Fall Term 2016 Yaşar University

Introduction to Economics I (Econ 101)

Answer key-Problem Sheet 3

The Market Forces of Supply and Demand

Market for Gum

100

80
Quantity
60 demanded
Price

40 Quantity
supplied
20

0
0 100 200
Quantity

a Qeq= 120 Peq=50 Since Qd=Qs

b At P=70 cent, Qd=80 Qs= 160 then, there exists excess supply=160-80= 80 mio packs of
unsold gum. Then to sell more gum, seller should decrease price until equilibrium price=50 cent

c Shift in supply curve, since quantity supplied decreases 40 mio packs for every price
level

d movement in demand curve

e New equilibrium price= 60cents Equilibrium quantity= 100

New
quantity
Price of gum Quantity demanded Quantity supplied supplied
20 180 60 20
30 160 80 40
40 140 100 60
50 120 120 80
60 100 140 100
70 80 160 120
80 60 180 140
 Market for Gum

100

80 Quantity
demanded
60 Quantity
P

40 " supplied
New quantity
20 supplied
0
0 100 200
Q

2. During the 1990s, technological advances reduced the cost of computer chips. How do you think

this affected the market for computers? For computer software? For typewriters?

Answer: Technological advances that reduce the cost of producing computer chips represent a

decline in an input price for producing a computer. The result is a shift to the right in the

supply of computers, as shown in Figure 3. The equilibrium price falls and the

equilibrium quantity rises, as the figure shows.

Figure 3

Since computer software is a complement to computers, the lower equilibrium price of

computers increases the demand for software. As Figure 4 shows, the result is a rise in

both the equilibrium price and quantity of software.

Figure 4

Since typewriters are substitutes for computers, the lower equilibrium price of computers

reduces the demand for typewriters. As Figure 5 shows, the result is a decline in both the

equilibrium price and quantity of typewriters.

 Figure 5

3. Ayşe’s income declines and, as a result, she buys more spaghetti. Is spaghetti an inferior or a

normal good for Ayşe ? What happens to Ayşe’s demand curve for spaghetti?

Answer: Since Ayşe buys more spaghetti when his income falls, spaghetti is an inferior good for

her. Since she buys more spaghetti, but the price of spaghetti is unchanged, her demand

curve for spaghetti shifts out as a result of the decrease in her income.

4. Suppose that in the year 2005 the number of births is temporarily high. How does this baby boom

affect the price of baby-sitting services in 2010 and 2020?

(Hint: 5-year olds need baby-sitters, whereas 15-year-olds can be baby sitters)

Answer: A temporarily high birth rate in the year 2005 leads to opposite effects on the price of

babysitting services in the years 2010 and 2020. In the year 2010, there are more 5-year

olds who need sitters, so the demand for babysitting services rises, as shown in Figure 23.

The result is a higher price for babysitting services in 2010. However, in the year 2020,

the increased number of 15-year olds shifts the supply of babysitting services to the right,

as shown in Figure 24. The result is a decline in the price of babysitting services.
Figure 6 Figure 7