4 | | | | | | THE MARKET FORCES OF SUPPLY AND DEMAND | | |

OF SUPPLY AND DEMAND

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SOLUTIONS TO TEXT PROBLEMS: Quick Quizzes 1. A market is a group of buyers (who determine demand) and a group of sellers (who determine supply) of a particular good or service. A perfectly competitive market is one in which there are many buyers and many sellers of an identical product so that each has a negligible impact on the market price. 2. Here is an example of a monthly demand schedule for pizza: Price of Pizza Slice | Number of Pizza Slices Demanded | $ 0.00 | 10 | 0.25 | 9 | 0.50 | 8 | 0.75 | 7 | 1.00 | 6 | 1.25 | 5 | 1.50 | 4 | 1.75 | 3 | 2.00 | 2 |
When we say the demand for pizza declines, we mean that the demand curve for pizza shifts to the left as in Figure 5. The supply curve for pizza is not affected. With a shift to the left in the demand curve, the equilibrium price and quantity both decline, as the figure shows. Thus, the quantity of pizza supplied and demanded both fall. In sum, supply is unchanged, demand is decreased, quantity supplied declines, quantity demanded declines, and the price falls.

Figure 5
9. Prices play a vital role in market economies because they bring markets into equilibrium. If the price is different from its equilibrium level, quantity supplied and quantity demanded are not equal. The resulting surplus or shortage leads suppliers to adjust the price until equilibrium is restored. Prices thus serve as signals that guide economic decisions and allocate scarce resources. Problems and Applications 1. a. Cold weather damages the orange crop, reducing the supply of oranges. This can be seen in Figure 6 as a shift to the left in the supply curve for oranges. The new equilibrium price is higher than the old equilibrium price.

Figure 6 b. People often travel to the Caribbean from New England to escape cold weather, so the demand for Caribbean hotel rooms is high in the winter. In the summer, fewer people travel to the Caribbean, because northern climes are more pleasant. The result, as shown in Figure 7, is a shift to the left in the