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Chapter 3: Problem 13

[Related to the Don't Let This Happen to You on page 96\(]\) A student writes the following: "Increased production leads to a lower price, which in turn increases demand." Do you agree with his reasoning? Briefly explain.

Short Answer

Expert verified
The reasoning can be agreed upon partially. Increased production can lead to lower prices due to surplus, and low prices might increase demand. However, this simplifies the relationship by assuming that demand is solely driven by price, while ignoring other factors like product value, tastes and preferences of consumers, or available alternatives.

Step by step solution

01

Understand the Concept Of Supply and Demand

In economic theory, supply represents how much the market can offer, while demand represents how much of a product or service is desired by buyers. According to the law of demand, as the price of a product decreases, the quantity demanded by consumers increases and vice versa.
02

Analyze the Reasoning

The student's reasoning suggests that increased production would lead to lower prices because of surplus supply, and further suggests that lower prices would ultimately boost demand. However, this reasoning may not hold in every case. It assumes that demand is only price sensitive and does not consider the quality or value of the product, tastes and preferences of consumers, or alternatives available in the market.
03

Formulate Response

Based on the understanding of the interdependence between supply, demand, and prices, it can be concluded that, while the student's reasoning is partially correct in suggesting that a lower price might lead to an increase in demand under classical economic theory, it oversimplifies the relationship and fail to account for other relevant factors. Therefore, the conclusion could only be agreed upon to a certain extent.

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Most popular questions from this chapter

[Related to the Don't Let This Happen to You on page 96\(]\) A student was asked to draw a demand and supply graph to illustrate the effect on the market for premium bottled water of a fall in the price of electrolytes used in some brands of premium bottled water, holding everything else constant. She drew the following graph and explained it as follows: Electrolytes are an input to some brands of premium bottled water, so a fall in the price of electrolytes will cause the supply curve for premium bottled water to shift to the right (from \(S_{1}\) to \(S_{2}\) ). Because this shift in the supply curve results in a lower price \(\left(P_{2}\right)\), consumers will want to buy more premium bottled water, and the demand curve will shift to the right (from \(D_{1}\) to \(D_{2}\) ). We know that more premium bottled water will be sold, but we can't be sure whether the price of premium bottled water will rise or fall. That depends on whether the supply curve or the demand curve has shifted farther to the right. I assume that the effect on supply is greater than the effect on demand, so I show the final equilibrium price \(\left(P_{3}\right)\) as being lower than the initial equilibrium price \(\left(P_{1}\right)\). Explain whether you agree with the student's analysis. Be careful to explain exactly what - if anything- you find wrong with her analysis.

If a market is in equilibrium, is it necessarily true that all buyers and sellers are satisfied with the market price? Brieflv explain.

From 1979 to 2015 , China had a policy that allowed couples to have only one child. (Since 2016 , couples have been allowed to have two children.) The one- child policy caused a change in the demographics of China. Between 1980 and 2015 , the share of the population aged 14 and under decreased from 36 percent to 17 percent. And, as parents attempted to ensure that the lone child was a son, the number of male children relative to female children increased. Choose three goods and explain how the demand for them has been affected by China's one-child policy. Sources: World Bank, World Development Indicators, April 2016; and "China New 'Two Child' Policy Increases Births by 7.9 Percent, Government Says," cbsnews.com, January 23, 2017 .

The Toyota Prius is a gasoline/electric hybrid car that gets 54 miles to the gallon. An article in the Wall Street Journal noted that sales of the Prius had been hurt by low gasoline prices and that "Americans are now more likely to trade in a hybrid or an electric vehicle for an SUV." Does the article indicate that gasoline-powered cars and gasoline are substitutes or complements? Does it indicate that gasoline-powered cars and hybrids are substitutes or complements? Briefly explain. Source: Sean McClain, "Toyota's Prius Pays Price for Cheap Gasoline," Wall Street Journal, September 6, 2016 .

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