Today’s Juice is composed of two different but related parts.
** Part I presents Economics information.
** Part II contains a set of questions which are based on the information in Part I.
** Tomorrow’s JuicyLesson will give the answers to the questions contained in today’s second section along with explanations as required.
** A fifty dollar ($50.00) prize goes to the winner. In case that there be more than one person with the highest number of correct answers, the prize money will be awarded to the first person to submit the highest number of correct answers.
** Please email your answers to: firstname.lastname@example.org. Please ensure that your answers are numbered correctly.
** I will email the winner to work out the logistics for the awarding of the prize money.
** The winner’s name will be published as part of Tuesday’s JL. (JL 200)
** No responses will be accepted after midnight, Monday, April 28th, 2014.
** Decision of the judge i.e. me, will be final.
So here we go.
PART I — The Laws of Supply and Demand
Supply and demand determine the price of a good or service; on the other hand, price has an effect on the supply of and the demand for goods. (Note: Goods are objects and services are actions or activities. I use the word “goods” here to mean both goods and services.)
Let’s deal with the second one first, that is the effect that price has on supply and demand.
When the price of a good rises, logically the demand for that good will naturally fall. So we say that Price Up; Demand Down. The converse is also true. That is when the price of a given good falls, demand for that good will increase. [Price Down; Demand Up]
On the other hand, when the price of a good rises, the supply of that good will rise as suppliers (producers) are urged by rising prices and consequently increased profits to increase the supply of a particular good. So we say that Price Up; Supply Up. As in the above example, the converse here is also true. That is when the price of a good falls, production of this good will fall as well. Reasoning here is similar to the above-mentioned example where producers supply more as prices rise; by the same logic, when prices drop so does supply. [Price Down; Supply Down.]
So, to this point we can conclude that price affects both demand and supply as follows:
Price Up; Demand Down
Price Down; Demand Up
Thus the relationship between Price and Demand is inverse. When one variable goes up, the other goes down and vice-versa. That is when the independent variable – price in this case – goes down, demand, the dependent variable goes up.
Price Up; Supply Up.
Price Down; Supply Down
The relationship between Price and Supply is direct. In other words, when the price goes up, supply also goes up and when price declines so does supply.
Now for the relationships which exist between supply and demand on the one hand and price on the other. In these cases, supply and demand are the independent variables while price is the dependent variable in the sense that the supply of and/or demand for a good determines the price of this good, or the price of a good depends on both the supply of and demand for that good.
When the demand for a good increases, the price of this good also goes up. [Demand Up; Price Up]. The converse is also correct so that we when the demand for a good falls, so will the price. [Demand Down; Price Down].
Thus we have a direct relationship between demand and price. When one rises, so does the other and, conversely, when the independent variable falls, so does the dependent variable.
When the supply of a good increases, the price of that good will naturally fall. [Hence Supply Up; Price Down.]. On the other hand, if the supply of a good should decline, the price of that good will rise. [Supply Down; Price Up]
Thus we have an inverse relationship between supply and price. When one rises, the other (the dependent variable, price here) will decrease and vice-versa. i.e. when the independent variable (S in this case) falls, the dependent variable will fall.
So in summary, we have the following relationships among Demand (D), Supply (S) and Price (P). First, employing Price as the dependent variable …
D Up; P Up
D Down; P Down
S Up; P Down
S Down; P Up
Now using Price as the independent variable …
P Up; D Down
P Down; D Up
P Up; Supply Up
P Down; Supply Down
All questions are of equal value. (Questions #6 and #9 are worth 2 marks each, one mark for each part of each of these two questions)
Use the info presented in Part I to answer the following ten questions.
1. The theory of conspicuous consumption dictates that consumers who want to be perceived as wealthy may desire more expensive items as a means of showing off. Which one of the following relationships among price, supply and demand, is contradicted by the behaviour of these so-called “conspicuous consumers”?
A) Price Up; Demand Down
B) Price Down; Demand Down
C) Demand Up; Price Down
D) Supply Down; Price Up
2. There is a shortage of homes on the market. In this situation, [FILL IN THE BLANK], the price of homes will ___________.
3. Use your understanding of the eight economic laws of supply and demand to answer this question.
In which one of the following situations is the demand for sports cars likely to increase?
A) The government increases the excise tax on luxury items.
B) Producers are forced to reduce the supply of sports cars because of a steel shortage.
C) American manufacturers reduce the price of sports cars by 10% in order to compete more successfully with Japanese imports.
D) The unemployment rate has been increasing steadily for more than a year now, and increasing numbers of consumers have seen their incomes decline.
4. In which one of the following situations will the supply of a good INCREASE over the long term?
A) The price of a good rises.
B) The price of a good falls.
C) Demand for a good decreases.
D) None of these is correct.
5. Prior to the April 7th election which threw it out of power, the Parti-Québécois was threatening a referendum on sovereignty which caused a significant number of homeowners to contemplate putting their homes on the market. What effect would this action by homeowners have had on the price of homes if, in fact, homeowners ended up putting their homes up for sale?
Answer: Price of homes will [FILL IN THE BLANK] _________________.
6. NOTE: In order to get credit for the following question (#6) both parts of it have to be answered correctly.
A) A clothing store in a mall declares bankruptcy and closes its doors thereby reducing the number of clothing stores in that mall from three to two. What effect will this action have on the price of clothes in that particular mall? Answer: Price of clothes will [FILL IN THE BLANK] _________________.
B) Please provide the law of supply, price and demand to explain your answer to question #6 (A) above. [FILL IN THE BLANK] The law is ________________.
7. The price of a good falls in the marketplace. In response to this price decrease, will the typical producer increase or decrease production? ANSWER: ______________.
8. The price of CD’s decreases by 15%. What effect will this price decrease have on the number of CD’s demanded by consumers? ANSWER: Demand will ________________ here.
9. NOTE: In order to get credit for the following question (#9) both parts of it have to be answered correctly.
(A) The Montreal Canadiens have been doing very well lately. What effect will this have on the price that scalpers can procure for Canadiens playoff tickets?
(B) Which one of the eight laws of demand and supply explains your answer?