ECW1101

Tutorial 4
Chapter 4: Market Forces of Supply and Demand

Note: These suggested answers are brief, they should only serve as a guide and should not be
treated as sample answers.

Question 1
Over the past 40 years, technological advances have reduced the cost of computer chips. How
do you think this has affected the market for computers? For computer software? For
typewriters?

Note: Computer chips are inputs used in computer production.

Suggested Answers:
* It should be emphasised to the students that even if their diagram is correct but if the
explanation is wrong, they will fail the question. A diagram is meaningless if it isn’t
accompanied by the right explanation.
* For all answers (including for question 2 & 3), the adjustment process must be explained
in details (i.e., how an equilibrium point moves from one to another). For instance, after the
rightward shift of supply curve in figure 1, there will be a surplus at the initial price level (I
did not draw the details here but please show the detailed drawings to the students). This
surplus will then put a downward pressure on the price, price drops until it reaches a new
equilibrium point (please label).
Technological advances that reduce the cost of producing computer chips represent a decline
in an input price for producing a computer. The result is a shift to the right in the supply of
computers, as shown in Figure 1. The equilibrium price falls and the equilibrium quantity
rises, as the figure shows.
 Figure 1

Because computer software is a complement to computers, the lower equilibrium

price of computers increases the demand for software. As Figure 2 shows, the result is
a rise in both the equilibrium price and quantity of software.

Figure 2
 Because typewriters are substitutes for computers, the lower equilibrium price of
computers reduces the demand for typewriters. As Figure 3 shows, the result is a
decline in both the equilibrium price and quantity of typewriters.

Figure 3

Question 2
Consider the following events: Scientists reveal that eating apples decreases the risk of
diabetes, and at the same time, farmers use a new fertilizer that makes apple trees produce
more apples. Illustrate and explain what effect these changes have on the equilibrium price
and quantity of apples.

Suggested Answer:
The news of the increased health benefits from consuming apples will increase the demand
for apples, increasing both the equilibrium price and quantity. If farmers use a new fertilizer
that makes apple trees more productive, the supply of apples will increase, leading to a fall in
the equilibrium price but a rise in the equilibrium quantity. If both occur at the same time,
the equilibrium quantity will definitely rise, but the effect on equilibrium price will be
ambiguous.
Question 3

Suggested Answers:

* You will be surprised that some students might think that fertiliser and corn are complements!
Please remind them that “Complements and substitutes” are used to describe related goods in
consumption.

a. If peas and corns are substitutes, demand for corn increases (demand curve shifts right)
equilibrium price increases; equilibrium quantity increases

b. Input prices are higher – cost of production increases

supply decreases (supply curve shifts left); equilibrium price increases; equilibrium quantity
decreases

c. Equilibrium price increases, the effect on equilibrium quantity will be ambiguous.