DEMAND AND SUPPLY

1- What is a competitive market? Briefly describe the types of markets other than perfectly
competitive markets.
2- What determines the quantity of a good that buyers demand?
3- What are the demand schedule and the demand curve, and how are they related? Why
does the demand curve Slope downward?
4- Does a change in consumers’ tastes lead to a movement along the demand curve or a shift
in the demand curve? Does a change in price lead to a movement along the demand curve
or a shift in the demand curve?
5- Popeye’s income declines and, as a result, he buys more spinach. Is spinach an inferior or
a normal good? What happens to Popeye’s demand curve for spinach?
6- What determines the quantity of a good that sellers supply?
7- What are the supply schedule and the supply curve, and how are they related? Why does
the supply curve slope upward?
8- Does a change in producers’ technology lead to a movement along the supply curve or a
shift in the supply curve? Does a change in price lead to a movement along the supply
curve or a shift in the supply curve?
9- Define the equilibrium of a market. Describe the forces that move a market toward its
equilibrium.
10- Beer and pizza are complements because they are often enjoyed together. When the price
of beer rises, what happens to the supply, demand, quantity supplied, quantity demanded,
and the price in the market for pizza?
11- Describe the role of prices in market economies.
12- Explain each of the following statements using supply and-demand diagrams.
13- When a cold snap hits Florida, the price of orange juice rises in supermarkets throughout
the country.
14- When the weather turns warm in New England every summer, the prices of hotel rooms in
Caribbean resorts plummet.
15- When a war breaks out in the Middle East, the price of gasoline rises, while the price of a
used Cadillac falls.
 16- “An increase in the demand for notebooks raises the quantity of notebooks demanded, but
not the quantity supplied.” Is this statement true or false?
Explain.

17- Consider the market for minivans. For each of the events listed here, identify which of
the determinants of demand or supply are affected. Also indicate whether demand or
supply is increased or decreased.
Then show the effect on the price and quantity of minivans. People decide to have more children.
b. A strike by steelworkers raises steel prices.
c. Engineers develop new automated machinery for the production of minivans.
d. The price of station wagons rises.
e. A stock-market crash lowers people’s wealth.

18- During the 1990s, technological advance reduced the cost of computer chips. How do
you think this affected the market for computers? For computer software? For
Type writers?

19- Using supply-and-demand diagrams, show the effect of the following events on the
market for sweatshirts.
20- A hurricane in South Carolina damages the cotton crop.
21- The price of leather jackets falls.
22- All colleges require morning calisthenics in appropriate attire.
23- New knitting machines are invented.

24- Suppose that in the year 2005 the number of births is temporarily high. How does this
baby boom affect the price of baby-sitting services in 2010 and 2020? (Hint:
5-year-olds need baby-sitters, whereas 15-year-olds can be baby-sitters.)

25- Ketchup is a complement (as well as a condiment) for hot dogs. If the price of hot dogs
rises, what happens to the market for ketchup? For tomatoes? For tomato juice? For
orange juice?

26- The case study presented in the chapter discussed cigarette taxes as a way to reduce
smoking. Now think about the markets for other tobacco products such as cigars and
chewing tobacco.
a. Are these goods substitutes or complements for cigarettes?
b. Using a supply-and-demand diagram, show what happens in the markets for cigars and chewing
tobacco if the tax on cigarettes is increased.
c. If policymakers wanted to reduce total tobacco consumption, what policies could they combine
with the cigarette tax?

27- The market for pizza has the following demand and
a. supply schedules:

PRICE QUANTITY DEMANDED QUANTITY SUPPLIED

$4 135 26
5 104 53
6 81 81
7 68 98
8 53 110
9 39 121
Graph the demand and supply curves. What is the equilibrium price and quantity in this market?
If the actual price in this market were above the equilibrium price, what would drive the market
toward the equilibrium? If the actual price in this market were below the equilibrium price, what
would drive the market toward the equilibrium?

1. Because bagels and cream cheese are often eaten together, they are complements.
a. We observe that both the equilibrium price of cream cheese and the equilibrium quantity of
bagels have risen. What could be responsible for this pattern—a fall in the price of flour or a fall
in the price of milk? Illustrate and explain your answer.
b. Suppose instead that the equilibrium price of cream cheese has risen but the equilibrium
quantity of bagels has fallen. What could be responsible for this pattern—a rise in the price of
flour or a rise in the price of milk? Illustrate and explain your answer.

2. Suppose that the price of basketball tickets at your college is determined by market forces.
Currently, the demand and supply schedules are as follows:
PRICE QUANTITY DEMANDED QUANTITY SUPPLIED
$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 might this
be true?
b. What are the equilibrium price and quantity of tickets?
c. Your college plans to increase total enrollment next year by 5,000 students. The additional
students will have the following demand schedule:
PRICE QUANTITY DEMANDED
$4 4,000
8 3,000
12 2,000
 16 1,000
20 0
Now add the old demand schedule and the demand schedule for the new students to calculate the
new demand schedule for the entire college.
What will be the new equilibrium price and quantity?

3. An article in The New York Times described a successful marketing campaign by the French
champagne industry.
The article noted that “many executives felt giddy about the stratospheric champagne prices. But
they also feared that such sharp price increases would cause demand to decline, which would
then cause prices to plunge.” What mistake are the executives making in their analysis of the
situation? Illustrate your answer with a graph.
ELASTICITY AND ITS APPLICATION

Questions for Review

1- Define the price elasticity of demand and the income elasticity of demand.
2- List and explain some of the determinants of the price elasticity of demand.
3- If the elasticity is greater than 1, is demand elastic or inelastic? If the elasticity equals 0, is
demand perfectly elastic or perfectly inelastic?
4- On a supply-and-demand diagram, show equilibrium price, equilibrium quantity, and the total
revenue received by producers.
5- If demand is elastic, how will an increase in price change total revenue? Explain.
6- What do we call a good whose income elasticity is less than 0?
7- How is the price elasticity of supply calculated? Explain what this measures.
8- What is the price elasticity of supply of Picasso paintings?
9- Is the price elasticity of supply usually larger in the short run or in the long run? Why?
10- In the 1970s, OPEC caused a dramatic increase in the price of oil. What prevented it from
maintaining this high price through the 1980s?

Problems and Applications:

1. For each of the following pairs of goods, which good would you expect to have more elastic
demand and why?
a. required textbooks or mystery novels
b. Beethoven recordings or classical music recordings in general
c. heating oil during the next six months or heating oil during the next five years
d. root beer or water
2. Suppose that business travelers and vacationers have the following demand for airline tickets
from New York to Boston:
 QUANTITY DEMANDED QUANTITY DEMANDED
PRICE (BUSINESS TRAVELERS) (VACATIONERS)
$150 2,100 1,000
200 2,000 800
250 1,900 600
300 1,800 400
a. As the price of tickets rises from $200 to $250, what is the price elasticity of demand for (i)
business travelers and (ii) vacationers? (Use the midpoint method in your calculations.)
b. Why might vacationers have a different elasticity than business travelers?

3. Suppose that your demand schedule for compact discs is as follows:

QUANTITY DEMANDED QUANTITY DEMANDED
PRICE (INCOME _ $10,000) (INCOME _ $12,000)
$8 40 50
10 32 45
12 24 30
14 16 20
16 8 12
a. Use the midpoint method to calculate your price elasticity of demand as the price of compact
discs increases from $8 to $10 if (i) your income is
$10,000, and (ii) your income is $12,000.
b. Calculate your income elasticity of demand as your income increases from $10,000 to $12,000
if (i) the price is $12, and (ii) the price is $16.

4. Emily has decided always to spend one-third of her income on clothing.

a. What is her income elasticity of clothing demand?
b. What is her price elasticity of clothing demand? c. If Emily’s tastes change and she decides to
spend only one-fourth of her income on clothing, how does her demand curve change? What are
her income elasticity and price elasticity now?
5. The New York Times reported (Feb. 17, 1996, p. 25) that subway ridership declined after a fare
increase: “There were nearly four million fewer riders in December 1995, the first full month
after the price of a token increased
25 cents to $1.50, than in the previous December, a 4.3 percent decline.”
a. Use these data to estimate the price elasticity of demand for subway rides.
b. According to your estimate, what happens to
the Transit Authority’s revenue when the fare
rises?
c. Why might your estimate of the elasticity be unreliable?

6. Two drivers—Tom and Jerry—each drive up to a gas station. Before looking at the price, each
places an order.
Tom says, “I’d like 10 gallons of gas.” Jerry says, “I’d like $10 worth of gas.” What is each
driver’s price elasticity of demand?

7 .Economists have observed that spending on restaurant meals declines more during economic
downturns than does spending on food to be eaten at home. How might the concept of elasticity
help to explain this phenomenon?

8. Consider public policy aimed at smoking.

a. Studies indicate that the price elasticity of demand for cigarettes is about 0.4. If a pack of
cigarettes currently costs $2 and the government wants to reduce smoking by 20 percent, by how
much should it increase the price?
b. If the government permanently increases the price of cigarettes, will the policy have a larger
effect on smoking one year from now or five years from now?
c. Studies also find that teenagers have a higher price elasticity than do adults. Why might this be
true?

9. Would you expect the price elasticity of demand to be larger in the market for all ice cream or
the market for vanilla ice cream? Would you expect the price elasticity of supply to be larger in
the market for all ice cream or the market for vanilla ice cream? Be sure to explain your answers.
10. Pharmaceutical drugs have an inelastic demand, and computers have an elastic demand.
Suppose that technological advance doubles the supply of both products (that is, the quantity
supplied at each price is twice what it was).
a. What happens to the equilibrium price and quantity in each market?
b. Which product experiences a larger change in price?
c. Which product experiences a larger change in quantity?
d. What happens to total consumer spending on each product?

11. Beachfront resorts have an inelastic supply, and automobiles have an elastic supply. Suppose
that a rise in population doubles the demand for both products (that is, the quantity demanded at
each price is twice what it was).
a. What happens to the equilibrium price and quantity in each market?
b. Which product experiences a larger change in price?
c. Which product experiences a larger change in quantity?
d. What happens to total consumer spending on each product?

12. Several years ago, flooding along the Missouri and Mississippi rivers destroyed thousands of
acres of wheat.
a. Farmers whose crops were destroyed by the floods were much worse off, but farmers whose
crops were not destroyed benefited from the floods.
Why?
b. What information would you need about the market for wheat in order to assess whether
farmers as a group were hurt or helped by the floods?

13. Explain why the following might be true: A drought around the world raises the total revenue
that farmers receive from the sale of grain, but a drought only in
Kansas reduces the total revenue that Kansas farmers receive.

14. Because better weather makes farmland more productive, farmland in regions with good
weather conditions is more expensive than farmland in regions with bad weather conditions.
Over time, however, as advances in technology have made all farmland more productive, the
price of
farmland (adjusted for overall inflation) has fallen. Use the concept of elasticity to explain why
productivity and farmland prices are positively related across space but negatively related over
time.