SUPPLY
DEMAND
OPTIMISM BIAS
EQUILIBRIUM
SHORTAGE/SURPLUS
100
Explain the law of supply!
As price increases, quantity supplied increases and as price decreases, quantity supplied decreases.
100
What does the law of demand say?
As the price increases, the quantity demanded decreases and as the price decreases the quantity demanded increases.
100
What do American newlyweds report as their probability of getting divorced? What is the actual probability?
0% 40%
100
When the market reaches equilibrium, this means that: (a) the quantity supplied is greater than quantity demanded (b) the quantity demanded is greater than the quantity supplied (c) the quantity demanded is equal to the quantity supplied (d) there is a shortage or surplus in the market
C!
100
What is the relationship between quantity supplied and quantity demanded when there is a surplus?
Quantity supplied is greater than quantity demanded
200
What kind of relationship do quantity supplied and price have? Show this graphically.
A direct relationship!
200
What kind of relationship do quantity demanded and price have? Show this graphically.
An inverse relationship
200
What is the optimism bias?
The tendency to overestimate the probability that good things will happen in your future and to underestimate the probability that bad things will happen in your future.
200
Why is it important for the market to reach equilibrium?
This is where the market is most efficient. Since the quantity supplied is equal to the quantity demanded, there is no waste.
200
What is the relationship between quantity supplied and quantity demanded when there is a shortage?
Quantity demanded is greater than quantity supplied
300
Imagine that you are a producer of Cheetos. Recent scientific research shows that eating Cheetos can cause early heart attacks. What might the government do to discourage Cheetos production? How would this change the supply of Cheetos?
Tax on Cheetos The supply curve will shift to the left.
300
In America people like to eat bacon and eggs together for breakfast. Imagine that the price of bacon decreases. Which of the following statements would be true? (a) the quantity demanded of bacon will decrease (b) the demand for eggs will increase (c) the demand for eggs will decrease (d) the quantity demanded of eggs will decrease
B!
300
Our class did an experiment with the 9th and 10th graders. This experiment was based on a real one done by scientists. In the real experiment, the researchers gave a survey to 1000 participants asking them to rank themselves on personal characteristics like driving ability, leadership ability, attractiveness, etc. For each characteristic, they had to rank themselves in the bottom 25%, middle 50% or top 25% of the population. What were the results?
On many characteristics at least 50% of the participants ranked themselves in the top 25% of the population. This is statistically impossible and clearly shows the optimism bias.
300
Imagine that you are selling donuts. At 20 cents, 300 are demanded and 100 are supplied. At 30 cents, 250 are demanded and 150 are supplied. At 60 cents 100 are demanded and 300 are supplied. Find the equilibrium price and equilibrium quantity!
The equilibrium price is 40 cents. The equilibrium quantity is 200 donuts.
300
Imagine that a new producer of video games thinks that he can sell 800 games a day. In reality people's income is not very high due to an economic crisis. As a result, only 400 video games are demanded. What does this cause in the market? Why is this bad?
This causes a surplus. It is bad because it is not efficient (the market loses money).
400
List three circumstances that can change supply.
Cost of inputs Change in technology Number of Producers Government policies Expectations of future prices
400
An increase in income ______________ (increases, decreases) the _____________________ (demand, quantity demanded) for jewelry.
increases demand
400
Explain the Tali Sharot experiment with the college students, where she gives them 99 events. Tali Sharot invited 150 university students to her lab and gave them a questionnaire with 33 positive events, 33 negative events and 33 neutral events. They had to answer "yes" or "no" if they believed each event would happen in the next month of their lives. Then, Dr. Sharot invited them to come back after a month and report if each event had actually happened. Explain the results of the experiment.
Dr. Sharot found that the students exhibited the optimism bias. When predicting their future, they overestimated the probability of positive things happening in their lives and underestimated the probability of negative things happening. They believed that the 33 positive events were 50% more likely to happen than the other 66 events. In reality, each event had the same probability of occurring (33%).
400
Now imagine that the price of flour and sugar has decreased! This shifts the supply curve! Now, at 20 cents 200 donuts are supplied. At 30 cents 250 donuts are supplied. At 60 cents, 400 donuts are supplied. What is the new equilibrium price and quantity?
The new equilibrium price is 30 cents. The new equilibrium quantity is 250 donuts.
400
Surpluses lead to ________________ (increases, decreases) in price and quantity supplied and to ________________ (increase, decrease) in quantity demanded.
decreases increase
500
Imagine that you are selling
500
Explain Dr. Sharot's experiment about the terrible life events. Dr. Sharot invited 20 students to her laboratory and she gave each of them a terrible life event (i.e., getting cancer, having your car stolen, getting cheated on). She asked them to estimate their probability of this event happening to them. She then told them the average probability of this event happening. Then she asked them to change their answer based on the new information. What were the results? How do they show the optimism bias?
Dr. Sharot discovered that when the new information she provided was better than their original answer, the students changed their answer a lot. However when the new information was worse, they did not really change their answer. 79% of the students showed this tendency. This is clearly an example of the optimism bias since it shows that people integrate positive information but ignore negative information.
500
Now imagine that the price of muffins has increased, causing a further increase in the demand for donuts. Now at 30 cents the demand is 350. What is the new equilibrium price and quantity?
40 cents 300
500
Shortages lead to _______________ (increases, decreases) in price and quantity supplied and to __________ (increase, decrease) in quantity demanded.
increases decrease
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