ECO10004: ECONOMIC PRINCIPLES

WEEK 3_TUTORIAL SOLUTIONS

Key concepts: Demand, Supply, Quantity Demanded, Quantity Supplied, Equilibrium,
Movement along the curve, Shift of the curve, Surplus, Shortage.

Short-answer Questions
Question 1) The following table gives information on the quantity of lemonade
demanded when the weather is sunny.
Price Quantity
(glasses of lemonade bought)
0.80 30
0.70 40
0.60 50
0.50 60

a. Draw a demand curve/line on a graph based on the data above. Make sure to
label your graph fully.
Students can draw the graph manually on a piece of paper. In class, teachers can show
how to draw the graph quickly using Microsoft Excel
b. What can you say about the relationship between price level and quantity
demanded? What can you say about the demand curve?
It can be seen clearly from the graph above that there is an inverse relationship
between price and quantity demanded. That is, when price rises, quantity demanded
falls and vice versa. There are two causes to this inverse relationship between price
and quantity demanded. They are the “income effect” and the “substitute effect”. This
is also known as the “law of demand”.
c. When the weather is cool and overcast, the quantity of lemonade demanded
starts to change. Refer to the table below.
Price Quantity
(glasses of lemonade bought)
0.80 10
0.70 20
0.60 30
0.50 40
Draw the new demand curve/line on the same graph with the old one based on the
data above. Make sure to label your graph fully.
d. What can you say about the differences between those two demand curves/lines?
What is the cause of such differences?
Dovercast is on the left-hand side of Dsunny. This suggests that at every single price level,
the quantity demanded for lemonade is lower on overcast days compared to sunny
days. We can say that when the weather turns cool and overcast, people demand less
lemonade, and the demand curve shifts left.

Based on the lecture slides, the variable that shifts the demand curve in this scenario
could be “tastes”. In cooler days, people do not want to drink lemonade that much.
This leads to the demand being lower compared to sunny days.
Question 2) The table below shows data regarding quantity demanded and supplied of
drinks for the “Boost Juice”.
Price ($) Quantity demanded Quantity supplied
4 2,000 1,500
6 1,600 1,600
8 1,200 1,700
10 800 1,800
12 400 1,900
14 0 2,000

a. Draw the demand and supply curves for “Boost Juice” based on the data above.
Make sure to label all axes and curves.

b. What are the equilibrium price and quantity of drinks? In your own words,
explain clearly why this is the equilibrium point.
The equilibrium point is where the supply curve and the demand curve meet. At
equilibrium, Quantity demand = Quantity supplied.
The equilibrium is reached when the price level is $6. At $6, Quantity Demanded =
Quantity Supplied = 1,600.

c. What would happen if the price was initially $12? Based on the graph in (a),
identify any surplus or shortage.
If the price was initially $12, Quantity Demanded = 400 and Quantity Supplied =
1,900.
Since Quantity Supplied is greater than Quantity Demanded, there exists a surplus.
The amount of this surplus is 1,500 units (1,900 – 400).
d. What would happen if the price was initially $4? Based on the graph in (a),
identify any surplus or shortage.
If the price was initially $4, Quantity Demanded = 2,000 and Quantity Supplied =
1,500.
Since Quantity Demanded is greater than Quantity Supplied, there exists a shortage.
The amount of this shortage is 500 units (2,000 – 1,500).
Question 3) A storm in New South Wales destroyed thousands of hectares of
pineapple crops. Pineapple farmers whose crops were destroyed by the storm were
much worse off, but those whose crops were not destroyed benefited from the storm.

a. Draw appropriate supply & demand graph(s) to illustrate the effects of the storm
on the market for pineapples. In your own words, explain which curve(s) would
shift and the reason behind the shift.
[Don’t let this happen to you] Many students in the past would draw two demand –
supply graphs. One for farmers whose crops were destroyed in which they showed the
supply curve shifting left. One for farmers whose crops were unscathed in which they
kept everything the same or even shifted the demand curve to the right.
This is incorrect. Because there is only one single market of pineapples in New South
Wales for all farmers. It would be wrong to separate pineapples farmers into two
groups and two markets.
If you want to illustrate how an individual farmer will be affected by the storm
(suppose his crops were wiped out), you will need to draw an individual firm’s graph.
Which is not a demand – supply graph and we will not cover it until Week 6 tutorial
(perfect competition market).
So, ONE demand – supply graph for the market of pineapples as a whole is what you
would need.
Since lots of crops have been destroyed, supply of pineapples will decrease
dramatically, and the supply curve will shift left.

Demand – Supply graph for pineapples

 [Don’t let this happen to you] Many students would go further and claim that
because pineapples will become more expensive, its demand must decrease. They
would proceed to shift the demand curve to the left.
This is incorrect and they are being confused between “change in quantity demanded”
and “change in demand”. It is true that the price of pineapple will increase.
Consequently, the quantity demanded of pineapple will decrease. However, the
demand is unchanged, and the demand curve remains the same.

b. Comment clearly on the changes in price and quantity of pineapples in the

aftermath of the storm.
Based on the graph above it is clear that
i. Price of pineapples will increase
ii. The quantity of pineapples will decrease

c. What would happen to the price and quantity of bananas, considering the effects
on the market for pineapples above? Draw appropriate supply & demand
graph(s) to illustrate your answer.
Bananas can be considered a substitute to pineapples. With pineapples being more
expensive, consumers will likely buy other fruits, one of which is bananas. Therefore,
since the price of pineapples (a substitute) increases, the demand for bananas will
increase. The relevant determinant of the demand for bananas in this case is “price of
related goods”.

Demand – Supply graph for the market of bananas

Based on the graph above, it can be seen that the price of bananas will increase, and
its quantity will increase as well.
Question 4) Hashtags such as “toiletpaperapocalypse”, “toiletpapergate”, etc were
trending on Twitter in Australia in early March 2020. Such trends occurred as a
significant number of Australians rushed to panic-buying toilet papers amid fears of
the coronavirus outbreak. When asked, many shoppers said they wanted to stockpile
in case the virus was to spread across the community.

a. Draw appropriate supply & demand graph(s) to illustrate the effects of the
above shock on the market for toilet papers in Australia. In your own words,
explain which curve(s) would shift and the reason behind the shift.
Many shoppers were panic buying toilet papers. They wanted to stockpile in case they
could not leave homes due to a potentially wide spread of the coronavirus. This
indicates a surge in demand for toilet papers at the present. Demand increases and the
demand curve shifts right.

Demand – Supply graph for the market of toilet papers

[Don’t let this happen to you] Many students would go further and claim that
because toilet papers would become more expensive, suppliers would be tempted by
the high price to increase production. Students would proceed to shift the supply
curve to the right.
This is incorrect and they are being confused between “change in quantity supplied”
and “change in supply”. It is true that the price of toilet papers will increase.
Consequently, the quantity supplied of toilet papers will increase. However, the
supply is unchanged, and the supply curve remains the same.

b. Comment clearly on the changes in price and quantity of toilet papers in

Australia following the shock above.
Based on the graph above it is clear that
i. Price of toilet papers will increase.
 ii. The quantity of toilet papers will increase.

c. Supermarkets have vowed not to increase the price of toilet papers. At the same
time, they have moved to limit purchases to 4 packs per customer. What would
happen to the market of toilet papers following the above policies by
supermarkets? Draw appropriate graph(s) to illustrate your answer.
Supermarkets have vowed to keep the price of toilet papers the same despite the
soaring demand. This will create the situation of a “price ceiling”.
At the old price, Quantity Supplied is now lower than Quantity Demanded. This
causes a shortage in the market for toilet papers.
If this shortage persists for too long, it may lead to the establishment of a “black
market” for toilet papers, in which sellers and buyers will trade toilet papers at a price
which is higher than the official price. In fact, there have been posts on gumtree, eBay
and Facebook marketplace where toilet papers are advertised at obscenely high prices.
Perhaps, most of those posts are meant as jokes.

However, there have been reports of black markets for medical related products such
as surgical masks and hand sanitisers in countries like South Korea, Vietnam, etc.

Price ceiling in the market for toilet papers