OFFER AND DEMAND

1. Explain each of the following statements using supply and demand diagrams.
a. “When a freeze hits Florida, the price of orange juice increases in
supermarkets across the country.”
When a frost occurs, the main input of juice becomes scarce, generating an
increase in its price. Demand is not affected. The supply curve would shift to the
left.
Price
EITHER
'
EITHER

But
But
Pe
Pe

d
Amount
Qe' Qe

b. “When there is warm weather in New England each summer, the price of
hotel rooms in its luxurious Caribbean hotels plummets”
The supply curve has no movement. A decrease in demand is generated, since the
need to seek a warmer climate elsewhere decreases.
Price

EITHER

Pe
Pe

But
But

d
D'
Amount
c. “When a war breaks out inQe'the Middle
Qe East, the price of gasoline goes up
and the price of a used Cadillac goes down.”

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 Price CAR MARKET

S1
INCREASE IN THE PRICE
OF GASOLINE
Pe1

Pe2

D1

Number of
Qe2 Qe1
cars

It is known that gasoline and cars are complementary goods, so when the price
of gasoline increases, the quantity demanded for cars is reduced and,
consequently, car producers find themselves with an excess of product. Then the
price of cars is reduced to maintain market equilibrium.

2. An increase in the demand for notebooks increases the quantity demanded but
not the quantity supplied. ''Is this statement true or false?

This statement is false since, if the demanded quantity of notebooks increased,

there would be a shortage of the product offered because everyone would buy
notebooks until they reached the maximum point of the quantity supplied. In
order to have a balance in the market, the quantity of notebooks would have to
increase or raise their prices.

3. Consider the minivan market. In each of the events mentioned below, identify
which of the determinants of demand or supply are affected, also indicate
whether demand or supply increases or decreases, then draw a diagram and
show the effect on the price and the number of minivans.

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a) People decide to have more children.
Demand is affected here, since when people decide to have more children,
they will want to purchase a minivan for convenience. The supply will not
be affected. What will happen is an increase in both price and quantity sold.

b) A strike by steelworkers increases steel prices.

This is a determinant of supply, since when the price of steel (production
factor) increases, producers reduce the production of minivans; therefore,
the offer. Demand will not be affected.

c) Engineers develop a new automated machine for the production of

minivans.
This is a determinant of demand. By developing new machinery, fewer
resources will be used and more minivans can be produced. Demand is not
affected. The result of the development of this machinery, which is an
improvement in technology, will increase the quantity offered.

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d) The price of sport utility vehicles increases.
As the price of sports vehicles increases, people will look for lower-priced
alternatives, thus increasing the demand for minivans. This is a determinant
of demand (price of substitute goods).

e) A stock market crash reduces people's wealth.

It is determined by demand, since there is a decrease in consumer income.
That is, these, having less income, will be limited to spending only on basic
needs, but not purchasing a minivan. As a result, demand decreases.

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4. Consider the markets for DVD movies, LED screens, and movie tickets.
a. For each pair, identify whether they are complementary or substitutes:

DVD AND LED SCREENS:

''COMPLEMENTARY''

DVD AND LED SCREENS:

''SUBSTITUTES''

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 DVD AND LED SCREENS:

''SUBSTITUTES''

b. Suppose that a technological advance reduces the manufacturing cost of

LED displays. Draw a diagram to show what is happening in the market
for flat screen televisions.

c. Draw two more diagrams to show how the change in the LED display
market affects the market for DVDs and Movie Tickets.
Buyers, having new screens with a high level of technology, will choose to
watch movies at home. This results in an increase in demand.

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By having substitute products for screens with lower prices, buyers will leave aside
movie tickets. Therefore, there is a decrease in demand.

5. Over the past 30 years, technological advances have reduced the cost of
computer chips. How do you think this affects the market for computers,
computer programs, computer programs and typewriters?
COMPUTER MARKET:

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If the production costs of computer chips are reduced, encouraged by the
advancement of technology, the supply curve shifts to the right and more computers
are offered, the equilibrium price decreases and therefore demand increases due to
lower prices. .

COMPUTER PROGRAMS AND COMPUTER PROGRAMS ARE

COMPLEMENTARY GOODS:

If technology reduces the cost of computer chip production, businessmen will offer
more computers and therefore more computer programs and more computer
programs will also be offered. Therefore the price decreases and the quantity
demanded of computer and computing programs will increase.

TYPEWRITERS:

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Since typewriters are substitute goods, if the cost of producing computer chips
decreases due to technology, the quantity supplied of typewriters decreases and the
price increases, therefore demand decreases.

6. Using supply and demand diagrams, show the effect of the following events on
the market for sweatshirts.
a. A Hurricane in South Carolina damages the cotton crop.

HURRICANE
(UNFAVORABLE
WEATHER)

In the graph we can see that if the weather is unfavorable for cotton, its supply will
decrease, resulting in an increase in price. And since cotton is the raw material for
making sweatshirts, it leads to a decrease in the quantity of sweatshirts offered.

b. A reduction in the price of leather jackets.

Price LEATHER CLOTHING

PRICE DECREASES

P2

P1

D1
Quantity of leather
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Q1 Q2 garments
 If the price of leather clothing items decreases, its quantity demanded will increase,
but the market equilibrium for sweatshirts will remain intact because they are not
substitute goods.

Price SWEATSHIRT MARKET

S1 Price of leather garments decreases

(good not substitute)

Pe1

D1
Number of
Qe1 sweatshirts

c. That all universities require that you exercise in the morning wearing
appropriate clothing.

Price
SWEATSHIRT MARKET

S1

Pe2 A2

Pe1
A1

D2

D1 1
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0 of
Number
Qe1 Qe2 sweatshirts
 If they require wearing the appropriate clothing for exercising, the demand for
sweatshirts will increase, causing a price increase to reach the new market
equilibrium. Otherwise the product would be scarce.

d. They invent new sewing machines.

Price SWEATSHIRT MARKET

S1

S2
Pe1 TECHNOLOGICAL
IMPROVEMENT

Pe2

D1
Cotton quantity
Qe1 Qe2

An improvement in technology brings with it an increase in supply but demand is not

very sensitive because of this, to achieve equilibrium, the price is decreased.
7. A survey shows an increase in drug consumption among young people. In the
subsequent debate, two hypotheses are proposed:
 The reduction in police surveillance has increased the availability of drugs on
the streets.
 Cuts to education campaigns have reduced awareness of the dangers of drug
addiction.
a. Use supply and demand diagrams to show how each of these hypotheses could
lead to an increase in the amount of drugs consumed.

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 s
Police surveillance = Q

Education campaign = Qd

b. How might information about what has happened to drug prices help
distinguish between these explanations?
 By decreasing police surveillance, the quantity offered increases and as a
consequence the price of the drug decreases.
 By decreasing the quantity demanded increases and as a consequence the price
of the drug increases.

8. Suppose that in 2015 the number of births is temporarily high. How does this
population explosion affect the price of babysitting services in 2020 and 2030?
(Hint: 5-year-olds need babysitters, while 15-year-olds can be babysitters.)
By having a high birth season, we can say that demand will be high in 2015, which
leads to an increase in the price of this service. After 5 years (2020), the cost is still
high because children born in 2015 are not old enough to support themselves, which
requires the babysitting service, not counting babies born in years after 2015 until
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 2020. In 2030, the demand stabilizes but the supply of nannies increases since
children born in 2015 are already old enough to be babysitters. Finally, this leads to a
collapse in the price of nannies for this year due to the supply of babysitters.
babysitters in the market.

9. Tomato sauce is a complementary good (as well as a condiment) for

hamburgers. If the price of hamburgers increases, what happens to the
ketchup market? With the tomato one? With tomato juice? With the orange
juice one?

 Tomato sauce is a complementary good, meaning that if we increase the cost

of hamburgers, the demand for said good will decrease.
 Tomatoes are a complementary good to tomato sauce, that is, as the demand
for it decreased, tomatoes will also be affected in the same way.
 To make a hamburger, tomato juice is not necessary, so it is not affected.
 Tomato juice will also not be affected since the burger and juice do not need
to be purchased together.

10. The pizza market has the following supply and demand tables:

Demanded Offered quantity of

Price
quantity of pizzas pizzas

$4 135 26

$5 104 53

$6 81 81

$7 68 98

$8 53 110

$9 39 121

a. Graph the demand and supply curves. What is the equilibrium price in this
market?
Price
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9
8
7
 The graph shows the equilibrium point at which the equilibrium price is $6 and
the equilibrium quantity is 81 pizzas.

b. If the actual market price were above the equilibrium price, what would
bring the market to equilibrium?
In this case, an excess supply will occur where the quantity of pizza supplied at
that price will be higher than that demanded. A surplus supply is generated that
remains unsold, which will lead sellers to lower the price in order to sell these
goods. As the price drops, the demand for pizzas will increase while the supply
decreases. This process will continue until the equilibrium point is reached.
c. If the market price were below the equilibrium price, what would bring the
market to equilibrium?
In the other case in which the market price is below the equilibrium price, excess
demand arises where the quantity demanded will be greater than the quantity
supplied. This unmet demand will allow sellers to raise the price, resulting in an
increase in supply and a decrease in demand. This process continues until the
equilibrium point is reached.

11. Consider the following developments: Scientists reveal that eating oranges
reduces the risk of diabetes, and at the same time, farmers use a new fertilizer

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 that makes orange trees more productive. Illustrate and explain the effect these
changes will have on the equilibrium price and quantity of oranges.

Given the new news about the benefits of orange consumption, farmers decide to
increase their production, which is why they use a new technique that will increase
their productivity and therefore increase their quantity offered; and buyers will
demand more oranges, this causes the quantity demanded to rise, thus shifting the
demand curve to the right. Therefore, an increase in equilibrium price and demand is
observed.
12. Because bread and cheese are regularly consumed together, they are
complementary goods.
a. It is observed that both the equilibrium price of cream cheese and the
equilibrium quantity of bread have increased. What could be the cause of
this pattern: a reduction in the price of flour or a drop in the price of milk?
Illustrate and explain the answer.

Price Cream cheese Price Bread

EITHE
R'
EITH EITH
But ER But ER
EITHE
But
Pe Pe R'
Pe Pe

d d
Amount Qe Qe'
Amount
Qe
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Of production costs Of production costs

(Milk) (Flour)
 This would be due to a fall in the price of flour, since if the price of flour
decreases then the supply of bread will increase and its price will decrease, in
turn increasing demand. In this way, the demand for cheese increases along with
its price.

b. Now suppose that the equilibrium price of cream cheese has increased, but
that the equilibrium quantity of bread has decreased. What could be the
cause of this pattern: an increase in the price of flour or an increase in the
price of milk? Illustrate and explain your answer.

Price Cream cheese Price Bread

EITHE
R'
EITH EITH
But ER ER
But
Pe Pe
Pe Pe

But

d D' d
Amount Qe' Qe Amount
Qe

Of production costs
Of demand
(Milk)

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 The cause of this pattern would be the increase in the price of milk, since an
increase in the price of milk would decrease the supply of cheese and increase its
price, thus the demand for bread would decrease.

13. Suppose the price of tickets to basketball games at your university is

determined by market forces. Currently, the supply and demand tables are
as follows:

Demanded Offered quantity of

Price
quantity of tickets tickets

$4 10 000 8 000

$8 8 000 8 000

$12 6 000 8 000

$16 4 000 8 000

$20 2 000 8 000

a. Draw the demand and supply curves. What is unusual about this supply
curve? Why would this be true?

The unusual thing about this curve is that the supply of tickets for the basketball
game is constant. This would be true because the supply of tickets is limited by
the capacity of the venue where the basketball game is held.

b. What are the equilibrium prices and quantities of tickets?

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 The equilibrium quantity is 8,000 tickets and the equilibrium price is $8.

c. His university plans to increase enrollment next year by 5,000 students.

Additional students will have the following demand table.

Demanded
Price quantity of
registrations

$4 4 000

$8 3 000

$12 2 000

$16 1 000

$20 0

Now add the new students to your demand table in order to calculate the
new demand table for the entire university. What will be the new
equilibrium price and quantity?
25
DEMANDA Linear (DEMANDA) Linear (DEMANDA)
20 OFERTA Linear (OFERTA) 20
f(x) = − 0.00133333333333333 x + 22.6666666666667
15 16
12
10
8
5 4
0
0 2000 4000 6000 8000 10000 12000 14000 16000

The new equilibrium quantity will be 13000 and the new equilibrium price is $5.77.

14. Research has revealed the following information about the chocolate bar
market: The demand schedule can be represented by the equation QD= 1600-
300P, where QD is the quantity demanded and P is the price. The supply table is
represented by the equation QO = 1400+700P, where QO is the quantity
supplied. Calculate the equilibrium price and quantity in the market for
chocolate bars.

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 To find the price, equate the quantity demanded with the quantity supplied.

1600 - 300P = 1400 + 700P

1600 -1400 = 700P +300P

200 = 1000P

P = 0.2

 To calculate the equilibrium quantity replaced the P found in the previous

equation

Q =1600 -300P

Q = 1600 – 300(0.2)

Q=1540

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