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Chapter 3

Chapter 3. Supply and Demand Q. 8, 10, 12, 14. Chapter 3, Problem 8. What will happen to the equilibrium price and quantity of beef if the price of chickenfeed increases?. Solution to Problem 8 (1) . Beef and chicken are substitutes

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Chapter 3

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  1. Chapter 3 Supply and Demand Q. 8, 10, 12, 14

  2. Chapter 3, Problem 8 What will happen to the equilibrium price and quantity of beef if the price of chickenfeed increases?

  3. Solution to Problem 8 (1) • Beef and chicken are substitutes • Increase in price of chickenfeed shifts the supply curve of chicken to the left. • Resulting in an increase in the price of chicken. Therefore, people will generally switch from consuming chicken to consuming beef • As a result, demand for beef increases • Is it a change in demand or a change in quantity demanded? • -Change in demand • -Increase in demand for beef is an outside factor affecting the demand curve. It will cause the demand curve shift up (right)

  4. Solution to Problem 8 (2) • Equilibrium is achieved where a demand curve and a supply curve intersect • Resulting in an increase in equilibrium price and equilibrium quantity of beef. Price of beef (P) S0 P1 P0 D1 D0 Quantity of beef (Q) 0 Q0 Q1

  5. Chapter 3, Problem 10 How will a new law mandating an increase in required levels of automobile insurance affect the equilibrium price and quantity in the market for new automobiles?

  6. Solution to Problem 10 (1) • Automobile insurance and automobiles are complement goods. • As the new law mandating the automobile insurance, some people who would have bought new automobiles with the lower insurance rates will choose not to, and will switch their preferences on buying used-car or taking public transit • As a result, the demand for new automobiles decrease • Is it a change in demand or a change in quantity demanded? • -Change in demand • -Decrease in demand for new automobiles is an outside factor affecting the demand curve. It will cause the demand curve shift down (left)

  7. Solution to Problem 10 (2) • Equilibrium is achieved where a demand curve and a supply curve intersect • Demand curve for automobiles falls (shift to left), the equilibrium price and equilibrium quantity falls. Price of new automobiles (P) S0 D1 P0 P1 D0 Quantity of new automobiles (Q) 0 Q1 Q0

  8. Chapter 3, Problem 12 What will happen to the equilibrium quantity and price of potatoes if population increases and a new, higher-yielding variety of potato plant is developed?

  9. Solution to Problem 12 (1) • The increase in population of potential buyers will increases the demand for potatoes • As a result, the demand for potatoes increases • Is it a change in demand or a change in quantity demanded? • Change in demand • Increase in demand for potatoes is an outside factor affecting the demand curve. It will cause the demand curve shift up (right)

  10. Solution to Problem 12 (2) • The improvement in technology leads the production in potatoes more efficient. Enable more potatoes production • As a result, the supply for potatoes increases • Is it a change in supply or a change in quantity supplied? • Change in supply • Increase in supply for potatoes is an outside factor affecting the supply curve. It will cause the supply curve shift down (right) • So, Demand curve shifts up (right), Supply curve shifts down (right)

  11. Solution to Problem 12 (3) • Equilibrium is achieved where a demand curve and a supply curve intersect • IF THE INCREASE OF DEMAND IS GREATER THAN THE INCREASE IN SUPPLY, both the equilibrium price and quantity of corn increase Price of Potato (P) D1 S0 S1 P1 P0 D0 Quantity of Potato (Q) 0 Q0 Q1

  12. Solution to Problem 12 (4) • Equilibrium is achieved where a demand curve and a supply curve intersect • IF THE INCREASE OF DEMAND IS LESS THAN THE INCREASE IN SUPPLY, the equilibrium price of potato decrease and the equilibrium quantity of potato increase Price of Potato (P) S0 D1 S1 P0 P1 D0 Quantity of Potato (Q) 0 Q0 Q1

  13. Solution to Problem 12 (5) • To summarize, the equilibrium quantity of potato will definitely increase • The equilibrium price of potato, however, is ambiguous • It depends on the relative change in demand and change in supply

  14. Chapter 3, Problem 14 What will happen to the equilibrium quantity and price of corn if the price of butter (a complement) increases and the price of fertilizer decreases?

  15. Solution to Problem 14(1) • For complement goods, as price of good A rises, demand for good B falls. • Corn and butter are complements • If the price of butter increases, people will demand less corn • As a result, the demand for corn decreases • Is it a change in demand or a change in quantity demanded? • Change in demand • Decrease in demand for corn is an outside factor affecting the demand curve. It will cause the demand curve shift down (left)

  16. Solution to Problem 14(2) • If price of fertilizer decreases, it decreases the cost of production of corn. Enable more crops to be produced with the same inputs. • As a result, supply for corn increases • Is it a change in supply or a change in quantity supplied? • Change in supply • Increase in supply of corn is an outside factor affecting the supply curve. It will cause the supply curve shift down (right) • So, Demand curve shifts down (left), Supply curve shifts down (right)

  17. Solution to Problem 14 (3) • Equilibrium is achieved where a demand curve and a supply curve intersect • IF THE DECREASE OF DEMAND IS GREATER THAN THE INCREASE IN SUPPLY, both the equilibrium price and quantity of corn decrease Price of corn (P) S0 S1 D1 P0 P1 D0 Quantity of corn (Q) 0 Q1 Q0

  18. Solution to Problem 14 (4) • Equilibrium is achieved where a demand curve and a supply curve intersect • IF THE DECREASE OF DEMAND IS LESS THAN THE INCREASE IN SUPPLY, the equilibrium price will decrease and the equilibrium quantity will increase Price of chicken (P) S0 S1 P0 P1 D0 Quantity of chicken (Q) 0 D1 Q0 Q1

  19. Solution to Problem 14(5) • To summarize, the equilibrium price of corn will definitely decrease • The equilibrium quantity of corn, however, is ambiguous • It depends on the relative change in demand and change in supply

  20. End of Chapter 3

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