'

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EXAM PREP

① Assume the winter in Germany is colder than expected . Use the demand
and supply framework to show the short run consequences on the
-

German market for

heating oil .

Short -

run
P colder than
^
when the winter is surprisingly
s expected then people will start to use
,

more heating oil for their heaters , so they

P
'
- - - - - - - -
• won't freeze This leads to an increased
.

i demand in
heating oil . The demand curve
1
Shifts from DUpwards to D '
.

'
p
•

equilibrium is now at P ' and

-

The
- - -
- - -

new
" i ☐
,

Q
'
Because demand increased , supplier
"
.

'

are now able to sell the heating oil

i. : for
higher price P
'
a .

i 1
☐
> Q
Q Q1

② Due political conflict gas exports to western European

to
,
countries

suddenly decline Show the short run effect of this event on the
-

German gas market .

Short run when the import of gas suddenly declines

-

,
P '
then the
^
s
supply is strongly decreasing .

shifts left from S to S !

5 The
supply curve
Now fewer
quantity is supplied for a

Much
higher price Not consumer
'
P - - -
.

every
will stick with the
i
good ,
but the ones
i that do CQ ' I have a much
to
pay
° of pi
higher price
"
" "

, ,
, ,
,

Q
'
Q
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EXAM PREP

③ If the price of
heating oil relative to prices of other
energy resources increases permanently what will be the ,

long run consequences for the gas market ? Explain your

-

thoughts and use the demand and supply framework to

answer the question .

oil and both resources used

Heating gas are
energy .

They get
independently to one another so they can be described as ,

substitute goods A consumer perceives both goods as similar

.

or comparable so that
having more of one good causes
,

of
the consumer to desire less the other
good .

If we expect heating oil to

permanently increase in price ,
it
that the
substitute towards another
is
likely consumer will

energy resource Which one depends on price andofpersonal

.
,

preference but we can expect a certain number

,
consumers
to substitute towards demand
gas there for ,
increasing
for
gas and
influencing the competitive market equilibrium .

④ Show the demand and framework

graphically What
supply .

is surplus ? What is
shortage ? And what is the market
mechanism ?

P of the cause, if the price

^
Regardless is

surplus
5 above the equilibrium then quantity supplied
will be
greater than
quantity demanded
#
.

known
s >☐
This excess
supply is as a surplus .

If price is lower than the equilibrium ,

p
; quantity demanded is than
-

then
- - - - -

greater
- -

i
supplied resulting ,
in a so called
shortage .

•
D÷
The situation where decision price and on
5h07 age ☐
in a market are made based on demand
> Q quantity
Q
an alone is called the market mechanism
supply .

you can also refer to it as the free market system .

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EXAM PREP

⑤ what does the price

elasticity of demand measure ?
of demand measures the %
The price elasticity in the
change
-

quantity demanded divided by the % change in price so it

-

. .

measures the responsiveness of

quantity demanded to a
change in the price .

⑥ Assume Demand :
Q 640 80 P
-
-
-

Q -200 40 P
supply
: = +

→ calculate equilibrium quantity and equilibrium price .

→ If government set a minimum price Pmin 8 what would =

,
the
market outcome be ?

640 -

80 P =
-200 + 40 P It 2001+80 P

840 =
120 P 1 :
120

7- =
P →
Equilibrium price

Q 640 (80-7) 80 Equilibrium quantity

= - = →

Pmin =
8
Producers would supply more
Q 640 -180.8 ) 0 Demand for the
higher
= →
price but
=
,

due to the
change demand
Q = -

200 + (40-8) =
120 →
supply decreases to 0 .

⑦ What is the difference between elastic , inelastic and unit elastic

-

demand ?

E: > 1
Elasticity value higher than 1 elastic and more responsive
=
→

&
Elasticity value equals elastic perfectly responsive
1 =
one →
unit
= -

to
changes .

E:< 1 =

Elasticity valve smaller than 1 → inelastic and not as responsive

to
changes .
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EXAM PREP

⑧ Demand is
given by Q☐ =
120 -

ZOP and supply is described by

Qs =
201-301? What is the
competitive market outcome ?
Now assume that an increase in income will lead to additional
demand at 50 Units How does this affect market demand
.

and market outcome ?

Competitive market outcome :

120 -

ZOP
=
201-3010 I -20 / 1- ZOP
100
=
50 P
2
=
p →
Equilibrium price

QD =
120 -

(20-2) =
80 →
Equilibrium quantity

Income increase →
50 additional units of Q

801-50 =
130
Quantity
Qs
=
130=201-30 P I -20
110=30 P
3,5 =P C New equilibrium price

P
with
higher
income resulting
^
in a demand increase of 50 s
units , the new
at 130
quantity sets
.

3,66 - - - - - - - - -

By placing Q -130 into the

-

supply equation ,
it was possible '

to calculate the new market 2 - - -

- - -

I ,
☐
price at D= 3,66 .
' '

I 1
'
The demand curve shifts
upwards to D ! ! ! D
, Q
80 130
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EXAM PREP

⑨ Briefly discuss the effect of increasing steel prices for

the automobile market .

First that is to expect is that the automobile producers

thing
will lean towards increasing the price of cars , because the
main material price is
increasing .

But producers have to keep in mind ,

that cars are durable
goods meaning the consume uses it over a time period
longer
-

and is more
likely to wait with a purchase when price
increases because it isn't a good he has to re ✗ refresh
,
buy
week Also durable goods tend to be more expensive
every .

too ,
making the consumer more cautious about the product .

for durable
The price elasticity of demand goods is generally
more elastic in the short ran than
-

in the long
-

run .

so if the car producers transfer the increasing price of

steel
directly and immadietly onto the consumer ,
they
demand
can expect decreasing in the short run When remaining
-

consistent with the increase in price , it's likely the consumers

will lean towards purchaisins in the
again long -
rein .

⑧ What is the short run effect of a temporary increase in demand

-

for hotel rooms ? How would you expect market supply to

respond to a temporary and to a permanent increase in
demand , respectively ? Explain .

Hotel rooms as a
good can't be
Short
long when demand
easily produced
run run
-

p p
^
increases in the short run
^ '
.

s s s
inelastic in
They are supply .

This leads to a shift from

D to D ' and a new
higher
price at P' .
If demand increase
remains constant likely
'

pl - - - - - -
•
p - - - - - -
•
,
it's
that in the
"
long run , more
P - - - - -
- - - -
• hotel rooms will be built ,

p - - - - - - •
p - - - -
- -
•
increasing the
quantity
supplied to QH Now
' '
D D .

I 1
P i > Q , i
☐
1 I > Q a new equilibrium

Q Q Q
"
price is set at P" .
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EXAM PREP

① Explain why demand and

supply tend to be more elastic in the
long -
rein than in the short run .

is the measurement of the change of one

Elasticity percentage elastic
economic variable in response to change in another .

describes the to react

ability to
changes very responsively ,

which most the of time is very difficult in the short run

-

Production and production resources are

already planned
and can't be
adf.es/etimmadieHy , or the product itself
has a
long production time ( e. g. hotel rooms) .

demand and
In the
long run supply are
normally more
-

elastic ,
because direct responding to changes become
easier .

① Assume that a competitive market is in equilibrium What .

happens to the equilibrium when

marginal cost decrease ?
,

p
Marginal cost represent the a
change in total cost that arise S "
when the
quantity produced S
is increased by one unit .

If marginal cost decrease ,

that means more
quantity can
be produced for fewer production P •
- - - - - - - -

cost This leads to the i

.
pl - - - - - - - - •

producers accepting The a lower 1 '

price when i
selling .

supply ,

right
'
curve shifts to s '

i
equilibrium
☐
and a new clears '

at Q' 1 P ' '

> Q
.
Q Q