Principles of Macroeconomics Econ 105

Analytical problems Chapter 3

1. What is the difference between a flow and a stock variable in economics? List a few examples of the flow
and stock variables.

2. In microeconomics, explain how "a change in demand" differs from "a change in quantity demanded."

3. For each of the following statements, determine and explain whether there has been a change in demand
or a change in quantity demanded. Draw a demand-and-supply diagram for each situation to show either a
movement along the demand curve or a shift of the demand curve.

a. The price of Canadian-grown peaches skyrockets during an unusually cold summer that reduces the size of
the peach harvest.
b. An increase in income leads to an increase in the price of family-restaurant meals and to an increase in their
sales.
c. Technological improvements in electronic publishing lead to price reductions for e-books and an increase
in e-book sales.
d. A low-carb diet becomes popular and leads to a reduction in the price of bread and less bread being sold.

4. Explain whether each of the following events represents (i) a shift of the supply curve or (ii) a movement
along the supply curve.

a. More homeowners put their houses up for sale during a real estate boom that causes house prices to rise.
b. Many strawberry farmers open temporary roadside stands during harvest season, even though prices are
usually low at that time.
c. Immediately after the school year beings, fast-food chains must raise wages, which represent the price of
labour, to attract workers
d. Due to favourable growing conditions, wheat farmers in the Prairie Provinces experience bumper crops

5. With the aid of a diagram, predict the effect of the following events on the equilibrium price of a specified
product.

a. Winter snowfall is at a record high in the interior of BC, but drought continues in the Quebec ski area. (the
price of skiing in the interior of BC)
b. A recession decreases employment in Oshawa automobile factories. (the price of restaurant meals in
Oshawa area)
c. The French grape harvest is the smallest in 20 years. (the price of French grape wines)
d. The province of Ontario cancels permission for campers to cut firewood in provincial campgrounds. (the
price of firewood in Ontario)

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Principles of Macroeconomics Econ 105
Analytical problems Chapter 3

Answers

Question 1

A stock variable is measured at one specific time and represents a quantity existing at that point in time,
which may have accumulated from the past. A flow variable is a quantity measured over an interval of time.
(i.e. per time period)

Examples of a stock variable: wealth, debt, height/weight and CGPA

Examples of a flow variable: income or wages, savings or borrowing, investment and national income (GDP)

Question 2

A change in demand is a consequence of changes in Qd at every price due to other influential factors, such
as income, price of other goods, taste/preference, expectations, the # of buyers, etc. However, a change in
quantity demanded is a consequence of the change in its own price only, other things being equal. Thus, the
change in demand is illustrated in the diagram by a demand curve shift, while a movement on the demand
curve illustrates a change in quantity demanded.

Question 3

Part a)

S’
Price S

The reduction in the size of the peach harvest due to bad weather is a decrease in the supply of peaches⎯a
leftward shift of the supply curve. For a given demand curve, lower supply leads to an increase in equilibrium
price. Thus, as equilibrium price rises, the quantity of peaches demanded falls, with other things being equal.
(I.e. an upward moment along the demand curve)

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Principles of Macroeconomics Econ 105
Analytical problems Chapter 3

Part b)

Price S

D’
D

An increase in income leads to a rise in the demand for all normal goods. Assuming people can afford
restaurant meals with more income, there will be a rightward shift in the demand curve for restaurant
meals. For a given upward-sloping supply curve, the higher demand increases the equilibrium price and
quantity of family restaurant meals.

Part c)

Price S

S’

Technological improvements in electronic publishing reduce the cost of producing e-books, resulting in an
increase in supply⎯a rightward shift of the supply curve for e-books. This causes a fall in equilibrium price but
a rise in equilibrium quantity. Thus, the quantity of e-books demanded rises as the equilibrium price of e-
book falls. (i.e. a downward moment along the demand curve)

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Principles of Macroeconomics Econ 105
Analytical problems Chapter 3

Part d)

Price S

D’ D

Greater awareness of benefits from a low-carb diet reduces demand for bread (and other high-carb food
items). Thus, for a given supply curve, the demand curve shifts to the left. As a result, in a market, both
the equilibrium price and quantity of bread fall.

Question 4

Part a)
The quantity of houses supplied rises as a result of a price increase. → A movement along the supply curve

Part b)
The quantity of strawberries supplied is higher at any given price. → A rightward shift of the supply curve

Part c)
The quantity of labour supplied is lower at any given wage. → A leftward shift of the labour supply curve
compared to the supply curve during school vacation

Part d)
The quantity of wheat supplied is higher at any given price. → A rightward shift of the supply curve

Question 5
Part a)

Price S

S'

D'
D

Q Skiing in BC

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Principles of Macroeconomics Econ 105
Analytical problems Chapter 3

According to the event happening in BC and Quebec, more skiers in Quebec would come to BC to enjoy
skiing, leading to a rise in demand for skiing in BC. On the other hand, a heavy winter snowfall in BC would
enable more ski resorts to provide a larger area for skiing (or a rise in the # of sellers), and also ski resorts
would enjoy the lower cost of snow production because they do not need to make artificial snow, thereby
increasing the supply of skiing area in BC. Since there is a rise in demand and supply, a change in equilibrium
price is ambiguous, but the equilibrium quantity of skiing activities rises.

Part b)

Price S

D' D

Q
Restaurant meals
In a market for restaurant meals, in general, lower consumers' income makes them switch to home meals.
Thus, the demand for restaurant meals decreases in Oshawa are. As a result, both equilibrium price and
quantity of restaurant meals decrease.

Part c)

Price S'
S

Q
French grape wines

In a market for French grape wines, sellers would generally face higher input prices since French grape is an
input for wines. Thus, the supply decreases. In a market, the equilibrium price of French grape wines will
rise.

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Principles of Macroeconomics Econ 105
Analytical problems Chapter 3

Part d)

Price S

D'
D

Q
Firewood in Ontario

Since campers now cannot cut trees in a campground, they have to buy firewood from stores if they need
a campfire. Thus, there will be a higher demand for firewood in the market. Thus, both equilibrium price
and quantity rise. (Note: no information provided on how this regulation affects the production of firewood,
so that it is uncertain that there is a change in the supply of firewood.)

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