Question

Demand and Supply Project

Overview: In economics, students need to be able to graph and explain the concepts related to supply and demand.

Purpose: The purpose for this project is for students to demonstrate the ability to analyze objective data and use supply and demand models and concepts that project possible economic outcomes.

Requirements: Number and answer each of the questions below.

1. Graph the following price and quantity information for athletic shoes. Label all parts of the graph including price, quantity, supply, demand and the equilibrium point as E1. (2 points)

Price(s) $	Quantity demanded (000)	Quantity supplied (000)
15	225	75
20	200	100
25	180	140
30	170	142
35	162	148
40	150	150
45	145	155
50	130	170
55	110	200
60	80	225

2. Is the demand curve a direct or inverse relationship? Explain how price relates to quantity demanded. (1 point)
3. Is the supply curve a direct or inverse relationship? Explain how price relates to quantity supplied. (1 point)
4. What is the equilibrium price and equilibrium quantity? Provide the exact numbers from the chart above. (1 point)
5. If the price of athletic shoes changes from $45 to $40 is this a movement along, or a shift of the demand and/or supply curves. Explain the changes in quantity demanded and quantity supplied. (2 points)
6. If incomes increase, what direction will the supply curve or demand curve shift? How do the equilibrium price and equilibrium quantity change? Show this on a separate graph with the original curves from question 1, label the new equilibrium point E2, and explain in writing which curve shifts and how equilibrium price and equilibrium quantity change (up or down). (3 points)
7. If labor costs decrease, what direction will the supply curve or demand curve shift? How do the equilibrium price and equilibrium quantity change? Show this on a separate graph with the original curves from question 1, label the new equilibrium point E3, and explain in writing which curve shifts and how equilibrium price and equilibrium quantity change (up or down). (3 points)
8. If a substitute good (tennis shoes) becomes available at a lower price, what direction will the supply curve or the demand curve shift. How do the equilibrium price and equilibrium quantity change? Show this on a separate graph with the original curves from question 1, label the new equilibrium point E4, and explain in writing which curve shifts and how equilibrium price and equilibrium quantity change (up or down). (3 points)
9. Answer all parts below using the following scenario: incomes decrease and labor costs decrease at the same time. (9 points in total)
   1. What direction will the supply and demand curves shift?
   2. Show on a separate graph, with the original curves from question 1, the potential situation that can occur if the demand curve shifts to a greater degree than the supply curve in relation to quantity. Label the new equilibrium point E5 and explain in writing what changes occur with the equilibrium price and the equilibrium quantity (up, down, or stays the same).
   3. Show on a separate graph, with the original curves from question 1, the potential situations that can occur if the demand curve shifts to a lesser degree than the supply curve in relation to quantity. Label the new equilibrium point E6 and explain in writing what changes occur with the equilibrium price and the equilibrium quantity (up, down, or stays the same).
   4. Show on a separate graph, with the original curves from question 1, the potential situations that can occur if the demand curve shifts to the same degree as the supply curve in relation to quantity. Label the new equilibrium point E7 and explain in writing what changes occur with the equilibrium price and the equilibrium quantity (up, down, or stays the same).

Answer 1

Is the demand curve a direct or inverse relationship? Explain how price relates to quantity demanded. (1 point).

Inverse relationship. The law of demand states that there is an inverse relationship between price and quantity demanded, other things remaining the same. If price increases then quantity demanded will fall, other things remaining same. Similarly, if price decreases, quantity demanded will increase, other things remaining the same.

Is the supply curve a direct or inverse relationship? Explain how price relates to quantity supplied. (1 point)

Direct relationship. Keeping other factors constant, an increase in price results in an increase in quantity supplied. In other words, there is a direct relationship between price and quantity: quantities respond in the same direction as price changes.The supply curve shows the relationship between the market price of the good and the quantity supplied at that price, other things remaining the same. When price of the good increases, quantity supplied will increase, other things remaining the same. If the price of the good decreases, quantity supplied will decrease, other things remaining the same.

If price increases from $40 to $45, it is a movement along the demand curve. A movement along the demand or curve occurs when a change in quantity supplied is caused only by a change in price, and vice versa. A shift in a demand  curve occurs when a good's quantity demanded or supplied changes even though price remains the same.

The quantity demanded when the price increases to $45 will fall and quantity supplied will increase. There will be excess supply.