Check Your Understanding

1. Question

   In the following three situations, the market is initially in equilibrium. After each event described below, does a surplus or shortage exist at the original equilibrium price? What will happen to the equilibrium price as a result?

   1. In 2014 there was a bumper crop of wine grapes.

   2. After a hurricane, Florida hoteliers often find that many people cancel their upcoming vacations, leaving them with empty hotel rooms.

   3. After a heavy snowfall, many people want to buy second-hand snowblowers at the local tool shop.

2. Question

   For each of the following examples, explain how the indicated change affects supply or demand for the good in question and how the shift you describe affects the equilibrium price and quantity.

   1. As the price of gasoline fell in the United States during the 1990s, more people bought large cars.

   2. Technological innovation in the use of recycled paper has lowered the cost of paper production.

   3. When a local cable company offers cheaper pay-per-view films, local movie theaters have more unfilled seats.

3. Question

   Periodically, a computer chip maker like Intel introduces a new chip that is faster than the previous one. In response, demand for computers using the earlier chip decreases as customers put off purchases in anticipation of machines containing the new chip. Simultaneously, computer makers increase their production of computers containing the earlier chip in order to clear out their stocks of those chips.

   Draw two diagrams of the market for computers containing the earlier chip: (a) one in which the equilibrium quantity falls in response to these events and (b) one in which the equilibrium quantity rises. What happens to the equilibrium price in each diagram?