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?
The graph above makes it evident that there is an inverse relationship between price
and quantity demanded. In other words, demand decreases as price increases and vice
versa. This inverse link between price and quantity demanded has two root causes.
The "income effect" and the "substitute effect" are what they are called. The "law of
demand" is another name for this.
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.
It is possible to think of bananas as a pineapple replacement. Because pineapples are
more expensive, people are more likely to purchase other fruits, like bananas. When a
result, as the cost of pineapples (a suitable equivalent) rises, so will interest in
bananas. "Price of related commodities" is an important factor that influences the
demand for bananas in this situation.

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.

Toilet paper was a panic purchase for many people. They intended to stockpile in case
the coronavirus spread widely and they were unable to leave their houses. This
suggests that there is now a boom in demand for toilet paper. As demand rises, the
demand curve moves to the 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.
Despite the enormous demand, supermarkets have committed to maintain the same
price for toilet paper. As a result, there will be a "price ceiling" issue. Quantity
Supplied is now less than Quantity Demanded at the previous pricing. As a result,
there is a lack of toilet paper on the market. A "black market" for toilet paper might
emerge if this shortage lasts too long, when buyers and sellers exchange toilet paper at
a price that is higher than the going rate. In reality, there have been posts on Facebook
Marketplace, eBay, and Gumtree advertising toilet paper at absurdly exorbitant rates.
Maybe the majority of those posts are supposed to be humorous. 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