QUESTIONS FOR REVIEW
1. Suppose that unusually hot weather causes the demand curve for ice cream to shift to the right. Why will
the price of ice cream rise to a new market-clearing level?
Suppose the supply of ice cream is completely inelastic in the short run, so the supply curve is vertical as
shown below. The initial equilibrium is at price P1. The unusually hot weather causes the demand curve for
ice cream to shift from D1 to D2, creating short-run excess demand (i.e., a temporary shortage) at the
current price. Consumers will bid against each other for the ice cream, putting upward pressure on the
price, and ice cream sellers will react by raising price. The price of ice cream will rise until the quantity
demanded and the quantity supplied are equal, which occurs at price P2.
Insert Figure (Q_1)
2. Use supply and demand curves to illustrate how each of the following events would affect the price of
butter and the quantity of butter bought and sold:
a. An increase in the price of margarine.
Butter and margarine are substitute goods for most people. Therefore, an increase in the price of
margarine will cause people to increase their consumption of butter, thereby shifting the demand
curve for butter out from D1 to D2 in Figure 2.2.a. This shift in demand causes the equilibrium
price of butter to rise from P1 to P2 and the equilibrium quantity to increase from Q1 to Q2.
Insert Figure 2.2.a
b. An increase in the price of milk.
Milk is the main ingredient in butter. An increase in the price of milk increases the cost of
producing butter, which reduces the supply of butter. The supply curve for butter shifts from S1 to
S2 in Figure 2.2.b, resulting in a higher equilibrium price, P2 and a lower equilibrium quantity, Q2,
for butter.
Insert Figure 2.2.b
Note: Butter is in fact made from the fat that is skimmed from milk; thus butter and milk are joint products, and this
complicates things. If you take account of this relationship, your answer might change, but it depends on why the
price of milk increased. If the increase were caused by an increase in the demand for milk, the equilibrium quantity
of milk supplied would increase. With more milk being produced, there would be more milk fat available to make
butter, and the price of milk fat would fall.
, The Basics of Supply and Demand
This would shift the supply curve for butter to the right, resulting in a drop in the price of butter and an increase
in the quantity of butter supplied.
c. A decrease in average income levels.
Assuming that butter is a normal good, a decrease in average income will cause the demand curve
for butter to decrease (i.e., shift from D1 to D2). This will result in a decline in the equilibrium
price from P1 to P2, and a decline in the equilibrium quantity from Q1 to Q2. See Figure 2.2.c.
Insert Figure 2.2.c
3. If a 3-percent increase in the price of corn flakes causes a 6-percent decline in the quantity demanded,
what is the elasticity of demand?
The elasticity of demand is the percentage change in the quantity demanded divided by the
percentage change in the price. The elasticity of demand for corn flakes is therefore
%Q 6
EPD 2.
%P 3
4. Explain the difference between a shift in the supply curve and a movement along the supply curve.
A movement along the supply curve occurs when the price of the good changes. A shift of the
supply curve is caused by a change in something other than the good’s price that results in a
change in the quantity supplied at the current price. Some examples are a change in the price of an
input, a change in technology that reduces the cost of production and an increase in the number of
firms supplying the product.
5. Explain why for many goods, the long-run price elasticity of supply is larger than the short-run elasticity.
The price elasticity of supply is the percentage change in the quantity supplied divided by the
percentage change in price. In the short run, an increase in price induces firms to produce more by
using their facilities more hours per week, paying workers to work overtime and hiring new
workers. Nevertheless, there is a limit to how much firms can produce because they face capacity
constraints in the short run. In the long run, however, firms can expand capacity by building new
plants and hiring new permanent workers. Also, new firms can enter the market and add their
output to total supply. Therefore, the price elasticity of supply is larger in the long run than in the
short run.
6. Why do long-run elasticities of demand differ from short-run elasticities? Consider two goods: paper
towels and televisions. Which is a durable good? Would you expect the price elasticity of demand for
paper towels to be larger in the short run or in the long run? Why? What about the price elasticity of
demand for televisions?
Long-run and short-run elasticities differ based on how rapidly consumers respond to price
changes and how many substitutes are available. If the price of paper towels, a non-durable good,
were to increase, consumers might react only minimally in the short run- because it takes time for
people to change their consumption habits. In the longrun, however, consumers might learn to use
other products such as sponges or kitchen towels instead of paper towels. In this case, then, the
price elasticity would be larger in the long run than in the short run. In contrast, the quantity
demanded of durable goods, such as televisions, might change dramatically in the short run
following a price change. For example, the initial result of a price increase for televisions would
cause consumers to delay purchases because they could keep using their current TVs longer.
Eventually consumers would replace their televisions as they wore out or became obsolete.
Therefore, we expect the demand for durables to be more elastic in the short run than in the long
run.
7
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall.
1. Suppose that unusually hot weather causes the demand curve for ice cream to shift to the right. Why will
the price of ice cream rise to a new market-clearing level?
Suppose the supply of ice cream is completely inelastic in the short run, so the supply curve is vertical as
shown below. The initial equilibrium is at price P1. The unusually hot weather causes the demand curve for
ice cream to shift from D1 to D2, creating short-run excess demand (i.e., a temporary shortage) at the
current price. Consumers will bid against each other for the ice cream, putting upward pressure on the
price, and ice cream sellers will react by raising price. The price of ice cream will rise until the quantity
demanded and the quantity supplied are equal, which occurs at price P2.
Insert Figure (Q_1)
2. Use supply and demand curves to illustrate how each of the following events would affect the price of
butter and the quantity of butter bought and sold:
a. An increase in the price of margarine.
Butter and margarine are substitute goods for most people. Therefore, an increase in the price of
margarine will cause people to increase their consumption of butter, thereby shifting the demand
curve for butter out from D1 to D2 in Figure 2.2.a. This shift in demand causes the equilibrium
price of butter to rise from P1 to P2 and the equilibrium quantity to increase from Q1 to Q2.
Insert Figure 2.2.a
b. An increase in the price of milk.
Milk is the main ingredient in butter. An increase in the price of milk increases the cost of
producing butter, which reduces the supply of butter. The supply curve for butter shifts from S1 to
S2 in Figure 2.2.b, resulting in a higher equilibrium price, P2 and a lower equilibrium quantity, Q2,
for butter.
Insert Figure 2.2.b
Note: Butter is in fact made from the fat that is skimmed from milk; thus butter and milk are joint products, and this
complicates things. If you take account of this relationship, your answer might change, but it depends on why the
price of milk increased. If the increase were caused by an increase in the demand for milk, the equilibrium quantity
of milk supplied would increase. With more milk being produced, there would be more milk fat available to make
butter, and the price of milk fat would fall.
, The Basics of Supply and Demand
This would shift the supply curve for butter to the right, resulting in a drop in the price of butter and an increase
in the quantity of butter supplied.
c. A decrease in average income levels.
Assuming that butter is a normal good, a decrease in average income will cause the demand curve
for butter to decrease (i.e., shift from D1 to D2). This will result in a decline in the equilibrium
price from P1 to P2, and a decline in the equilibrium quantity from Q1 to Q2. See Figure 2.2.c.
Insert Figure 2.2.c
3. If a 3-percent increase in the price of corn flakes causes a 6-percent decline in the quantity demanded,
what is the elasticity of demand?
The elasticity of demand is the percentage change in the quantity demanded divided by the
percentage change in the price. The elasticity of demand for corn flakes is therefore
%Q 6
EPD 2.
%P 3
4. Explain the difference between a shift in the supply curve and a movement along the supply curve.
A movement along the supply curve occurs when the price of the good changes. A shift of the
supply curve is caused by a change in something other than the good’s price that results in a
change in the quantity supplied at the current price. Some examples are a change in the price of an
input, a change in technology that reduces the cost of production and an increase in the number of
firms supplying the product.
5. Explain why for many goods, the long-run price elasticity of supply is larger than the short-run elasticity.
The price elasticity of supply is the percentage change in the quantity supplied divided by the
percentage change in price. In the short run, an increase in price induces firms to produce more by
using their facilities more hours per week, paying workers to work overtime and hiring new
workers. Nevertheless, there is a limit to how much firms can produce because they face capacity
constraints in the short run. In the long run, however, firms can expand capacity by building new
plants and hiring new permanent workers. Also, new firms can enter the market and add their
output to total supply. Therefore, the price elasticity of supply is larger in the long run than in the
short run.
6. Why do long-run elasticities of demand differ from short-run elasticities? Consider two goods: paper
towels and televisions. Which is a durable good? Would you expect the price elasticity of demand for
paper towels to be larger in the short run or in the long run? Why? What about the price elasticity of
demand for televisions?
Long-run and short-run elasticities differ based on how rapidly consumers respond to price
changes and how many substitutes are available. If the price of paper towels, a non-durable good,
were to increase, consumers might react only minimally in the short run- because it takes time for
people to change their consumption habits. In the longrun, however, consumers might learn to use
other products such as sponges or kitchen towels instead of paper towels. In this case, then, the
price elasticity would be larger in the long run than in the short run. In contrast, the quantity
demanded of durable goods, such as televisions, might change dramatically in the short run
following a price change. For example, the initial result of a price increase for televisions would
cause consumers to delay purchases because they could keep using their current TVs longer.
Eventually consumers would replace their televisions as they wore out or became obsolete.
Therefore, we expect the demand for durables to be more elastic in the short run than in the long
run.
7
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall.
