Activity Analysis of Demand

Applied Economics
Julia Punzalan & Gab Edejer

August 8, 2020
ACTIVITY: ANALYSIS OF DEMAND
1. Explain in your own words the implication if the phrase, ceteris paribus, is not
included in the definition of Law of Demand and Demand Curve.
- Ceteris Paribus means for us that all variables except those specified are
constant. No one knows which variables will change and which will remain
constant. And lastly what is true for the individual is not necessarily true for the
whole.
2. Make an illustration of a Demand Curve with the following prices and quantities
respectively (Pont A=10, Point B=20, Point C=30, Point D=40; 50, 100, 150, 200).
Complete your illustration with the proper labels.
3. Based on
your illustration in #2, answer the following: (1 Point Each)
a. If P is 30, what is the QD?
- If P is 30, QD is 100.
b. If price increases from 20 to 30, what is the original QD and the new QD?
- The original QD is 150 and the new QD is 100.
c. From 40, the price decreases by 30, what is the original QD, and the new
QD?
- The original QD was 50 and the new QD was 200.
d. From Point A, the price increases to point D, what is the original P and
QD, and the new P and QD?
- The original price is 10, and the QD is 200. The new Price is 40 and the QD is
200.
e. From Point C, the price decreases by 10, what is the original P and QD, and
the new P and QD?
- Original price is 30 and QD is 100. The new price is 20 and QD 150.
4. Prove through an illustration that if the demand curve is positively sloped, it would
fail to represent the inverse relationship between price and quantity demanded.
Explain your illustration? (3 Points)
- Imagine if the demand curve was positively sloped it would represent a direct
relationship between the price and the quantity demand. So, this will break
down to represent the inverse relation connecting price and quantity demand,
because when the price increases QD will decrease, and when the price
decreases the QD will increase. Experience having a direct relationship if when
one increases so does the other or as one decreases so does the other.
5. Explain the reasons behind the relationship between price and demand in the Law of
Demand by giving an example of Income Effect and Substitution Effect. (3 Points)
- The income effect describes how the change in the price of a good can change
the quantity that consumers will demand of that good and related goods, based
on how the price change affects their real income. For example, consider a
consumer who on an average day buys a cheap cheese sandwich to eat for lunch
at work, but occasionally splurges on a luxurious hot dog. If the price of a
cheese sandwich increases relative to hotdogs, it may make them feel like they
cannot afford to splurge on a hotdog as often because the higher price of their
everyday cheese sandwich decreases their real income. The substitution effect
refers to the change in demand for a good as a result of a change in the relative
price of the good compared to that of other substitute goods. For example, when
the price of a good rises, it becomes more expensive relative to other goods in
the market. As a result, consumers switch away from the good toward its
substitutes.
6. Construct a Demand Schedule from your Demand Curve in #2. (3 Points)
POINT PRICE QUANTITY
A 10 200
B 20 150
C 30 100
D 40 50
7. Comment on the Demand Schedule below. (3 Points)

POINT PRICE QUANTITY
A 5 5
B 10 10
C 15 15
D 20 20
E 25 25
- This demand goes wrong to represent the relationship between the Price and the
Quantity Demand. Because the Price and Quantity Demand show that they both
increases.
II. News Article (15 Points)
1. Look for a news article published in 2020 that relates to the concept of the Law of
Demand.
- The news article we found is “The Law of Supply and Demand Isn’t Fair” A
Walmart during the early stages of the U.S. coronavirus outbreak in March. By
Richard Thaler.
2. Provide the link to the article.
- https://www.nytimes.com/2020/05/20/business/supply-and-demand-isnt-
fair.html
SUMMARY
- Supply and Demand is not supposed to be fair. You'd have no competition if it

was and competition is one of the driving factors in Capitalism. An economic
system with complete and fair distribution would not be our current economy -
it'd be closer to a post scarcity economy and perhaps even Communistic
entirely.
- The article suggests that the reason why a Supply-Demand model did not work
in recent market conditions is because consumers would not see price increases
as being fair. Therefore, since retailers do not want to be seen as being price
gougers, they implement limits, which still results in a deadweight loss.
- In normal market conditions (i.e. not a demand shock seen during pandemics,
hurricanes, etc.) an increase in consumer price due to an increase in supplier
price was seen as fair by a 4:1 margin (Question 7 in the Kahneman paper).
- Interestingly in the Kahneman paper, consumers reacted differently to price
increases compared to a discount cancelation even during a supply shortage,
even when the end result was exactly the same.

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Applied Economics

Julia Punzalan & Gab Edejer

7. Comment on the Demand Schedule below. (3 Points)

II. News Article (15 Points)

- Supply and Demand is not supposed to be fair. You'd have no competition if it

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