In: Economics
1. For each of the following scenarios, determine if there is an increase or decrease in supply for the good in italics. Explain your reasoning using economic principles.
a. Tomato growers have an unusually good season
b. New medical evidence reports that consumption of organic products reduces the incidence of cancer.
c. Wages of clothing producers increase.
d. The price of silver increases.
2.
For each of the
following scenarios, determine if there is an increase or decrease
in demand for the good in italics. Explain
your reasoning using economic principles.
a. The price of oranges increases
b. You love air travel, but get fired from your job.
c. A wet spring results in an unusually bad mosquito season, which can be mitigated with citronella
d. Idaho starts to require motorcycle helmets for adults.
3. Consider the market S&D schedules for ice cream – draw the curves & determine the equilibrium price & quantity. Calculate the S&D functions and solve for equilibrium mathematically.
Price (per quart) |
QD |
QS |
2 |
100 |
20 |
3 |
80 |
40 |
4 |
60 |
60 |
5 |
40 |
80 |
6 |
20 |
100 |
4. Suppose the market for wooden #2 pencils is in equilibrium. Determine how the following changes will affect the market and the equilibrium price and quantity. Explain your reasoning. Draw a graph to illustrate each of your answers.
b. The price of graphite (pencil lead) increases
c. School attendance falls
d. Legislation restricts lumber harvests
e. Pencil makers unionize and receive a large wage increase
f. The price of ballpoint pens falls
5. Suppose the market for laptops is in equilibrium. Determine how the following changes will affect the market and the equilibrium price and quantity. Explain your reasoning. Draw a graph to illustrate each of your answers.
b. The price of memory chips falls
c. Software prices fall
d. College students are required to own a laptop
e. The price of electricity increases
f. Doctors warn of health risks from radiation from video terminals
Answer:
If they have an unusually good season, that means the production of tomato has risen and this will therefore increase the supply.
Given, that organic consumption can reduce cancer, producers know that increasing the supply will be beneficial because people will demand more as well. This will increase the supply
If wages of clothing producers increase, it means their cost of production will also increase. An increase in the cost of production means that it is now more costly for the producers to produce a unit of a good. Therefore this has the effect of decreasing supply.
If the price of silver increases,
again the cost of production of let’s say making silver jewelry
will increase, and therefore supply also
decreases.
Changes in Demand:
If the price of oranges increases then it is more expensive to consume it. Therefore the overall demand for oranges will decrease.
If you get fired from your job, your income falls, and therefore now it is difficult for you to pay for airfare, and thus your demand for air travel will decrease.
Given that people are concerned about their health, they will want to consume more citronella to avoid getting any disease during the mosquito season. This will increase the demand for citronella.
If motorcycle helmets become compulsory, then people will have to wear them. Thus this will increase the demand for motorcycle helmets.
According to the table, the equilibrium price is $4, since demand is equal to supply at this point. Now, to estimate the demand and supply equation mathematically we need to note down the general form:
Qd = a-bP
Qs = c+dP
where b and d are the slopes of the demand and supply function respectively
The slope is calculated by (Change in Q / Change in P)
Using this logic, notice that the slope of demand function (b) is -20. The price change is by 1 unit and quantity is decreasing by 20 units for every unit increase in price.
Similarly, the slope of the supply function (d) is 20. The price change is by 1 unit and the quantity is increasing by 20 units.
We can now write this as:
Further, we know the equilibrium price is 4 then the quantity demanded is 60, so let us try to substitute:
This implies,
Similarly, quantity supplied is also 60 when P is 4, then
Therefore Qd = 140 - 20P and Qs = -20+20P
Te demand and supply schedule is depicted blow: