Questions for Review with Answers
Chapter 12. Supply and Demand Together
I. Equilibrium and the Standard Supply-Demand Graph
Chapter 12 – Question 1
Draw the standard graph.
Chapter 12 – Question 2
Which triangle shows surpluses, which shortages?
* The upper horizontal triangle shows surpluses that are not sold. The lower horizontal triangle shows shortages.
Chapter 12 – Question 3
And which triangle shows the winners, which the losers?
* The triangle on the left side shows the winners who can buy and sell. The triangle on the right shows the losers who cannot buy or sell.
Chapter 12 – Question 4
Explain the effects of scarcity and abundance on prices and demand.
* Scarcity of supply > prices up > supply up.
Abundance of supply > prices down > supply down.
Chapter 12 – Question 5
What are third-party-payer markets?
* Markets in which the recipient and the payer are not identical.
Chapter 12 – Question 6
What happens to the equilibrium price and equilibrium quantity of vanilla pudding if vanilla pudding is proved to lower the risk of heart attacks?
* The demand curve shifts to the right; equilibrium price and quantity rise.
Chapter 12 – Question 7
Why is equilibrium self-restoring?
* It is the result of a revision process. It is mostly restored by suppliers who revise prices and quantities.
Chapter 12 – Question 8
What does comparative statics analyse?
* Comparative statics is an analytical tool to compare a new equilibrium resulting from shifts of the demand or supply curve with a previous equilibrium.
II. Total Surplus
Chapter 12 – Question 9
Write down the formula for
A. consumer surplus
B. producer surplus
C. total surplus
* A. Value ascribed to a commodity by buyer minus price paid by buyer.
* B. Price received by producer minus cost incurred by producing a commodity.
* C. Value to buyer minus cost of seller.
Chapter 12 – Question 10
How can producers make a surplus when all of them sell at marginal cost?
* The market price equals the marginal costs of the market leader, who produces the highest portion of overall market supply and therefore has the highest marginal costs.
III. The Effects of Government Policies on Equilibrium and Total Surplus
Chapter 12 – Question 11
Why do taxes and tariffs lower total surplus?
* As they lead to a shift of the supply curve to the left, they make the triangle depicting total surplus smaller. Please ask your instructor what answer he expects you to give to this question. As I wrote in the book, most textbooks state that the demand curve shifts to the left in response to taxes and tariffs.
Chapter 12 – Question 12
What happens if a price floor is set above equilibrium price?
* A price floor like a minimum wage leads to an increase in the quantity supplied and hence to a surplus.
Chapter 12 – Question 13
Who bears the burden of a tax, if the supply curve is a vertical line?
* Suppliers. A vertical supply curve means that supply is completely inelastic. The burdens of taxes are always borne by the people with inelastic demand/supply curves.
Chapter 12 – Question 14
Equilibrium quantity of bananas is 2,000 kilos, equilibrium price is $3. The highest price on the y-axis is $6. What is consumer surplus?
* $3,000. Remember the formula to calculate consumer surplus: (Base x height) : 2. The quantity is the base. The difference between the highest value ascribed to bananas ($6) and the actual equilibrium price is the height.
Chapter 12 – Question 15
Why do price floors and price ceiling lower total surplus?
* Price floors such as minimum wages raise the price to be paid by employers and therefore reduce their surplus (consumer surplus = value ascribed minus price). Price ceilings such as rent control lower the price received by landlords and therefore lower supplier surplus (price minus cost).
Chapter 12 – Question 16
Explain why people with inelastic demand/supply are likely to bear most of a tax imposed on a commodity.
* Elasticity is another word for having alternatives. When a commodity is taxed, the burden is borne by the people who cannot alter their behaviour. Suppliers must pay most of the tax, if they cannot lower quantity supplied. Consumers must bear most of the tax, if they cannot lower quantity demanded.
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