Book cover for Economics

Economics

Michael Parkin

ISBN #9780133872279

12th Edition

839 Questions

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Summary
Learning Objectives
Key Concepts
Example Problems
Explanations
Common Mistakes

Summary

This section covers the fundamental principles of demand and supply in a competitive market, emphasizing the laws of demand and supply and the distinction between changes in quantity (movements along curves) versus changes in demand or supply (shifts of curves). It also introduces the mathematical formulation of these relationships, explaining how to determine equilibrium price and quantity, and discusses real-world applications and scenarios where simultaneous changes in non-price factors can affect market outcomes.

Learning Objectives

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Key Concepts

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Example Problems

Example 1

In April 2014 , the money price of a carton of milk was $\$ 2.01$ and the money price of a gallon of gasoline was $\$ 3.63 .$ Calculate the relative price of a gallon of gasoline in terms of milk.

Example 2

The price of food increased during the past year. a. Explain why the law of demand applies to food just as it does to other goods and services. b. Explain how the substitution effect influences food purchases when the price of food rises and other things remain the same. c. Explain how the income effect influences food purchases and provide some examples of the income effect.

Example 3

Which of the following goods are likely substitutes and which are likely complements? (You may use an item more than once): coal, oil, natural gas, wheat, corn, pasta, pizza, sausage, skateboard, roller blades, video game, laptop, iPad, cellphone, text message, email

Example 4

As the average income in China continues to increase, explain how the following will change: a. The demand for beef b. The demand for rice

Example 5

In $2013,$ the price of corn fell and some corn farmers will switch from growing corn in 2014 to growing soybeans. a. Does this fact illustrate the law of demand or the law of supply? Explain your answer. b. Why would a corn farmer grow soybeans?
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Step-by-Step Explanations

QUESTION

Given a linear demand equation P = a \u2212 bQ and a linear supply equation P = c + dQ, how do you find the equilibrium price and quantity?\nStep-by-step Answer:\nStep 1: Set the quantity demanded equal to the quantity supplied by equating the two equations: a \u2212 bQ = c + dQ.\nStep 2: Rearrange the equation to collect Q terms: a \u2212 c = (b + d)Q.\nStep 3: Solve for the equilibrium quantity: Q* = (a \u2212 c) / (b + d).\nStep 4: Substitute Q* back into either the demand or supply equation to find the equilibrium price: P* = a \u2212 bQ* (or P* = c + dQ*).\nFinal Answer: The equilibrium quantity Q* is (a \u2212 c) / (b + d) and the equilibrium price P* is found by substituting Q* into either equation.\n\n- Topic: Understanding Shifts Versus Movements \nQuestion: How do changes in non-price factors differ from price changes in their effect on the demand curve?\nStep-by-step Answer:\nStep 1: Recognize that a change in the price of the good causes a movement along the demand curve, resulting in a change in the quantity demanded.\nStep 2: Understand that changes in non-price factors (like consumer income or the price of substitutes/complements) shift the entire demand curve either to the right (increase in demand) or left (decrease in demand).\nStep 3: Realize that a shift represents a change in demand itself, while movement along the curve is merely a change in the quantity demanded at a given price.\nFinal Answer: Price changes lead to movements along a fixed demand curve; alterations in non-price factors shift the entire curve to a new position.\n\n"

STEP-BY-STEP ANSWER:

Step 1: Set the quantity demanded equal to the quantity supplied by equating the two equations: a \u2212 bQ = c + dQ.\nStep 2: Rearrange the equation to collect Q terms: a \u2212 c = (b + d)Q.\nStep 3: Solve for the equilibrium quantity: Q* = (a \u2212 c) / (b + d).\nStep 4: Substitute Q* back into either the demand or supply equation to find the equilibrium price: P* = a \u2212 bQ* (or P* = c + dQ*).\nFinal Answer: The equilibrium quantity Q* is (a \u2212 c) / (b + d) and the equilibrium price P* is found by substituting Q* into either equation.\n\n- Topic: Understanding Shifts Versus Movements \nQuestion: How do changes in non-price factors differ from price changes in their effect on the demand curve?\nStep-by-step Answer:\nStep 1: Recognize that a change in the price of the good causes a movement along the demand curve, resulting in a change in the quantity demanded.\nStep 2: Understand that changes in non-price factors (like consumer income or the price of substitutes/complements) shift the entire demand curve either to the right (increase in demand) or left (decrease in demand).\nStep 3: Realize that a shift represents a change in demand itself, while movement along the curve is merely a change in the quantity demanded at a given price.\nFinal Answer: Price changes lead to movements along a fixed demand curve; alterations in non-price factors shift the entire curve to a new position.\n\n"
Final Answer: The equilibrium quantity Q* is (a \u2212 c) / (b + d) and the equilibrium price P* is found by substituting Q* into either equation.\n\n- Topic: Understanding Shifts Versus Movements \nQuestion: How do changes in non-price factors differ from price changes in their effect on the demand curve?\nStep-by-step Answer:\nStep 1: Recognize that a change in the price of the good causes a movement along the demand curve, resulting in a change in the quantity demanded.\nStep 2: Understand that changes in non-price factors (like consumer income or the price of substitutes/complements) shift the entire demand curve either to the right (increase in demand) or left (decrease in demand).\nStep 3: Realize that a shift represents a change in demand itself, while movement along the curve is merely a change in the quantity demanded at a given price.\nFinal Answer: Price changes lead to movements along a fixed demand curve; alterations in non-price factors shift the entire curve to a new position.\n\n"

"- Topic: Calculating Market Equilibrium \nQuestion: Given a linear demand equation P = a \u2212 bQ and a linear supply equation P = c + dQ, how do you find the equilibrium price and quantity?\nStep-by-step Answer:\nStep 1: Set the quantity demanded equal to the quantity supplied by equating the two equations: a \u2212 bQ = c + dQ.\nStep 2: Rearrange the equation to collect Q terms: a \u2212 c = (b + d)Q.\nStep 3: Solve for the equilibrium quantity: Q* = (a \u2212 c) / (b + d).\nStep 4: Substitute Q* back into either the demand or supply equation to find the equilibrium price: P* = a \u2212 bQ* (or P* = c + dQ*).\nFinal Answer: The equilibrium quantity Q* is (a \u2212 c) / (b + d) and the equilibrium price P* is found by substituting Q* into either equation.\n\n- Topic: Understanding Shifts Versus Movements \nQuestion: How do changes in non-price factors differ from price changes in their effect on the demand curve?\nStep-by-step Answer:\nStep 1: Recognize that a change in the price of the good causes a movement along the demand curve, resulting in a change in the quantity demanded.\nStep 2: Understand that changes in non-price factors (like consumer income or the price of substitutes/complements) shift the entire demand curve either to the right (increase in demand) or left (decrease in demand).\nStep 3: Realize that a shift represents a change in demand itself, while movement along the curve is merely a change in the quantity demanded at a given price.\nFinal Answer: Price changes lead to movements along a fixed demand curve; alterations in non-price factors shift the entire curve to a new position.\n\n"

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Common Mistakes

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