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    Answer Key Supply Demand.v2

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    Dognimin Aboudramane Konate
    This document provides an economics lesson on demand and supply, including examples of how different market events impact equilibrium price and quantity. It analyzes how the markets for peanut butter, wheat, instant ramen, corn, hybrid automobiles, iPhones would be affected by events like changes in input prices, technological advances, natural disasters, and trade agreements. For each market, it illustrates the impact on the supply and demand curves and indicates whether the equilibrium price and quantity would increase, decrease, or have an indeterminate effect. It also explains the adjustment process back to the new equilibrium for the peanut butter and wheat markets after experiencing shocks to supply or demand.

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    Answer Key Supply Demand.v2

    Uploaded by

    Dognimin Aboudramane Konate
    68 views3 pages
    This document provides an economics lesson on demand and supply, including examples of how different market events impact equilibrium price and quantity. It analyzes how the markets for peanut butter, wheat, instant ramen, corn, hybrid automobiles, iPhones would be affected by events like changes in input prices, technological advances, natural disasters, and trade agreements. For each market, it illustrates the impact on the supply and demand curves and indicates whether the equilibrium price and quantity would increase, decrease, or have an indeterminate effect. It also explains the adjustment process back to the new equilibrium for the peanut butter and wheat markets after experiencing shocks to supply or demand.

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    This document provides an economics lesson on demand and supply, including examples of how different market events impact equilibrium price and quantity. It analyzes how the markets for peanut butter, wheat, instant ramen, corn, hybrid automobiles, iPhones would be affected by events like changes in input prices, technological advances, natural disasters, and trade agreements. For each market, it illustrates the impact on the supply and demand curves and indicates whether the equilibrium price and quantity would increase, decrease, or have an indeterminate effect. It also explains the adjustment process back to the new equilibrium for the peanut butter and wheat markets after experiencing shocks to supply or demand.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    68 views3 pages

    Answer Key Supply Demand.v2

    Uploaded by

    Dognimin Aboudramane Konate
    This document provides an economics lesson on demand and supply, including examples of how different market events impact equilibrium price and quantity. It analyzes how the markets for peanut butter, wheat, instant ramen, corn, hybrid automobiles, iPhones would be affected by events like changes in input prices, technological advances, natural disasters, and trade agreements. For each market, it illustrates the impact on the supply and demand curves and indicates whether the equilibrium price and quantity would increase, decrease, or have an indeterminate effect. It also explains the adjustment process back to the new equilibrium for the peanut butter and wheat markets after experiencing shocks to supply or demand.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 3

    Economics 101: Principles of Microeconomics

    Demand and Supply Exercises - Key

    Question 1
    a. Assume that each of the markets below is initially in equilibrium. Then for each market below,
    suppose that the indicated event occurs. Illustrate the effect of each event in a diagram and
    indicate the effects on the equilibrium price and quantity.

    Market Event
    Peanut butter The price of jelly increases.
    When the price of jelly increases, the quantity demanded of jelly
    decreases. Because peanut butter and jelly are complementary
    goods, you will also want less peanut butter. Thus, the demand
    for peanut butter decreases. The decrease in demand for peanut
    butter decreases the equilibrium price and quantity of peanut
    butter.

    i.
    Wheat Midwest floods destroy 50% of the wheat crop.
    The destruction of the wheat crop decreases the supply of wheat.
    The decrease in the supply of wheat increases the equilibrium
    price and decreases the equilibrium quantity of wheat.

    ii.
    Instant ramen A rise in average family incomes.
    Since instant ramen is an inferior good, an increase in family
    incomes will decrease the demand for instant ramen. The
    iii. decreased demand results in a decrease in the equilibrium price
    and quantity of instant ramen.

    Corn The price of fertilizer decreases.


    A decrease in the price of an input to production will increase the
    supply of corn. An increase in the supply of corn will decrease the
    equilibrium price and increase the equilibrium quantity.

    iv.
    Hybrid automobiles Technological advances reduce costs of producing high-quality
    hybrid cars and there is an increase in fuel prices.
    Technological advances reducing the cost of producing high-
    quality hybrid cars will increase the supply of these cars. An
    increase in fuel prices will increase the demand for hybrid cars
    (since fuel is a complementary good and hybrid cars require less of
    it). The combined changes in supply and demand will result in an
    increase in the equilibrium quantity of hybrid cars but the change
    in equilibrium price is indeterminate.

    v.
    iPhones Due to free trade agreements, the components used to
    manufacture iPhones can be purchased more cheaply. There is
    also a decrease in average household incomes.
    When the components (inputs) used to produce iPhones decrease
    in price, the supply of iPhones increases. The decrease in
    household incomes will decrease the demand for iPhones
    (assuming that iPhones are a normal good). The combined
    changed in demand and supply will result in a decrease in the
    equilibrium price of iPhones but the change in the equilibrium
    quantity is indeterminate.

    vi.

    b. Explain the adjustment process in the peanut butter market after the shock to the new equilibrium.
    When the price of jelly increases, consumers will purchase less jelly (quantity demanded falls) and
    also demand less peanut butter (which they eat with jelly). At the initial equilibrium price (P*) and
    the new demand, the quantity demanded is lower than the quantity of peanut butter supplied.
    Thus, there is a surplus of peanut butter. In response to the surplus, price begins to fall and thus the
    quantity of peanut butter supplied falls and the quantity demanded increases (moving along the
    new demand and original supply curves) until they are equal and the new equilibrium is reached.
    c. Explain the adjustment process in the wheat market after the shock to the new equilibrium.
    When half of the wheat crop is destroyed, the supply of wheat falls. At the initial equilibrium price
    (P*) and the new supply curve, the quantity demanded exceeds the quantity supplied. Thus, there is
    a shortage of wheat. In response to the shortage, the price begins to be bid up. The increasing price
    causes the quantity demanded to fall and the quantity supplied to increase (moving along the
    original demand and new supply curves) until they are equal and the new equilibrium is established.

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