BAFB1023 MICROECONOMICS

TOPIC 2
SUPPLY & DEMAND CURVE

Question 1

Draw a demand curve or supply curve and label it D1 or S1. On the graph, illustrate
an increase in demand or supply and a decrease in demand or supply, and label the curve
D2 or S2 and D3 or S3, respectively. Starting on demand curve or supply curve D1 or
S1, explain the shift that would result from each of the following events:

a). Assume books and magazines are substitutes. What will happen in the book market if
the price of magazines decreases?

The above Diagram shows the demand curve of two substitutes, Magazine and Books.

When Price of Magazine go down, the Demand will go up. However, when both

substitutes are priced at the same price example; $2 the demand is expected to be the

same.
b). What will happen in the lemonade market if a new technology is introduced in the
production of lemonade?

With the Introduction of Technology, the cost of production of Lemonade will be

lowered and the output will increase. This will result in an increase in supply to the

market. This is reflected in the movement of the curve to the right from S1 to S2.

c). What will happen in the market for cats if the income of the population who buy cats
increase?
As the Income of the population who buys cats increase, the demand for cats is likely

to increase as well. Reflected on the shift from (D1) to (D2).

d). What will happen in the market for cars if the price of steel to make cars increases?

When Price of Steel increase and on the assumption that the company has a limited

budget, the number of cars produced would decrease which in turn lowers supply to the

market. This is shown on the graph above whereby the supply curve shifts from (S1) to

(S2).
Question 2

Based on the graph shown below:

Price Supply

$7

$4

$2

Demand
10 20 30

a). Determine the equilibrium price and quantity?

At the Price of $4 and Quantity of 20, the demand and supply are at equilibrium.

b). If price increase to $7, explain the changes that happen in the market.

If the price increases to $7, the Demand will drop to 10 and the Supply will increase to

30. Therefore, there will be a surplus in supply of 20 units (30-10).

Question 3. Consider the following supply and demand tables for bread.
Price of 1 loaf Quantity Supplied Quantity Demanded
$.50 10 75
$1 20 55
$2 35 35
$3 50 25
$5 60 10
a). Draw the supply and demand curves for this market.

b). What is the equilibrium price and quantity?

The equilibrium Price is $2 and at quantity of 35 units

Question 4.

The demand and supply schedules for gum are:

Price (cents per Qd (millions of packs a Qs (millions of packs a

pack) week) week)
20 180 60
40 140 80
60 100 100
80 80 120
100 40 140
a). Draw a graph of the gum markets, label the axes and the curves and mark in the
equilibrium price and quantity.

b). Suppose the price of gum is 80 cents a pack. Describe the situation in the gum market.

At the price of 80 cents, the demand of Gum would be 80 million packs a week and the

supply would be at 120 million packs a week. This results in a surplus Gum supply of

40 million packs a week (120 – 80).

c). A fire destroys some factories that produce gum and the quantity of gum supplied
decreases by 40 million packs a week at each price. Explain what happens in the
market for gum and illustrate the changes on your graph in Part (a).

Price (cents Qd (millions of Qs (millions of Qs-2 (millions

per pack) packs a week) packs a week) of packs a
week)
20 180 60 20
40 140 80 40
60 100 100 60
80 80 120 80
100 40 140 100
With the reduction in the number of Supply by 40 million packs a week which is

represented by Supply curve of (Qs-2). As illustrated in the graph above, the

equilibrium price has increased from 60 to 80 and equilibrium quantity has reduced

from 100 to 80 million of packs a week.