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Tutorial 2 2014 2015

This document provides a tutorial on demand and supply and how markets work. It includes objectives, homework assignments with supply and demand exercises, and additional practice problems. Students are asked to graph and analyze supply and demand curves, identify shifts in the curves, calculate market equilibrium, and explain how changes in the determinants of supply and demand affect equilibrium price and quantity.

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886 views4 pages

Tutorial 2 2014 2015

This document provides a tutorial on demand and supply and how markets work. It includes objectives, homework assignments with supply and demand exercises, and additional practice problems. Students are asked to graph and analyze supply and demand curves, identify shifts in the curves, calculate market equilibrium, and explain how changes in the determinants of supply and demand affect equilibrium price and quantity.

Uploaded by

noegaes
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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TUTORIAL 2

Demand and Supply: how markets work

INTRODUCTORY ECONOMICS
Taught by Pilar Beneito

YEAR 2014-15

TUTORIAL 2
Lesson 2.

Demand and Supply: how markets work


(Mankiw and Taylor, Chapter 4)

1. Objectives
The main goal of Lesson 2 is the understanding of the concepts of demand and supply, and the
equilibrium in a free market. The student should get familiar with the mathematical and graphical
representation of the curves and the equilibrium. It is esential to distinguish between movements
along the curves and shifts of the curves. The tutorial of Lesson 2 is thought to practice these
issues.

2. Homework (exercises to be handed in to the teacher in class).


2.1 Consider the following functions:

i) y = 16 + 2x
ii) y = 30 3x
a) Represent these two functions in graphs.
b) Obtain the slopes. Which curve has a greater slope?
c) Consider now the functions i) y = 26 + 2x; ii) y = 30 3x. Represent them again. What
has changed?
d) Consider now the functions i) y = 26 + 2x; ii) y = 30 2x. Represent them again. What
has changed?
2.2 Consider the following functions of demand and supply of a sandwhich at the bar of the
campus:
Demand
Supply

Xd = 100 3 Px - Py + 0.5 Pz - 2 I
Xs = 80 + 5 Px - 3 Pm

where Px is the price of the sandwich (in euros), I is income and Pm is the price of bread.
Initially, I = 30; Py = 4; Pz = 12; and Pm = 30.
a) Explain how to obtain the demand and supply curves from the functions given
above, Obtain the slopes, and say which is larger. What does it mean a larger
slope?
b) Obtain the equilibrium in this market, both mathematically and graphically.
c) Get the quantity sold, the quantity bought, the quantity demanded and the
quantity supplied if the price is 1 euro above the equilibrium price, and if is is 1
euro below the equilibrium price.
d) Describe the law of supply and demand and explain what this law tells us
about what would happend in the cases out of the equilibrium of point c.
e) Assume income rises to I = 40. Get the new equilibrium and represent it
graphically. What has happened? Is it a normal or an inferior good? Why?

INTRODUCTORY ECONOMICS
Taught by Pilar Beneito

YEAR 2014-15

f) Explain what would happen if, jointly with the increase in income of point e.,
the price of bread disminishes. Represent graphically.
g) Assume the price of good y falls to Py = 2. Compare with the initial
equilibrium of poing b. Obtain the new values and represent in a graph.
Explain the changes.
h) What would happend if it is Pz which diminishes instead of Py? Put an
example of a posible good y and z.
2.3 Explain each of the following statements using supply-and-demand diagrams.
a) Every summer, the price of fruit decreases.
b) Every summer, the rental price of appartments in the coast increases.
c) Every summer both the quantitiy eaten of fruit and the number of rented
appartments in the coast increases. However, while the price of fruit falls, the
rental price of appartments increases. Is it a contradiction?
2.4 An increase in the demand for iPads raises the quantity of iPads demanded but not the
quantity supplied. Is this statement true or false? Explain.
2.5 Consider the market for minivans. For each of the events listed here, identify which of the
determinants of demand or supply are affected. Also indicate whether demand or supply
increases or decreases. Then draw a diagram to show the effect on the price and
quantity of minivans.
a) People decide to have more children.
b) A strike by steelworkers raises steel prices.
c) Engineers develop new automated machinery for the production of minivans.
d) The price of sports utility vehicles rises.
e) A stock-market crash lowers peoples wealth.
2.6 Identify the flaw in this analysis: If more people go on a low-carb diet, the demand for
bread will fall. The decrease in the demand for bread will cause the price of bread to fall.
The lower price, however, will then increase the demand. In the new equilibrium, people
might end up consuming more bread than they did initially. Explain using a graph.
2.7 Consider the following events: Scientists reveal that consumption of oranges decreases
the risk of diabetes and, at the same time, farmers use a new fertilizer that makes
orange trees more productive. Illustrate and explain what effect these changes have on
the equilibrium price and quantity of oranges.
2.8 Because bagels and cream cheese are often eaten together, they are complements.
a)

b)

We observe that both the equilibrium price of cream cheese and the equilibrium
quantity of bagels have risen. What could be responsable for this patterna fall in
the price of flour or a fall in the price of milk? Illustrate and explain your answer.
Suppose instead that the equilibrium price of cream cheese has risen but the
equilibrium quantity of bagels has fallen. What could be responsible for this
patterna rise in the price of flour or a rise in the price of milk? Illustrate and explain
your answer.

INTRODUCTORY ECONOMICS
Taught by Pilar Beneito

YEAR 2014-15

3. Additional exercises
3.1 Each of the events listed below has an impact on the market for bicycles. For each
event, which curve is affected (supply or demand), what direction is it shifted, and what is
the resulting impact on the equilibrium price and quantity?
a)
b)
c)
d)
e)

An increase in the price of automobiles.


A decrease in incomes of consumers if bicycles are a normal good.
An increase in the price of steel used to make bicycles frames.
An environmental movement that makes more people to prefer bicycling.
A technological advance in the manufacture of bicycles.

3.2 Suppose now that both supply and demand shift.


a) What would happen to the equilibrium price and quantity of bicycles if there is an
increase in both the supply and demand of bicycles.
b) What would happen to the equilibrium price and quantity of bicycles if the demand for
bicycle increases more than the increase in the supply of bicycles?
3.3 Suppose there is an increase in the incomes of consumers. In the market for
automobiles (a normal good) does this event cause an increase in demand or an
increase in quantity demanded? Does this cause an increase in supply or an increase in
quantity supplied? Explain.
3.2 The demand curve for chocolate bars is Xd = 1,600 300P, where Xd is the quantity of
chocolate bars demanded and P is the price in . The supply curve of chocolate bars is
XS = 1,400 + 700P, where XS is the quantity of chocolate bars supplied.
a) Calculate the equilibrium price and the equilibrium quantity of this market.
b) Suppose now that because of a decline in consumers tastes for chocolate bars the
demand curve changes to Xd = 1,500 300P. Calculate the new equilibrium price
and quantity.
c) How would your answers to a) and b) above change if in both cases the supply
curve was completely elastic (that is, horizontal) at the price of 0.2 per chocolate
bar?

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