

Andi: \$70 − \$68 = \$2

total producer surplus: \$35 + \$32 + \$2 = \$69

At \$45 per pot, only Alice and Amber will sell their pots. Andi is only willing to sell if the price is $68 or greater.

Question 11

Hint All else equal, higher prices produce more producer surplus and less consumer surplus. How are price, supply, and demand related in identifying producer surplus and consumer surplus?

A. Producer surplus is the difference between

A. the market price and the minimum price a seller is willing to accept.
B. the market price and the minimum price a buyer is willing to pay.
C. the maximum price a seller is willing to accept and the market price.
D. the maximum price a buyer is willing to pay and the market price.

Answer A. the market price and the minimum price a seller is willing to accept.

B. Producer surplus is shown graphically as the area

A. above the supply curve and below the market price.
B. under the demand curve and below the market price.
C. under the demand curve and above the market price.
D. above the supply curve and above the market price.

Answer A. above the supply curve and below the market price.
Explanation The price a firm receives for a product is generally above the price it is willing to accept, i.e., its marginal cost. The difference between these two is producer surplus—a measure of the net benefit a producer receives when it sells a product.

The height of the supply curve represents the lowest price firms can accept for their product. The price they actually receive is the equilibrium or market price. Therefore, shown graphically, producer surplus is the area under the market price and above the supply curve.