ECON-2120 Lecture Notes - Lecture 2: Comparative Advantage, Absolute Advantage, Demand Curve

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23 Jan 2017

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Supply & Demand

● Demand: a demand curve slopes downward, indicating that as price falls, the

quantity demanded increases

● There are 2 reasons the demand curve slopes down:

1. Income Effect

a. Suppose apples are currently priced at Pa = $2. I spend $30 a week

on apples, so that I buy 15 apples per week. Now suppose the

price rises to Pa = $3. On my $30 budget, I can now only afford 10

apples per week. I effectively have a lower income, since my

purchasing power fell.

2. Substitution Effect

a. Now suppose I have another $30 I spend each week on oranges,

priced at Po = $6, so I buy 5 each week. When Pa rose from $2 to

$3, I might only buy 8 apples, and spend the remaining $6 on

additional orange.

● Supply: A supply curve is upward sloping to indicate that as price rises, quantity

supplied rises

● Equilibrium Price (P*): The price at which quantity demanded equals quantity

supplied

○ At P*, Qs = Qd = Q*

○ There is so excess of the good, and nobody who is willing to pay P* is left

wanting

○ At P^H, G^Hs > Q^Hd, so there is no excess supply

Chapter 2 - Comparative Advantage & The Power of Trade

1. Trade helps when tastes differ

a. Trading halloween candy

b. Trading in pro sports (needs differ)

2. Specialization

a. Nobody is good at everything

b. Being proficient is costly

3. Increase production through comparative advantage

a. Comparative advantage: a country has a comparative advantage in

producing a good (x) if it can produce “x” at a lower opportunity cost (in

terms of producing other goods) than other countries

b. A country has absolute advantage in x if it produces x at a lower

resource cost than other countries

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Document Summary

Demand: a demand curve slopes downward, indicating that as price falls, the quantity demanded increases. There are 2 reasons the demand curve slopes down: income effect, suppose apples are currently priced at pa = . I spend a week on apples, so that i buy 15 apples per week. Now suppose the price rises to pa = . On my budget, i can now only afford 10 apples per week. I effectively have a lower income, since my purchasing power fell: substitution effect, now suppose i have another i spend each week on oranges, priced at po = , so i buy 5 each week. , i might only buy 8 apples, and spend the remaining on additional orange. Supply: a supply curve is upward sloping to indicate that as price rises, quantity supplied rises. Equilibrium price (p*): the price at which quantity demanded equals quantity supplied. At p*, qs = qd = q*

Related Questions

1. Suppose the supply curve with no quota is

Q No Quota=-10 + 0.5p

and the market supply with a quota is

Q Quota=0.5 + 0.25p.

Output (Q) is in thousands of units.

Assuming an inverse demand curve of p = 80-2Q, what will be the effect of a binding quota on equilibrium price and quantity?

A. Price rises by $2.67 and output falls by 1.33 thousand.

B. Price falls by $5 and output falls by 2 thousand.

C. Price falls by $1.33 and output rises by 2.67 thousand.

D. Price rises by $5 and output falls by 2 thousand.

E. Price falls by $3 and output rises by 1.25 thousand.

F. Price rises by $5 and output rises by 2 thousand.

Which of the following is true?

A. The elasticity of supply varies only along the upward-sloping linear supply curves.

B. The elasticity of supply varies along most supply curves.

C. The elasticity of supply is constant along most supply curves.

D. None of the above.

A. When I> 1, supply is considered elastic.

B. When 0<I< 1, supply is considered inelastic.

C. When I = 1, supply is considered unit elastic.

D. All of the above.

E. None of the above.

yellowox78

QUESTION 1

The demand for oranges increases while the supply decreases. The equilibrium price of oranges ________, and the equilibrium quantity ________.

		falls; increases
		falls; perhaps changes but we can't say if it increases, decreases, or stays the same
		rises; decreases
		rises; perhaps changes but we can't say if it increases, decreases, or stays the same

1 points

QUESTION 2

Assume a competitive market is in equilibrium. There is an increase in demand, but no change in supply. As a result the equilibrium price ________, and the equilibrium quantity is ________.

		rises; increases
		falls; decreases
		falls; does not change
		rises; does not change

1 points

QUESTION 3

Bagels and cream cheese are complementary goods. Suppose that the price for flour, which is used to produce bagels, increases. The equilibrium price of cream cheese ________ and the equilibrium quantity of cream cheese ________.

		does not change; does not change
		rises; increases
		falls; decreases
		rises; decreases

1 points

QUESTION 4

If consumers buy a large number of plug-in electric cars, the equilibrium price of electricity will ________ and the equilibrium quantity of electricity will ________.

		rise; increase
		rise; decrease
		fall; increase
		fall; decrease

1 points

QUESTION 5

Which of the following shifts the supply curve for oranges?

		an increase in income for all orange consumers if oranges are a normal good
		disastrous weather that destroys about half of this year's orange crop
		an increase in the price of bananas, a substitute in consumption for oranges
		a newly discovered increase in the nutritional value of oranges

1 points

QUESTION 6

Which of the following shifts the supply curve of rutabagas rightward? (A rutabaga is a potato-like vegetable.)

		normal goods in production.
		an exceptionally cold summer that killed much of the rutabaga crop.
		a fall in the price of fertilizer used to grow rutabagas.
		an increase in the price of a rutabaga

1 points

QUESTION 7

Suppose over the next several years the productivity of firms producing electric cars improves dramatically. The advance in productivity leads to

		an increase in the supply electric cars so that the supply curve shifts rightward.
		an increase in the supply of electric cars so that the supply curve shifts leftward.
		a decrease in the supply of electric cars so that the supply curve shifts rightward.
		a decrease in the supply of electric cars so that the supply curve shifts leftward.

1 points

QUESTION 8

Hot dogs and hot dog buns are complements. If the price of a hot dog falls, then

		the demand for hot dogs will increase.
		the demand for hot dog buns will decrease.
		the quantity demanded of hotdogs will decrease.
		the demand for hot dog buns will increase.

1 points

QUESTION 9

Demand curves slope ________ because as the price increases and other things remain the same, the quantity demanded ________.

		upward; increases
		downward; decreases
		upward; decreases
		downward; increases

1 points

QUESTION 10

Water bottlers announce that next month the price of bottled water will rise by 25 percent. Which of the following occurs immediately?

		The quantity of bottled water demanded increases.
		The demand for bottled water increases.
		The quantity of bottled water demanded decreases.
		The demand for bottled water decreases.

1 points

QUESTION 11

If the price of carrots is below the equilibrium price, the

		quantity supplied of carrots exceeds the quantity demanded and a shortage exists.
		quantity demanded of carrots exceeds the quantity supplied and a shortage exists.
		quantity supplied of carrots exceeds the quantity demanded and a surplus exists.
		quantity demanded of carrots exceeds the quantity supplied and a surplus exists.

1 points

QUESTION 12

Which of the following is true regarding demand?
i. Demand is the relationship between quantity demanded and the price of a good when all other influences on buying plans remain the same.
ii. Demand refers to one quantity at one time.
iii. "Demand" and " quantity demanded" are the same thing.

		both i and ii
		i only.
		ii only.
		iii only.

1 points

QUESTION 13

Suppose the current price of a pound of steak is $6 per pound and the equilibrium price is $9 per pound. What takes place?

		There is a shortage, so the price rises and quantity demanded decreases.
		There is a shortage, so the price rises and quantity demanded increases.
		There is a shortage, so the price falls and quantity demanded increases.
		There is a surplus, so the price falls and quantity demanded increases.

1 points

QUESTION 14

The number of corn producers increases, so the supply of corn ________ and the supply curve of corn ________.

		decreases; shifts leftward
		decrease; shifts rightward
		increases; shifts rightward
		increases; shifts leftward

1 points

QUESTION 15

Market equilibrium

i. can never occur because there are always people who want a good but cannot afford it.

ii. occurs at the intersection of the supply and demand curves.

iii. is the point where the price equals the quantity.

		iii only
		ii and iii
		ii only
		i only

1 points

QUESTION 16

Milk can be used to produce cheese or butter. If the price of a pound of butter rises, what happens to the supply of cheese?

		The supply of cheese stays the same and there is a decrease in the quantity supplied of cheese.
		The supply of cheese decreases.
		The supply of cheese stays the same and there is no change in the quantity supplied of cheese.
		The supply of cheese increases.

1 points

QUESTION 17

Consumers regard Dell computers and Apple computers as substitutes. If the price of a Dell computer decreases, the

		demand for Dell computers decreases.
		demand for Apple computers increases.
		demand for Apple computers decreases.
		demand for Dell computers increases.

1 points

QUESTION 18

Suppose the current price of a pound of steak is $12 per pound and the equilibrium price is $9 per pound. In this case, there is a

		surplus, so the price rises and quantity demanded increases.
		shortage, so the price rises and quantity demanded decreases.
		surplus, so the price falls and quantity demanded increases.
		shortage, so the price falls and quantity demanded increases.

1 points

QUESTION 19

Plywood is used in the construction of houses. If the price of plywood rises, what happens to the supply of houses?

		The supply increases so that the supply curve shifts rightward.
		The quantity supplied increases but there is no shift in the supply curve.
		The supply decreases so that the supply curve shifts leftward.
		The quantity supplied decreases but there is no shift in the supply curve.

1 points

QUESTION 20

In stores, it is common to find seasonal products marked down when the season ends. What explains this behavior?

		The store is trying to increase its customers' demand for the product.
		The law of demand is being used to increase the quantity demanded.
		The store manager must be trying to drive away customers by selling low quality products.
		The store is trying to increase its consumer's incomes by increasing their purchasing power.

1 points

QUESTION 21

Suppose that the price of flour used to produce bagels increases. Hence the equilibrium price of a bagel ________ and the equilibrium quantity ________.

		rises; increases
		rises; decreases
		falls; increases
		falls; decreases

1 points

QUESTION 22

If both the supply and demand curves shift simultaneously, we can always predict what will happen to

		either the price or the quantity, but not both.
		only the quantity.
		only the price.
		both the price and the quantity.

1 points

QUESTION 23

If income increases and the demand for bus rides decreases,

		bus rides are a substitute good.
		consumers are behaving irrationally.
		bus rides are an inferior good.
		bus rides are a normal good.

1 points

QUESTION 24

A surplus of cardboard boxes means that

		at the current price of a cardboard box, the quantity demanded equals the quantity supplied and the price will fall to restore the equilibrium..
		the current price of a cardboard box is less than the equilibrium price.
		at the current price of a cardboard box, the quantity demanded exceeds the quantity supplied.
		at the current price of a cardboard box, the quantity demanded is less than the quantity supplied.

1 points

QUESTION 25

If a freeze destroys oranges before they are harvested, the equilibrium price of an orange ________ and the equilibrium quantity ________.

		rises; increases
		rises; decreases
		falls; increases
		falls; decreases

1 points

turquoisedeer344

1. Using supply-and-demand diagrams, show the effect of the following events on the market for sweatshirts.

(a) A hurricane in South Carolina damages the cotton crop.

(b) The price of leather jackets falls.

(d) New knitting machines are invented.

2. (a) What is the definition of quantity demanded?

(b) What is the definition of quantity supplied?

(d) Choose one of the factors from part (b) and consider the market for bananas. On a well-labeled diagram, demonstrate what will occur in this market if there is a change in this factor.

(e) List the 4 factors that cause the supply curve to shift to the left or the right.

(f) Choose one of the factors from part (e) and consider the market for scooters. On a well-labeled diagram, demonstrate what will occur in this market if there is a change in this factor.

(g) Choose one factor from part (b) and another from part (e) and consider the market for minivans. On a well-labeled diagram, demonstrate what will occur in this market given the change in both factors. (Hint: Draw separate diagrams for parts (d), (f), & (g))

3. Suppose that the price of basketball tickets at your college is determined by market forces. Currently, the demand and supply schedules are as follows:

page1image3877024

(a) Draw the demand and the supply curves. What is unusual about this supply curve? Why might this be true?

(b) What are the equilibrium price and quantity of tickets?

(c) Your college plans to increase total enrollment next year by 5,000 students. The additional students will have the following demand schedule:

page1image3870304

Now add the old demand schedule and the demand schedule for the new students to calculate the new demand schedule for the entire college. What will be the new equilibrium price and quantity?

4. Market research has revealed the following information about the market for chocolate bars: The demand schedule can be represented by the equation QD = 1600 − 300P, where QD is the quantity demanded and P is the price. The supply schedule can be represented by the equation QS = 1400 + 700P, where QS is the quantity supplied.

(a) Sketch a graph representing the market for chocolate bars. Identify the equilibrium point on your graph.

(b) Calculate the equilibrium price and quantity in the market for chocolate bars.

5. For each of the following pairs of goods, which good would you expect to have more elastic demand and why?

(a) Required textbooks or mystery novels

(b) Beethoven recordings or classical music recordings in general

(d) Root beer or water

(e) Insulin or Tylenol

(f) Food or bananas

6.Consider the following information from the market for lemonade:

Price	Quantity Demanded	Quantity Supplied
$1	500 cups	150 cups
$2	200 cups	310 cups

(a) As the price changes from $1 to $2, what is the value of price elasticity of demand?

(b) As the price changes from $1 to $2, what is the value of price elasticity of supply?

(c) Sketch a diagram demonstrating the market for lemonade. Are the supply and demand curves relatively inelastic or elastic? Explain.

(d) Suppose that when the price of lemonade increases from $1 to $2, the quantity demanded of orange juice increases from 150 cups to 190 cups. Calculate cross-price elasticity of demand for orange juice.

(e) Are orange juice and lemonade substitute or complementary goods? Explain.

7. Suppose that business travelers and vacationers have the following demand for airline tickets from New York to Boston:

page2image1834528

(a) As the price of tickets rises from $200 to $250, what is the price elasticity of demand for (i) business travelers and (ii) vacationers? (Use the midpoint method in your calculations)

(b) Why might vacationers have a different elasticity from business travelers?

8. Suppose the price elasticity of demand for heating oil is 0.2 in the short run and 0.7 in the long run.

(a) If the price of heating oil rises from $1.80 to $2.20 per gallon, what happens to the quantity of heating oil demand in the short run? In the long run? (Use the midpoint method in your calculations)

(b) Why might this elasticity depend on the time horizon?

9. The Government has decided that the free-market price of cheese is too low.

(a) Suppose the government imposes a binding price floor in the cheese market. Draw a supply-and-demand diagram to show the effect of this policy on the price of cheese and the quantity of cheese sold. Is there a shortage or surplus of cheese?

(b) Farmers complain that the price foor has reduced their total revenue. Is this possible? Explain

(c) In response to farmer's complaints, the government agrees to purchase all the surplus cheese at the price floor. Compared to the basic price floor, who benefits from this new policy? Who loses?

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ECON-2120 Lecture Notes - Lecture 2: Comparative Advantage, Absolute Advantage, Demand Curve

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