Chapter 3

Demand and Supply

1. T03 \ F \\ Prices \ 2 \\ Demand prices tend to be subjective and explain very little about individual purchasing patterns. T03 \ T \\ Prices \ 2 \\ Relative market prices are computed by dividing absolute (monetary) prices by each other. T03 \ F \\ Demand \ 2 \\ The demand for a good falls when its production costs rise. T03 \ F \\ Demand \ 2 \\ The idea that demand will fall when the price of a good rises reflects the law of demand. T03 \ F \\ Demand \ 3 \\ If the price the U.S. Post Office charges to deliver Express Mail rises, the demand facing Federal Express will fall because their respective services are complementary. T03 \ F \\ Demand \ 2 \\ If a Food & Drug Administration (FDA) study showed that eating cashews significantly boosts people's IQ scores, the quantity of cashews demanded would rise when the demand curve shifted leftward. T03 \ F \\ Supply \ 2 \\ Demand is the most important short-run determinant of supply. T03 \ T \\ Supply \ 3 \\ Expectations that the prices of durable goods will soon fall will cause production to fall, but the short term supply will probably rise. T03 \ T \\ Shortages \ 2 \\ Buyers are likely to compete by queuing and bidding higher prices if the quantity demanded exceeds the quantity supplied.

2.

3. 4.

5.

6.

7. 8.

9.

Ralph T. Byrns

Chapter 3 Demand and Supply

14

10.

T03 \ F \\ Supply & Demand \ 3 \\ Saying that "the quantities demanded and supplied are equal", or that "demand equals supply", or that "demand prices equal supply prices", are all equivalent ways to express the idea that a market is in equilibrium. T03 \ T \\ Demand \ 2 \\ The inverse relationship of price and quantity demanded in the law of demand implies that (other factors being equal) people will purchase more items when the price falls. T03 \ T \\ Supply \ 2 \\ The law of supply works basically because business decision makers expect higher cost or greater profits from higher prices and increased amounts supplied. T03 \ F \\ Supply \ 2 \\ The law of supply is clearly illustrated by the five-year output plans in the Soviet Union. T03 \ T \\ Surpluses \ 2 \\ If a current market price produced a surplus, one may conclude that this price is above the equilibrium market price. T03 \ F \\ Demand \ 2 \\ "Demands" is economic jargon that refers primarily to the negotiating strategies of labor unions. T03 \ T \\ Demand \ 2 \\ An increase in demand will normally increase the quantity of the good supplied. T03 \ F \\ Supply \ 2 \\ From the producer's point of view, supply and capacity are synonymous. T03 \ T \\ Supply \ 2 \\ Expectations of a price hike for a good that can be inventoried normally results in a temporary reduction in its supply. T03 \ F \\ Supply & Demand \ 2 \\ In the short run, demand depends primarily on supply and supply depends primarily on demand. T03 \ T \\ Demand \ 2 \\ Economic jargon refers to new fads as "changes in tastes and preferences."

11.

12.

13.

14.

15.

16. 17. 18.

19.

20.

2006 EconomicsInteractive .com

Contemporary Economics

10

21.

T03 \ F \\ Supply \ 2 \ The direct relationship of price and quantity supplied in the law of supply implies that market price increases lead to decreased quantity supplied. T03 \ F \\ Equilibrium \ 2 \ A surplus or shortage between quantity demanded and supplied may exist at any given market equilibrium price. T03 \ F \\ Shortages \ 2 \ A market shortage can be resolved by cutting the market price. T03 \ F \\ Demand \ 2 \ Market demands are based on biological needs. T03 \ T \\ Demand \ 2 \ A change in demand shifts the demand curve; a change in quantity demanded refers to movement along a stable demand curve. T03 \ T \\ Supply \ 3 \ Virtually all changes in supply originate from some change in the opportunity costs of production. T03 \ T \\ Equilibrium \ 2 \ A reduction of supply will normally increase the price of a good and reduce the quantity demanded in the market. T03 \ T \\ Demand \ 2 \ An increase in income causes poor American consumers to demand less of such inferior goods as lard or lima beans. T03 \ F \\ Costs \ 2 \ Most transactions costs are associated with excessive sales taxes. T03 \ F \\ Supply & Demand \ 2 \ The forces of supply and demand are more powerful as determinants of prices under a command economy than in a market economy. T03 \ T \\ Prices \ 2 \ More than microeconomists, macroeconomists are concerned about absolute (monetary) prices. T03 \ F \\ Prices \ 2 \ Suppliers are unwilling to sell goods unless the market price exceeds the prospective buyer's subjective price.
Chapter 3 Demand and Supply 14

22.

23. 24. 25.

26.

27.

28.

29. 30.

31.

32.

Ralph T. Byrns

33.

T03 \ F \\ Demand \ 2 \ Most buyers who expect the price of a perishable good to rise soon will buy much more while the price is still low. T03 \ T \\ Demand \ 3 \ Transaction costs reduce demand from the vantage points of buyers and sellers. T03 \ T \\ Demand \ 2 \ Demands for inferior goods fall and demands for luxury goods rise when people receive raises in their salaries. T03 \ F \\ Supply & Demand \ 2 \ Supply is a major short run determinant of demand. T03 \ T \\ Supply \ 2 \ Increases in the wages of migratory workers will reduce the supplies of farm products. T03 \ T \\ Supply \ 2 \ Technological advances tend to reduce supply prices and shift supply curves to the right. T03 \ F \\ Surpluses \ 2 \ Attempts to liquidate excessive inventories tend to raise the supply prices of sellers. T03 \ F \\ Equilibrium \ 2 \ Government regulation is needed to ensure that markets achieve equilibrium.

34. 35.

36. 37. 38.

39. 40.

2006 EconomicsInteractive .com

Contemporary Economics

12