Handout 3 Demand and Supply - Applications, Analysis, and International Trade This handout contains exercises of - Demand and Supply: Numerical Equilibrium - Demand and Supply: Consumer and Producer Surpluses - Demand and Supply: Market Intervention (Price and Quantity) and Deadweight Loss - Demand and Supply: International Trade Things you should know - What is equilibrium? How to find the equilibrium in demand-supply system? What are consumer and producer surpluses? - What are price ceiling and price floor? What is deadweight loss? What are the effects towards economic surpluses? - What happens when the small open economy opens to trade? How to find the price and quantity that the product is sold? What is tariff? Exercises Question 1 (Qualitative Shifts of Demand and Supply) 1. What can we say about the equilibrium if supply increases? 2. What can we say about the equilibrium if demand increases? 3. What can we say about the equilibrium if supply increases and demand increases? 4. What can we say about the equilibrium if supply increases and demand decreases? 5. What can we say about the equilibrium if supply decreases and demand increases? 6. What can we say about the equilibrium if supply decreases and demand decreases? Question 2 (Demand-Supply: Economic Surpluses, Shifts, Market Intervention, and International Trade) Let the demand equation be given by Q = 100 – 0.5P. The supply equation is P = 2Q. This section introduces the basic equilibrium. 1. Plot the demand and supply curves. Denote at which prices are there shortage and surplus. 2. Find the equilibrium price and quantity. 3. Find the consumer’s and producer’s surplus. This section gives you examples of shifting demand or supply curves. 4. If demand increases by 40 units, what is the new equilibrium? 5. If instead supply decreases by 10 units, what is the new equilibrium? Revert to the original demand and supply curves given. This section analyzes the effects of government intervention. 6. If the government enacts a price floor of $80, find the quantity sold, excess supply, consumer and producer surpluses, and deadweight loss. 7. If the price floor enacted is $140, find the quantity sold, excess supply, consumer and producer surpluses, and deadweight loss. 8. If instead the price ceiling is enacted at $50, find the quantity sold, excess demand, consumer and producer surpluses, and deadweight loss. 9. Draw the demand and supply graphs, along with the surpluses and deadweight loss, when the quantity restriction is in place at 40 units. 1 This section gives you an example when a small open economy opens to trade. That is, it is possible to buy or sell this goods from and to other countries. Suppose this country has the demand and supply of the product as listed above. 10. Suppose the world price for this product is $50, what would be the quantity produced by domestic producers? What is the quantity consumed in this country? How many units are imported or exported? Find consumer and producer surpluses. 11. Seeing the world price of $50, the government wishes to help domestic producers by implementing a $30 tariff per each unit imported. Answer the same questions as in part 10. 12. Answer the same questions as in part 10 if the world price is $140. 2