Here is a question that originally hit our economics forums. The questions are based on some introductory supply and demand curves. The picture and the answers after the jump.
Here is what one user responded with.
Event A. Since you need chips to make computers, a decrease in the price of chips means that people will buy more computers. This will shift the demand for computers outward, as shown by A
Event B. When incomes fall, the demand for inferior goods shifts outwards, while the demand for normal goods shift inwards. This is intuitive because when you have less money, you demand more cheap goods. The best answer for this one would be B, because the Supply-Demand curves shows the demand for normal goods shifting inwards.
Event C. When the price of margarine rises, people will not want to buy it as much as they will buy butter. Therefore, the demand for butter will increase because butter has become relatively cheaper. You want to look for the graph of the butter market. This curve should show an outward shift in demand. Ergo, the right answer is A
Event D. When the price of office buildings goes down, producers will be less willing to supply it. If you have the resources to build two goods, say a dell mp3 player or an ipod, and the ipod sold for more money, you would probably want to produce ipods, other things equal. The Building Firm works off of the same principle. Thus, since the schools are relatively more expensive to buy, the firm will want to supply more of them. The correct answer for what happens to the market for school buildings would be C
Event E. Use the same logic that applied to Event A to get this answer.
1) Since there is no indication of a change of demand, but the price of production decreases, we can assume they can produce more for the same amount….. so supply expands and price drops. C
2) B, demand decreases
4) you would hope C but then again it could be D assuming the builders just wanted to buil and get it done with for cheap.
These replies are correct. Just don’t confuse them with the real world. Demand for school buildings is driven by the fact that a general contractor is a choke point. Every general contractor knows going in that he will have to pay graft to whomever has the juice to OK the construction of new buildings. This is pretty much universal. New school buildings are being built at a high rate in my area and our school age population is actually falling. btw there isn’t a darn thing wrong with the present buildings that are being replaced.
Perceived value also skews our data. For instance, if a certain fish sells at x dollars per pound the demand will slacken if it rises in price. If the price goes much below x dollars per pound the demand will slacken because it is now perceived as “trash fish” and not fit for the table.