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Problem Set 2 - Solutions

The document is a review of key economic concepts related to demand and supply, including definitions, laws, and shifts in curves. It covers market equilibrium, excess demand, and excess supply, along with practical problems and multiple-choice questions for application. The content is intended for an Economics course (Econ 210) at METU for the Spring 2024-2025 semester.

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15 views9 pages

Problem Set 2 - Solutions

The document is a review of key economic concepts related to demand and supply, including definitions, laws, and shifts in curves. It covers market equilibrium, excess demand, and excess supply, along with practical problems and multiple-choice questions for application. The content is intended for an Economics course (Econ 210) at METU for the Spring 2024-2025 semester.

Uploaded by

sezgidurlanik
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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METU

Department of Economics
Econ 210: Principles of Economics Section All
Spring 2024-2025

REVIEW OF THE MAIN CONCEPTS

Demand
Demand refers to a schedule of quantities of a good that will be bought per unit of
time at various prices, other things constant.
Quantity demanded refers to a specific amount that will be demanded per unit of
time at a specific price, other things constant.
Law of Demand: The negative relationship between price and quantity demanded:
As price rises, quantity demanded decreases; as price falls, quantity demanded
Increases

Substitutes vs. Complements


Substitutes: Goods that can serve as replacements for one another; when the price
of one increase, demand for the other increases.
Complements: Goods that “go together”; a decrease in the price of one result in an
increase in demand for the other and vice versa

Shift of Demand versus Movement Along a Demand Curve


Shift of a Demand Curve: The change that takes place in a demand curve
corresponding to a new relationship between quantity demanded of a good and
price of that good. The shift is brought about by a change in the original conditions.
(Change in income, preferences, or prices of other goods) Movement along a
Demand Curve: The change in quantity demanded brought about by a change in
price. (Change in price of a good)

Supply
Supply refers to a schedule of quantities a seller is willing to sell per unit of time at
various prices, other things constant.
Quantity supplied refers to a specific amount that will be supplied at a specific
price.
Law of Supply: The positive relationship between price and quantity of a good
supplied: An increase in market price will lead to an increase in quantity supplied,
and a decrease in market price will lead to a decrease in quantity supplied.
Shift of Supply versus Movement Along a Supply Curve
Shift of Supply Curve: The change that takes place in a supply curve
corresponding to a new relationship between quantity supplied of a good and the
price of that good. The shift is brought about by a change in
the original conditions. (Change in costs, input prices, technology, or prices of
related goods)
Movement along a Supply Curve: The change in quantity supplied brought about
by a change in price. (Change in price of a good)

Market Equilibrium
Equilibrium: The condition that exists when quantity supplied, and quantity
demanded are equal. At equilibrium, there is no tendency for price to change

Excess Demand vs. Excess Supply


Excess Demand or Shortage: The condition that exists when quantity demanded
exceeds quantity supplied at the current price.
Excess Supply or Surplus: The condition that exists when quantity
supplied exceeds quantity demanded at the current price
PART 1: PROBLEMS
Q1: In the market for ordinary milk the demand function for is 𝑄𝐷 = 100– 30𝑃
and the supply function is 𝑄𝑆 = 50 + 20𝑃.
a) Calculate the equilibrium price and quantity in the market.
b) After a famous doctor states that lactose-free milk is better for health, which
of the following demand functions might be representing the new demand curve for
ordinary milk?
1. 𝑄𝐷 = 125 – 30𝑃
2. 𝑄𝐷 = 75 – 30𝑃
c) Find the new equilibrium price and quantity after the shift of the demand
curve.
d) Starting with the demand and supply functions given at the beginning of this
question in (a), if a technological advancement in ordinary milk production occurs,
which of the following might be the new supply curve?
3.𝑄𝑆 = 25 + 20 𝑃
4.𝑄𝑆 = 75 + 20𝑃
e) Find the new equilibrium price and quantity after the shift of the supply
curve.
Q2: For each of the following, draw a diagram that illustrates the likely effect on
the market for sausages. Indicate in each case the impact on equilibrium price and
equilibrium quantity. (Show clearly what happens to demand curve, supply curve,
equilibrium price and quantities).
a) A surgeon general warns that sausages are high-cholesterol food, and they
cause heart attacks.
b) The price of egg, a complementary product, decreases.
c) An increase in the price of spice used in the production of sausages.
d) Hot-dogs become trendy in cafes.
e) A technological improvement occurred in sausage production.
Q3: How will each of the following changes in demand and/or supply affect
equilibrium price and equilibrium quantity in a competitive market; that is, do price
and quantity rise, fall, or remain unchanged, or are the answers indeterminate
because they depend on the magnitudes of the shifts? Use supply and demand to
verify your answers.
PART 2: MULTIPLE CHOICE QUESTIONS
Q1: What is the difference between an "increase in demand" and an "increase in
quantity demanded"?
a) There is no difference between the two terms; they both refer to a shift of the
demand curve.
b) An "increase in demand" is represented by a rightward shift of the demand
curve while an "increase in quantity demanded" is represented by a
movement along a given demand curve.
c) There is no difference between the two terms; they both refer to a movement
downward along a given demand curve.
d) An "increase in demand" is represented by a movement along a given
demand curve, while an "increase in quantity demanded" is represented by a
rightward shift of the demand curve.

Q2: An increase in society’s income would be represented by a movement from


a) A to B.
b) B to A.
c) D1 to D2.
d) D2 to D1.

Q3: A decrease in taste or preference would be represented by a movement from


a) A to B.
b) B to A.
c) D1 to D2.
d) D2 to D1
Q4: A decrease in the price of the product would be represented by a movement
from
a) A to B.
b) B to A.
c) D1 to D2.
d) D2 to D1

Q5: A decrease in the price of a substitute good would be represented by a


movement from
a) A to B.
b) B to A.
c) D1 to D2.
d) D2 to D1.

Q6: A decrease in the price of a complementary good would be represented by a


movement from
a) A to B.
b) B to A.
c) D1 to D2.
d) D2 to D1.

Q7: An increase in the expected future price of the product would be represented
by a movement from
a) A to B.
b) B to A
c) D1 to D2.
d) D2 to D1.

Q8: Suppose that the supply of parking spaces in METU is fixed at 4,500, and the
annual demand for these parking spaces is given as.
QD = 6000 − 3 ∙ P
What is the equilibrium annual price for parking at METU?
a. 1,000 TL
b. 750 TL
c. 500 TL
d. 250 TL

9)Now suppose that due to inflation, annual price for parking spaces increase to 600.
What will be new quantity supplied in equilibrium?
a. 3900
b. 3500
c. 4700
d. 4200

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