Transcript ECON 1001 AB Introduction to Economics I Dr. Ka

Chapter 3
Supply and Demand
Q. 1, 3, 5, 7, 9, 11, 13, 15
Chapter 3, Problem 1
• State whether the following pairs of goods are complement or
substitutes. (If you think a pair is ambiguous in this respect,
explain why.)
–
–
–
–
Tennis courts and squash courts
Squash racquets and squash balls
Ice cream and chocolate
Cloth diapers and paper diapers
• Substitutes- goods that can be used / consumed
interchangeably, i.e. Coca Cola and Pepsi
• Complements- goods that have to be used / consumed at the
same time, i.e. Computer hardware and software
Solution to Problem 1 (1)
• Tennis courts and squash courts
– Substitutes- you cannot play tennis in a squash court and you cannot
play squash court in a tennis court. Two kinds of sport venue
• Squash racquets and squash balls
– Complements- to play squash, you will need both
• Ice cream and chocolate
– Substitutes for some people who regard them as desert
– Complement for some people who want to have chocolate (chips) on
top of the ice cream
• Cloth diapers and paper diapers
– Substitutes- just different materials! We can use them interchangeably
Chapter 3, Problem 3
• Indicate how you think each of the following would shift
demand in the indicated market
– Incomes of buyers in the market for Adirondack vacation increase
– Buyers in the market for pizza read a study linking hamburger
consumption to heart disease
– Buyers in the market for CDs learn of an increase in the price of
audiocassettes (a substitutes for CDs)
– Buyers in the market for CDs learn of an increase in the price of CDs
• Demand shifts up (right)- increase in demand at any given level of price
• Demand shifts down (left)- decrease in demand at any given level of price
Solution to problem 3 (1)
• Incomes of buyers in the market for Adirondack vacations
increase
– The demand curve will shift up (right)
– Assume vacations are a normal good. Buyers will increase their
consumption in vacations when their incomes increase.
• Buyers in the market for pizza read a study linking hamburger
consumption to heart disease
– The demand curve will shift up (right)
– Pizza and hamburger are both junk food and can be consumed
interchangeably. If a study shows proven connection between
hamburger consumption and heart disease, people will consume less
pizza for now. People will probably switch to consume pizza going
forward.
Solution to problem 3 (2)
• Buyers in the market for CDs learn of an increase in the price
of audiocassettes.
– The demand will shift up (right)
– CDs and audiocassettes are substitutes . They both can be used to
record and play music or soundtrack.
– If price of audiocassettes increases, people will probably switch to CDs
• Buyers in the market for CDs learn of an increase in the price
of CDs
– As price of CDs goes up, people will buy less
– But the demand curve will not shift- why?
• Change in Quantity Demanded versus Change in Demand
Solution to problem 3 (3)
• Change in Quantity Demanded
– Endogenous factors affecting the demand
– A demand graph consists of price on the Y-axis and quantity on the Xaxis. Thus, price and quantity are endogenous factors
– Change in an endogenous factor itself (price of CDs) will only cause
movement along the demand curve
• Change in Demand
– Exogenous factors affecting the demand
– Factors other then the endogenous factors (price and quantity) are
going to shift the demand curve
• Price of substitutes, price of complements, increase in wealth
(exogenous factors)
Chapter 3, Problem 5
• What will happen to the equilibrium price and quantity of
oranges if the wage paid to orange pickers rises?
Solution to problem #5 (1)
• Wage paid to orange pickers is actually one of the production
costs of orange
• If now the production cost increases, suppliers will find it less
profitable and so they will begin producing less orange to the
market
• As a result, the supply of orange will decrease
• Is it a change in supply or a change in quantity supplied?
– Change in supply
– Increase in wage paid is an outside factor affecting the supply curve. It
will cause the supply curve shift up (left)
Solution to problem #5 (2)
Price of orange (P)
S1
S0
P1
P0
D0
0
Quantity of orange (Q)
Q1 Q0
• Equilibrium is achieved where a demand curve and a supply curve
intersect
• Equilibrium price of orange increases and equilibrium quantity of orange
decreases when the wage paid to orange pickers increases
Chapter 3, Problem 7
• What will happen to the equilibrium price and quantity of fish
if fish oils are fount to help prevent hear disease?
Solution to problem #7 (1)
• If fish oil is found to help prevent heart disease, people will
probably increase their consumption in fish so that they can
be healthier
• As a result, the demand for fish will increase
• Is it a change in demand or a change of quantity demanded?
– Change in demand
– Increase in fish consumption is an outside factor affecting the demand
curve. It will cause the demand curve shift up (right)
Solution to problem #7 (2)
Price of fish (P)
S0
P1
P0
D1
D0
0
Quantity of fish (Q)
Q0 Q1
• Equilibrium is achieved where a demand curve and a supply curve
intersect
• Both the equilibrium price and quantity of fish increase when fish is
found healthy
Chapter 3, Problem 9
• Use supply and demand analysis to explain why hotel room
rental rates near your campus during parents’ weekend and
graduation weekend might differ from rates charged during
the rest of the year.
Solution to problem #9 (1)
• As many parents visit the campus and participate in their
children’s activities during parents’ weekend and graduation
weekend, there will be a higher demand for hotel rooms near
the campus than other periods in the year
• The demand for hotel rooms near the campus during the
weekends during the special weekends will increase
• Is it a change in demand or a change in quantity demanded?
– Change in demand
– Increase in demand for hotel rooms during the time is an outside
factor affecting the demand curve. It will cause the demand curve shift
up (right)
Solution to problem #9 (2)
Price of hotel
rooms (P)
S0
P1
P0
D1
D0
0
Quantity of hotel rooms (Q)
Q0 Q1
• Equilibrium is achieved where a demand curve and a supply curve
intersect
• Both the equilibrium price and quantity of hotel rooms increase when it
is a special weekend for parents
Problem #11, Chapter 3
• Suppose the current issue of the New York Times reports an
outbreak of mad cow disease in Nebraska, as well as the
discovery of a new breed of chicken that gains more weight
than existing breeds that consume the same amount of food.
How will these developments affect the equilibrium price and
quantity of chickens sold in the United States?
Solution to problem #11 (1)
• Beef and chicken are substitutes
• If there is an outbreak of mad cow disease, people will
generally switch from consuming beef to consuming chicken
• As a result, the demand for chicken will increase
• Is it a change in demand or a change in quantity demanded?
– Change in demand
– Increase in demand for chicken is an outside factor affecting the
demand curve. It will cause the demand curve shift up (right)
Solution to problem #11 (2)
• If there is a discovery of a new breed of chicken that gains
more weight than existing breeds that consume the same
amount of food, it will be more profitable for chicken
suppliers
• As a result, the supply of chicken will increase
• Is it a change in supply or a change in quantity supplied?
– Change in supply
– Increase in supply of chicken is an outside factor affecting the supply
curve. It will cause the supply curve shift down (right)
Solution to problem #11 (3)
Price of chicken
(P)
S0
S1
P1
P0
D1
D0
0
Q0
Quantity of chicken (Q)
Q1
• Equilibrium is achieved where a demand curve and a supply curve
intersect
• IF THE INCREASE OF DEMAND IS GREATER THAN THE INCREASE IN
SUPPLY, both the equilibrium price and quantity of chicken increase
Solution to problem #11 (4)
Price of chicken
(P)
S0
S1
P0
P1
D1
D0
0
Q0
Quantity of chicken (Q)
Q1
• Equilibrium is achieved where a demand curve and a supply curve
intersect
• IF THE INCREASE OF DEMAND IS LESS THAN THE INCREASE IN SUPPLY, the
equilibrium price will decrease and the equilibrium quantity will increase
Solution to problem #11 (5)
• To summarize, the equilibrium quantity of chicken will
definitely increase
• The equilibrium price of chicken, however, is ambiguous
– It depends on the relative change in demand and change in supply
Chapter 3, Problem 13
• What will happen to the equilibrium price and quantity of
apples if apples are discovered to help prevent colds and a
fungus kills 10 percent of existing apple trees?
Solution to problem #13 (1)
• If apples are discovered to help prevent colds, people will
probably increase their consumption in apples so that they
can be healthier
• As a result, the demand for apples will increase
• Is it a change in demand or a change in quantity demanded?
– Change in demand
– Increase in demand for apples is an outside factor affecting the
demand curve. It will cause the demand curve shift up (right)
Solution to problem #13 (2)
• If a fungus kills 10% of existing apple trees, there will be a
decrease in supply of apples
• As a result, the supply of apples will decrease
• Is it a change in supply or a change in quantity supplied?
– Change in supply
– Decrease in supply for apples is an outside factor affecting the supply
curve. It will cause the supply curve shift up (left)
Solution to problem #13 (3)
Price of apples
(P)
S1
S0
P1
P0
D1
D0
0
Quantity of apples (Q)
Q0 Q1
• Equilibrium is achieved where a demand curve and a supply curve
intersect
• IF THE INCREASE OF DEMAND IS GREATER THAN THE DECREASE IN
SUPPLY, both the equilibrium price and quantity of apples increase
Solution to problem #13 (4)
Price of apples
(P)
S1
S0
P1
P0
0
D1
D0
Quantity of apples (Q)
Q1 Q0
• Equilibrium is achieved where a demand curve and a supply curve
intersect
• IF THE INCREASE OF DEMAND IS LESS THAN THE DECREASE IN SUPPLY,
the equilibrium price will increase and the equilibrium quantity will
decrease
Solution to problem #13 (5)
• To summarize, the equilibrium price of apples will definitely
increase
• The equilibrium quantity of apples, however, is ambiguous
– It depends on the relative change in demand and change in supply
Problem #15, Chapter 3
• Twenty-five years ago, tofu was available only from small
businesses operating in predominantly Asian sections of large
cities. Today Tofu has become popular as a high-protein health
good and is widely available in supermarkets throughout the
United States. At the same time, tofu production has evolved to
become factory-based using modern food-processing
technologies. Draw a diagram with demand and supply curves
depicting the market for tofu 25 years ago and the market for tofu
today. Given the information above, what does the demandsupply model predict about changes in the volume of tofu sold in
the United States between then and now? What does it predict
about changes in the price of tofu?
Solution to problem #15 (1)
• As tofu has been regarded as a healthy food, people will
probably increase their consumption in tofu so that they can
be healthier
• As a result, the demand for tofu will increase
• Is it a change in demand or a change in quantity demanded?
– Change in demand
– Increase in demand for tofu is an outside factor affecting the demand
curve. It will cause the demand curve shift up (right)
Solution to problem #15 (2)
• If there has been an advancement on the processing
technology, it will be more profitable for tofu suppliers
• As a result, the supply of tofu will increase
• Is it a change in supply or a change in quantity supplied?
– Change in supply
– Increase in supply of tofu is an outside factor affecting the supply
curve. It will cause the supply curve shift down (right)
Solution to problem #15 (3)
Price of tofu (P)
S0
S1
P1
P0
D1
D0
0
Q0
Quantity of tofu (Q)
Q1
• Equilibrium is achieved where a demand curve and a supply curve
intersect
• IF THE INCREASE OF DEMAND IS GREATER THAN THE INCREASE IN
SUPPLY, both the equilibrium price and quantity of tofu increase
Solution to problem #15 (4)
Price of tofu (P)
S0
S1
P0
P1
D1
D0
0
Q0
Quantity of tofu (Q)
Q1
• Equilibrium is achieved where a demand curve and a supply curve
intersect
• IF THE INCREASE OF DEMAND IS LESS THAN THE INCREASE IN SUPPLY, the
equilibrium price will decrease and the equilibrium quantity will increase
Solution to problem #15 (5)
• To summarize, the equilibrium quantity of tofu will definitely
increase
• The equilibrium price of tofu, however, is ambiguous
– It depends on the relative change in demand and change in supply