Handout 2 (Demand and Supply - Theory and Simple Applications) with Solutions

Handout 2 Demand and Supply - Theory and Simple Applications This handout contains exercises of - Demand and Supply: The Basics, Shifts vs. Movement, Determinants - The Market Demand and Market Supply Curves - Demand and Supply: Equilibrium Things you should know - What are the law of demand and the law of supply? - What are the determinants of demand and supply of each good? - What is the difference of change in quantity demanded/supplied and change in demand/supply? - What happen when there is a shift in demand or supply? - From individual demand or supply curves, how to find the aggregated (market/joint) demand or supply curves? - What is equilibrium? How to find the equilibrium in demand-supply system? Exercises Question 1 (Basics of Demand and Supply) Consider the following situations in the market for Apple iPhone 6S. Holding everything else constant and assume that iPhone is a normal good, analyze what would happen to the demand and/or supply for Apple iPhone 6S? a. Special price sale for iPhone 6S is announced just for today and today only. b. Special price sale for Samsung Galaxy is announced. c. The State of Wisconsin announces 10% raise to all state employees. d. “Shame on Apple” labor dispute protest affects the perception of Apple products. e. Rumors of $200 Black Friday sales of iPhone 6S leaks out to public. f. Foxconn factory (supplier of iPhones) improves production method. g. Price of MacBook increases as all students are buying laptops for schools. Question 2 (Shifts of Demand and Supply in multiple markets) a. Let us reconsider the example from 1g). We consider the markets for the following goods: MacBook, iPhones and iPhones accessories. Draw three demand-supply diagrams for each of the three markets and analyze the effects towards equilibria when students are buying more MacBooks. b. (Challenging, don’t try this at home!) This year’s drought has dramatically plagued water supply for brewery. Wisconsinites must have beer with brats. Also, recent Health and Safety inspections shut down the majority of sausages factories due to poor hygiene. Draw three demand-supply diagrams for each of the three markets – beer, brats, and wine – then analyze the effects towards equilibria. Question 3 (The Market Demand with Tabulated Numerical) From Anna’s and Maria’s demands and market demand for iced coffee, complete the table and plot the market demand. Price of Iced Coffee ($/cup) Anna’s Quantity Maria’s Quantity Market Quantity $0 10 8 $2 5 4 $4 2 2 $6 0 0 1 Question 4 (The Market Demand with Equations, and Supply) There are only two persons in the Austrian Alps – Jeremy and Mitch. Each of them has the following individual demand curve for Swiss cheese: Jeremy p = 10 – 0.5q Mitch p = 20 – 2q The market supply is given by: Q = 0.5P. 1. Draw each of the individual demand curves. 2. At market price P = 20, what is quantity demanded in the market? What about when the market price is P = 10, P = 5 and P = 0? 3. Find the market demand curve graphically and denote the kink points. Write down the equations for each segment. 4. Find the equilibrium price and quantity. (Extra) What if there is a third consumer on the demand side? Question 5 (Demand-Supply) Let the demand equation be given by Q = 100 – 0.5P. The supply equation is P = 2Q. 1. Plot the demand and supply curves. Denote where there are shortage and surplus. 2. Find the equilibrium price and quantity. 3. If demand increases by 40 units, what is the new equilibrium? 4. If supply decreases by 10 units, what is the new equilibrium? 5. What can we say about the equilibrium if supply increases and demand increases? 6. What can we say about the equilibrium if supply decreases and demand decreases? 2 Note for center picture of Q2b) — In this case, since there are two simultaneous shifts of both demand and supply, we can only know the equilibrium effect on one variable,but not the other. In this case, we only know that equilibrium quantity falls, but equilibrium price is indeterminate (will study this on Thursday lecture)