SOLUTION MANUAL FOR FUNDAMENTALS OF ECONOMICS 6TH
EDITION BY BOYES MELVIN ISBN 1133956106 9781133956105 Formatted: Font: Times New Roman, 14 pt
Formatted: Centered
Full link download: Formatted: Font: 14 pt, Bold
Solution Manual:
https://testbankpack.com/p/solution-manual-for-fundamentals-of-economics-6th-
edition-by-boyes-melvin-isbn-1133956106-9781133956105/
Test Bank:
https://testbankpack.com/p/test-bank-for-fundamentals-of-economics-6th-edition-
by-boyes-melvin-isbn-1133956106-9781133956105/
Formatted: Body Text1
CHAPTER 2
Markets and the Market Process
Field Code Changed
FUNDAMENTAL QUESTIONS
1. How are goods and services allocated? Field Code Changed
2. How does the market process work? Field Code Changed
3. What is demand? Field Code Changed
4. What is supply? Field Code Changed
5. How is price determined by demand and supply? Field Code Changed
6. What causes price to change? Field Code Changed
Field Code Changed
TEACHING OBJECTIVES
The purpose of this chapter is twofold. The first is to introduce the different allocation
mechanism systems, and the second is to develop the concepts of demand and supply and
explain how they combine to produce equilibrium prices and quantities.
The unique features of this chapter are the explanation of the functioning of the market process
and a discussion of market equilibrium in the real world.
The concepts that warrant special coverage are the construction of demand and supply curves,
how a movement along one curve compares to a shift in the entire curve, and how equilibrium
prices and quantities are obtained. Reasons for changes in equilibrium prices are also shown as
shifts in the demand and/or supply curves.
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a
publicly accessible website, in whole or in part.
12 Chapter 2: Markets and the Market Process
Field Code Changed
KEY TERMS
efficienc
y
demand
law of demand
demand schedule
demand curve
market demand
quantity
demanded
determinants of
demand substitute
goods complementary
goods supply
law of supply
determinants of
supply supply
schedule
supply Field Code Changed
curve
Field Code Changed
equilibrium
surplus
shortage
LECTURE OUTLINE AND TEACHING STRATEGIES
1. How are goods and services allocated?
The ways inputs can be utilized to serve the needs of consumers are called the allocation Field Code Changed
mechanisms. The market (price), government, random choice, and the first-come, first-served
mechanisms are the most commonly used allocation mechanisms.
Teaching Strategy: Using the exercise in Preview in the text, survey the class about their
response to the different situations. This is an excellent way of introducing the students to the Field Code Changed
notion of market mechanism and other means of allocating resources. You should expect a great
deal of debate about the different allocation mechanisms. Field Code Changed
1. Efficiency: If an allocation mechanism is efficient, it means that it best satisfies the needs
and wants of a society compared to the other allocation mechanisms. A system of markets
and prices is often the most efficient way of allocating scarce resources. As a result, it is
predominantly used in most industrial countries today.
2. Self-interest: When economists assume people are self-interested, they do not mean
people are mean-spirited or selfish, but are pursuing ends that best suit their needs and
wants.
3. Alternatives to market allocation: In some cases, the market system is not the best. One
reason for this is that for some goods and services, such as health care and defense, people do
not like the outcome of the market system. Another reason is that the market system is
inefficient under some
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a
publicly accessible website, in whole or in part.
Chapter 2: Markets and the Market Process 13
circumstances. When the market is not the best system, the government is often called
on to allocate resources and goods.
Disagreement with the market outcome
Inefficiency
Teaching Strategy: Divide the class into groups and ask each group to make a list of situations
where they consider the market outcome is not efficient. Select one group to share their list with
the class and choose another group to react to the first group’s list. Then repeat the exercise with
other groups. At the end, point out that the market system is not the best available allocation
mechanism in some cases, although it is in most cases.
Field Code Changed
2. How does the market process work?
A market is defined as a place where buyers and sellers get together and set prices and quantities.
Teaching Strategy: Give real-world examples of markets that students can conceptualize, for
example, the market for X-Box, for illegal drugs, or for a local painter working on a cash-only
basis.
The market process guides producers to produce goods and services demanded by consumers at
the lowest possible price. As a result, those firms that cannot use resources most efficiently have
to leave the market. Thus, the market process brings about efficiency and increases consumer
welfare. Some have compared market efficiencies to economic Darwinism: survival of the Field Code Changed
fittest.
3. What is demand?
1.
The law of demand: The quantity of a well-defined good or service that people are willing and Field Code Changed
able to purchase during a particular period of time decreases as the price of that good rises,
ceteris
paribus. Be sure to define this term.
There are two points that economists advance to argue for a downward-sloping demand
the income and substitution effects. The income effect takes place when a change in the price
curve—
of a
good alters the consumers’ purchasing power. When the price of a good changes, and in turn
the
Teaching
demand forStrategy: When
a substitute goodbeer prices the
changes, fall substitution
during a Friday afternoon
effect happy hour, bar patrons
is at work.
substitute more beer for other goods they could consume (the substitution effect). In
increase
addition,in
thetheir purchasing power due to the less expensive beer allows them to buy more
pretzels and pizza (the income effect).
2. The demand schedule is a list of the quantities of a good that consumers demand at different Field Code Changed
prices, ceteris paribus.
Teaching Strategy: Pass out slips of paper and ask students what price they would pay for an
in
A the course. Generate a demand schedule with the results.
3. The demand curve is a graph constructed from the data in the demand schedule. Field Code Changed
Teaching Strategy: Derive a demand curve from the demand schedule created in the
teaching strategy above.
4. A market demand curve is the horizontal summation of all individual demand curves. Field Code Changed
5. Compare a movement along a demand curve, a change in quantity demanded, to a shift in the Field Code Changed
entire curve, a change in demand. The determinants of demand are income, tastes, the prices
of
related goods, expectations, and the number of buyers.
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a
publicly accessible website, in whole or in part.
14 Chapter 2: Markets and the Market Process
Teaching Strategy: Consider using a mnemonic to help students appreciate the various
forces that can cause a change in demand: TYPEN.
T = tastes
Y = income
P = price of related goods
E = expectations
N = number of consumers
Teaching Strategy: Ask your students to reconsider their demand for an A after receiving
$1,000 in lottery winnings.
Field Code Changed
4. What is supply?
1. The law of supply: The quantity of a good producers will sell is positively related to price, Field Code Changed
ceteris paribus.
Teaching Strategy: Focus the law of supply around the profit motive of producers, that is,
self- interest.
2. The supply curve is composed of all the combinations of prices and quantities supplied Field Code Changed
that are listed in the supply schedule.
Field Code Changed
3. The market supply curve is the summation of all the individual supply curves. It is the
horizontal summation—the total amount provided by all producers at each price.
Field Code Changed
4. A change in supply occurs when the quantity supplied at every price changes, and a
change in quantity supplied occurs when only the product price changes while all other
factors hold constant.
Again, consider using a mnemonic to help students appreciate the various forces than can
cause a change in supply: PPETN.
P = price of resources
P = price of related goods
E = expectations
T = technology
N = number of producers
Teaching Strategy: Show a change in quantity supplied as a movement along a stationary
supply curve, as shown in Figure 4 in the text. A change in supply occurs when the quantity
supplied at every price changes due to a change in a factor other than product price, such as
resource prices, technology, producer expectations, number of producers, or prices of related
goods.
Teaching Strategy: Show how an increase in rent paid by the DVD store will cause the Field Code Changed
supply curve for DVDs to shift to the left. Refer to Figure 4 in the text.
Field Code Changed
5. How is price determined by demand and supply?
1. Equilibrium is the price where quantity demanded equals quantity supplied.
Teaching Strategy: Ask students which blade of a scissors cuts paper. Answer, à la Alfred
Marshall, both, just as supply and demand determine price.
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a
publicly accessible website, in whole or in part.
Chapter 2: Markets and the Market Process 15
6. What causes price to change?
2. Demand shifts Field Code Changed
Teaching Strategy: Have students name fad items from their childhood or adolescence.
Today’s students may mention Tickle Me Elmo, X-box, or Beanie Babies. Older students
may mention Rubik’s cubes or Cabbage Patch dolls. Show how changes in demand for “hot”
items affected the equilibrium price. Have students use TYPEN to think of other factors that
would cause a demand shift.
Field Code Changed
3. Supply shifts
Teaching Strategy: Ask students how much they paid for their first personal computers
versus how much they paid for their most recent computer. Most students will have paid less
(if they paid for it and not their parents!) Show the results of changes in technology in the
market on the equilibrium price and quantity of personal computers. Have students use
PPETN to think of other factors that would cause a supply shift.
Field Code Changed
OPPORTUNITIES FOR DISCUSSION
Field Code Changed
1. Why does the demand curve slope down? Why does the supply curve slope up?
Field Code Changed
2. How do shortages and surpluses appear in a market? How are disequilibria eliminated?
Field Code Changed
ANSWERS TO EXERCISES Field Code Changed
1. Field Code Changed
a. Demand curve shifts Field Code Changed
Field Code Changed
in. b. Demand curve
shifts in.
c. Movement along the demand curve and movement along the supply curve.
Field Code Changed
d. Demand curve shifts in. Field Code Changed
e. Demand curve shifts in. Field Code Changed
2. Field Code Changed
a. F. An increase in demand is represented by a shift outward of the demand curve. Field Code Changed
Field Code Changed
b. F. An increase in quantity supplied is represented by a move up the supply curve.
Field Code Changed
c. T. The demand curve shifts out, leading to an increase in the Field Code Changed
price. d. F. The supply curve shifts out, leading to a decline in the Field Code Changed
price. Field Code Changed
3. Equilibrium price = $5; equilibrium quantity = 300. At a price of $10, the quantity supplied
is
975, and the quantity demanded is only 150. There is a surplus of 825. The surplus will
Field Code Changed
cause the supplier to lower the price. Price must decline to $5. At a price of $2, there is a
shortage of 280. The producer will raise the price until the shortage no longer exists. Price
must increase to $5.
4. California and Florida citrus are substitutes. Thus, as the quantity of California citrus Field Code Changed
declines, the supply curve shifts in and the price of California citrus rises. People shift their
purchases from California to Florida citrus. The demand for Florida citrus rises. As a result,
the price of Florida citrus rises.
5. People who buy the Polo line are also buying the prestige that comes with it. The prestige
rises as the price rises. Thus, in our demand and supply curves we would look at the Polo
brand and the
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a
publicly accessible website, in whole or in part.
16 Chapter 2: Markets and the Market Process
JCPenney brand as two different goods. The law of demand states that for the JCPenney
brand, the higher the price, the lower the quantity demanded, everything else the same.
higher the the
Similarly, price of the Polo brand, the lower the quantity demanded, everything else being the
same.
6. No. The price of trees rises because the demand curve shifts out; the demand for trees rises. Field Code Changed
7. The demand for U.S. oranges has increased due to a rise in foreign demand for the domestic Field Code Changed
product (U.S. oranges). This may result from an increase in Japanese consumers’ income or
the
depreciation of the U.S. dollar against the Japanese yen (or the appreciation of the yen against
the
dollar).
oranges.This creates a rightward shift in the demand curve, indicating a rise in demand for
8. The cost of supplying the packaged meat will rise as a result of the new labeling law. This Field Code Changed
that
meansthe supply curve will shift to the left (or up). As a result, the price of meat will rise.
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a
publicly accessible website, in whole or in part.
Chapter 2: Markets and the Market Process 17
9. Field Code Changed
a. The freeze in Florida would shift the supply curve to the left, creating a decline in Field Code Changed
quantity demanded and an increase in price.
b. This would increase the supply of oranges and lower the orange juice prices as the Field Code Changed
supply curve shifts out to the right.
c. This ban would shift the supply curve for oranges to the left, creating a decline in Field Code Changed
the quantity demanded and an increase in the orange juice prices.
Field Code Changed
10. When the supply of a product rises, it means that the supply curve shifts to the right due to
nonprice factors, such as technological changes, whereas changes in the quantity supplied
are reflected in movements along the (same) supply curve because of the changes in the
price. Changes (shifts) in the demand curve for television sets could raise the price of
television sets if there is no change in the supply to offset the increase in the demand.
Field Code Changed
ACTIVE LEARNING EXERCISE
The purpose of this exercise is to allow students to observe how equilibrium prices and
quantities are set in goods markets. It also reinforces the point that market equilibrium is a
dynamic process and equilibrium quantities change with movements in prices. Finally, students
get another opportunity to practice the construction of supply and demand curves.
Field Code Changed
Materials Needed
Green and red tickets—green for buyer, red for seller
Five types of buyer sheets noting the following values for each buyer type:
Number of Goods Buyer 1 Buyer 2 Buyer 3 Buyer 4 Buyer 5
1 28 35 27 25 26
2 22 20 21 24 23
3 17 18 15 19 16
Five types of seller sheets noting the following costs for each seller type:
Number of Goods Seller 1 Seller 2 Seller 3 Seller 4 Seller 5
1 18 16 0 15 17
2 22 21 19 27 20
3 24 25 26 28 27
Each buyer values the first item purchased more than the second, and the second more than the third.
Each seller finds the cost of producing and selling the second item higher than the first, and the
third higher than the second.
Open the market. Buyers hold aloft green tickets, and sellers hold aloft red tickets. Then they call
out offered prices. Once a deal is set, it is recorded. Each buyer has two goods to buy, each seller
two goods to sell. Buyer profits are value less price paid; seller profits are price received less costs.
Carry out several trading sessions, and construct supply and demand curves plotting price
on the vertical axis and quantity on the horizontal axis.
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a
publicly accessible website, in whole or in part.
