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Chapter 3: Problem 7

Find the flaws in reasoning in the following statements, paying particular attention to the distinction between shifts of and movements along the supply and demand curves. Draw a diagram to illustrate what actually happens in each situation. a. "A technological innovation that lowers the cost of producing a good might seem at first to result in a reduction in the price of the good to consumers. But a fall in price will increase demand for the good, and higher demand will send the price up again. It is not certain, therefore, that an innovation will really reduce price in the end." b. "A study shows that eating a clove of garlic a day can help prevent heart disease, causing many consumers to demand more garlic. This increase in demand results in a rise in the price of garlic. Consumers, seeing that the price of garlic has gone up, reduce their demand for garlic. This causes the demand for garlic to decrease and the price of garlic to fall. Therefore, the ultimate effect of the study on the price of garlic is uncertain."

Short Answer

Expert verified
Short Answer: Technological innovation that lowers production costs results in an increase in supply, leading to a lower price and a higher quantity, without affecting the demand curve. Similarly, new information on garlic's health benefits leads to a rightward shift in the demand curve, resulting in a higher price and equilibrium quantity, rather than reducing demand due to increased prices. The price changes are a result of shifts in supply and demand curves, not movements along the curves.

Step by step solution

01

Analyze the impact of technological innovation on supply curve

When there's a technological innovation that lowers the cost of producing a good, this will lead to an increase in supply because producers can make more goods at a lower cost. This shift will be represented by a rightward shift of the supply curve.
02

Show the effect of increased supply on equilibrium price and quantity

When the supply curve shifts rightward, the new equilibrium point will have a lower price and a higher quantity in comparison to the initial equilibrium point, as the intersection of the supply and demand curves moves.
03

Discuss the flaw in reasoning

The statement incorrectly assumes that a fall in price will lead to an increase in demand, moving along the demand curve. However, when the price falls due to the increase in supply, there is no shift in the demand curve. The fall in price is accompanied by an increase in equilibrium quantity, not an increase in demand. Thus, it is misleading to say that higher demand will send the price up again.
04

Conclusion

In conclusion, a technological innovation that lowers the cost of producing a good will generally lead to a reduction in price and an increase in quantity, without affecting the demand curve. #b. The effect of a study on the price of garlic#
05

Analyze the impact of the study on demand curve

When consumers learn that eating a clove of garlic daily can help prevent heart disease, this information will lead to an increase in demand for garlic. This shift will be represented by a rightward shift of the demand curve.
06

Show the effect of increased demand on equilibrium price and quantity

When the demand curve shifts rightward, the new equilibrium point will have a higher price and a higher quantity in comparison to the initial equilibrium point, as the intersection of the supply and demand curves moves.
07

Discuss the flaw in reasoning

The statement incorrectly assumes that the increase in price due to higher demand would cause consumers to reduce their demand for garlic, thus moving along the demand curve rather than shifting it. The increase in demand for garlic is caused by new information about its health benefits, and a higher price is a result of this increased demand. The higher price may lead some consumers to reduce their garlic consumption, but this will only result in a new equilibrium along the shifted demand curve, not a decrease in overall demand.
08

Conclusion

In conclusion, the study that shows the health benefits of garlic will likely lead to a rightward shift in the demand curve, causing the price of garlic to rise and the equilibrium quantity to increase. The ultimate effect of the study on the price of garlic is not uncertain, but rather is determined by the shift in the demand curve.

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Most popular questions from this chapter

Aaron Hank is a star hitter for the Bay City baseball team. He is close to breaking the major league record for home runs hit during one season, and it is widely anticipated that in the next game he will break that record. As a result, tickets for the team's next game have been a hot commodity. But today it is announced that, due to a knee injury, he will not in fact play in the team's next game. \Lambdassume that season ticket holders are able to resell their tickets if they wish. Use supply and demand diagrams to explain your answers to parts a and \(b\). a. Show the case in which this announcement results in a lower equilibrium price and a lower equilibrium quantity than before the announcement. b. Show the case in which this announcement results in a lower equilibrium price and a higher equilibrium quantity than before the announcement. c. What accounts for whether case a or case b occurs? d. Suppose that a scalper had secretly learned before the announcement that Aaron Hank would not play in the next game. What actions do you think he would take?

Let's assume that each person in the United States consumes an average of 37 gallons of soft drinks (nondiet) at an average price of \(\$ 2\) per gallon and that the U.S. population is 294 million. At a price of \(\$ 1.50\) per gallon, each individual consumer would demand 50 gallons of soft drinks. From this information about the individual demand schedule, calculate the market demand schedule for soft drinks for the prices of \(\$ 1.50\) and \(\$ 2\) per gallon.

The market for many goods changes in predictable ways according to the time of year, in response to events such as holidays, vacation times, seasonal changes in production, and so on. Using supply and demand, explain the change in price in each of the following cases. Note that supply and demand may shift simultaneously. a. Lobster prices usually fall during the summer peak lobster harvest season, despite the fact that people like to eat lobster during the summer more than at any other time of year. b. The price of a Christmas tree is lower after Christmas than before but fewer trees are sold. c. The price of a round-trip ticket to Paris on Air France falls by more than \(\$ 200\) after the end of school vacation in September. This happens despite the fact that generally worsening weather increases the cost of operating flights to Paris, and Air France therefore reduces the number of flights to Paris at any given price.

In recent years, the number of car producers in China has increased rapidly. In fact, China now has more car brands than the United States. In addition, car sales have climbed every year and automakers have increased their output at even faster rates, causing fierce competition and a decline in prices. At the same time, Chinese consumers' incomes have risen. Assume that cars are a normal good. Draw a diagram of the supply and demand curves for cars in China to explain what has happened in the Chinese car market.

Suppose that the supply schedule of Maine lobsters is as follows: $$ \begin{array}{c|c} \begin{array}{c} \text { Price of lobster } \\\ \text { (per pound) } \end{array} & \begin{array}{c} \text { Quantity of lobster } \\\ \text { supplied (pounds) } \end{array} \\\ \$ 25 & 800 \\\ 20 & 700 \\\ 15 & 600 \\\ 10 & 500 \\\ 5 & 400 \end{array} $$ Suppose that Maine lobsters can be sold only in the United States. The U.S. demand schedule for Maine lobsters is as follows: $$ \begin{array}{c|c} \begin{array}{c} \text { Price of lobster } \\\ \text { (per pound) } \end{array} & \begin{array}{c} \text { Quantity of lobster } \\\ \text { demanded (pounds) } \end{array} \\\ \$ 25 & 200 \\\ 20 & 400 \\\ 15 & 600 \\\ 10 & 800 \\\ 5 & 1,000 \end{array} $$ a. Draw the demand curve and the supply curve for Maine lobsters. What are the equilibrium price and quantity of lobsters? Now suppose that Maine lobsters can be sold in France. The French demand schedule for Maine lobsters is as follows: $$ \begin{array}{c|c} \begin{array}{c} \text { Price of lobster } \\\ \text { (per pound) } \end{array} & \begin{array}{c} \text { Quantity of lobster } \\\ \text { supplied (pounds) } \end{array} \\\ \$ 25 & 100 \\\ 20 & 300 \\\ 15 & 500 \\\ 10 & 700 \\\ 5 & 900 \end{array} $$ b. What is the demand schedule for Maine lobsters now that French consumers can also buy them? Draw a supply and demand diagram that illustrates the new equilibrium price and quantity of lobsters. What will happen to the price at which fishermen can sell lobster? What will happen to the price paid by U.S. consumers? What will happen to the quantity consumed by U.S. consumers?
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