BASIC ECONOMICS

TUTORIAL 2
Demand & Supply

THE TUTORIAL
This week’s tutorial looks at Demand, Supply and Government Policies. Please prepare
these problems prior to attending tutorials.
 Quick Quiz (Text book)
- Chapter 4 (p.63, 69, 73, 80)
- Chapter 6 (p.118)
 Problems and Applications (Text book)
- Chapter 4 (1, 2, 3, 6, 8, 11)
- Chapter 6 (3, 10 - a,b,c)
 True/False
 Multiple choice

READING GUIDE
Review Chapter 4, 6 of Principles of Economics (9th edition) – N. Gregory Mankiw as
preparation for this tutorial. You should also look overcarefully your lectures notes for
Week 2.

CHAPTER 2 - 6 - SUMMARY

Demand
1

- Quantity demanded: the amount of a good that buyers are willing and able to purchase
- Law of demand the claim that, other things being equal, the quantity demanded of a
good falls when the price of the good rises
P  QD 
P QD 
- Demand schedule: a table that shows the relationship between the price of a good and
the quantity demanded
- Demand curve: a graph of the relationship between the price of a good and the quantity
demanded
Because a lower price increases the quantity demanded, the demand curve slopes
downward

- Market Demand versus Individual Demand

We sum the individual demand curves horizontally to obtain the market demand curve
(Figure 2. page 65 – Text book)

- Shifts in the Demand Curve

Variable A Change in This Variable . . .

Price of the good itself Represents a movement along the demand curve
 Shifts the demand curve
Normal good
I D : the demand curve shifts to the right
Income I D : the demand curve shifts to the left
Inferior good
I D : the demand curve shifts to the left
I D : the demand curve shifts to the right
Shifts the demand curve
Substitute goods (A,B)
PA  DB : the demand curve shifts to the right
Prices of related goods PA  DB : the demand curve shifts to the left
Complementary goods (A,B)
PA  DB : the demand curve shifts to the left
PA  DB : the demand curve shifts to the right
Tastes Shifts the demand curve
Expectations Shifts the demand curve
Number of buyers Shifts the demand curve

Supply
2

- Quantity supplied: the amount of a good that sellers are willing and able to sell
- Law of supply the claim that, other things being equal, the quantity supplied of a
good rises when the price of the good risess
P  QS 
P QS 
- Supply schedule: a table that shows the relationship between the price of a good and
the quantity supplied
- Supply curve: a graph of the relationship between the price of a good and the quantity
supplied
- Market Supply versus Individual Supply

we sum the individual supply curves horizontally to obtain the market supply curve
(Figure 6. page 71 – Mankiw)

- Shifts in the Supply Curve

Variable A Change in This Variable . . .

Price of the good itself Represents a movement along the supply curve
Input prices Shifts the supply curve
Technology Shifts the supply curve
Expectations Shifts the supply curve
Number of sellers Shifts the supply curve
 Equilibrium
3
- Equilibrium: a situation in which the market price has reached the level at which
quantity supplied equals quantity demanded
- Equilibrium price: the price that balances quantity supplied and quantity
demanded
- Equilibrium quantity: the quantity supplied and the quantity demanded at the
equilibrium price
At the equilibrium price,
the quantity of the good
that buyers are willing
and able to buy exactly
balances the quantity that
sellers are willing and
able to sell:
QS = Q D

- Three steps for analyzing changes in equilibrium

 Decide whether the event shifts the supply or demand curve (or perhaps both).
 Decide in which direction the curve shifts.
 Use the supply-and-demand diagram to see how the shift changes the
equilibrium price and quantity.

What Happens to Price and Quantity When Supply or Demand Shifts?

As a quick quiz, make sure you can explain at least a few of the entries in this table
using a supply-and-demand diagram
 Market disequilibrium
4

- Definition: This describes the market when the quantity supplied is not equal to the
quantity demanded
- Surplus (A surplus is sometimes called a
situation of excess supply): a situation in
which quantity supplied is greater than
quantity demanded
QD < QS
- Price will fall
+ Quantity supplied decreases
+ Quantity demanded increases
- Shortage (A shortage is sometimes called
a situation of excess demand): a situation in
which quantity demanded is greater than
quantity supplied
QD > QS
- Price will rise
+ Quantity supplied increases
+ Quantity demanded decreases

Controls on Prices
5

- Price ceiling: a legal maximum on the price at which a good can be sold
+ The price ceiling is not binding if set above the equilibrium price
+ The price ceiling is binding if set below the equilibrium price, leading to a shortage
- Price floor: a legal minimum on the price at which a good can be sold
+ The price floor is not binding if set below the equilibrium price
+ The price ceiling is binding if set above the equilibrium price, leading to a surplus
 TRUE/FALSE

TRUE FALSE
1. In a market economy, supply and demand determine both the
......... .........
quantity of each good produced and the price at which it is sold
2. The law of demand states that, other things equal, when the price of
a good rises, the quantity demanded of the good rises, and when the ......... .........
price falls, the quantity demanded falls
3. When Mario's income decreases, he buys more pasta. For Mario,
......... .........
pasta is a normal good
4. A decrease in the price of a complement will shift the demand
......... .........
curve for a good to the left.
5. If a person expects the price of socks to increase next month, then
......... .........
that person’s current demand for socks will increase
6. An increase in the price of ink will shift the supply curve for pens
......... .........
to the left
7. When a seller expects the price of its product to decrease in the
......... .........
future, the seller's supply curve shifts left now
8. When quantity supplied exceeds quantity demanded at the current
market price, the market has a surplus and market price will likely ......... .........
rise in the future to eliminate the surplus
9. If the equilibrium price of an airline ticket is $500 and the
government imposes a price floor of $400 on airline tickets, then ......... .........
fewer airline tickets will be sold than at the market equilibrium
10. Binding price ceilings benefit consumers because they allow
......... .........
consumers to buy all the goods they demand at a lower price
 SHORT – ANSWER QUESTIONS

1. If consumers expect the price of some good to rise next week, then we generally
observe the price of the good rising this week. Explain this fact using a graph.
2. The drought in the plain states has made grain, and therefore feed, quite expensive.
Many ranchers cannot afford to feed their cattle, and have sold much of their herd
for slaughter.
a. What will be the immediate effect of this event on the equilibrium price
and quantity of beef? Illustrate using a supply and demand diagram.
b. Chicken and beef are substitute goods. Illustrate the effect that the
slaughter of the cattle herds will have on the equilibrium price and quantity
of chicken.
c. As it happens, the slaughter of beef cattle has coincided with a decrease
in consumers' income. Assuming that steak is a normal good while
hamburgers are an inferior good, use a supply-and-demand diagram for
either market to illustrate the combined effect of the two aforementioned
events on the equilibrium price and quantity of hamburgers and steak.
3. Assume that the markets for sugar cane, rum, and whiskey are initially in
equilibrium. Assume further that Hurricane Marilyn destroys much of the
Jamaican sugar cane crop. Sugar cane is a principal ingredient in rum, but it is not
an ingredient in whiskey. Analyze the effect of the hurricane on the markets for
each of the three goods. Explain using graphs.
4. Consider a competitive market for which the quantities demanded and supplied at
(per month) various prices are given as follows:
Price Quantity Demanded Quantity Supplied
$5 6,000 10,000
$4 8,000 8,000
$3 10,000 6,000
$2 12,000 4,000
$1 14,000 2,000

a. Given the table below, graph the demand and supply curves for flashlights. Make
certain to label the equilibrium price and equilibrium quantity.
b. What is the equilibrium price and the equilibrium quantity?
c. Suppose the price is currently $5. What problem would exist in the market? What
would you expect to happen to price? Show this on your graph.
d. Suppose the price is currently $2. What problem would exist in the market? What
would you expect to happen to price? Show this on your graph.
 MULTIPLE CHOICE

1. The following table contains a demand schedule for a good:

Price Quantity Demanded
$10 100
$20 ?
If the law of demand applies to this good, then “?” could be ....................
Ⓐ0
Ⓑ 100
Ⓒ 200
Ⓓ 400
Table 2.1
Aaron’s Angela’s Austin’s Alyssa’s
Price Quantity Quantity Quantity Quantity
Demanded Demanded Demanded Demanded
$0.00 20 16 4 8
$0.50 18 12 6 6
$1.00 14 10 2 5
$1.50 12 8 0 4
$2.00 6 6 0 2 ....................
$2.50 0 4 0 0

2. Refer to Table 2.1. Whose demand does not obey the law of demand?
Ⓐ Aaron’s
Ⓑ Angela’s
Ⓒ Austin’s
Ⓓ Alyssa’s
3. Refer to Table 2-1. If these are the only four buyers in the market, then the
market quantity demanded at a price of $1/$2:
Ⓐ 4 units/0 units
....................
Ⓑ 7.75 units/3.5 units
Ⓒ 31 units/14 units
Ⓓ 14 units/6 units
4. Which of the following would not shift the demand curve for mp3 players?
....................
Ⓐ a decrease in the price of mp3 players
 Ⓑ a fad that makes mp3 players more popular among 12-25 year olds
Ⓒ an increase in the price of CDs, a complement for mp3 players
Ⓓ a decrease in the price of satellite radio, a substitute for mp3 players
5. Which of the following is not a determinant of the demand for a particular
good?
Ⓐ the prices of related goods
....................
Ⓑ income
Ⓒ tastes
Ⓓ the prices of the inputs used to produce the good
6. Currently you purchase 6 packages of hot dogs a month. You will graduate
from college in December, and you will start a new job in January. You
have no plans to purchase hot dogs in January. For you, hot dogs are
Ⓐ a substitute good ....................
Ⓑ a normal good
Ⓒ an inferior good
Ⓓ a complementary good
7. Suppose that a decrease in the price of good X results in fewer units of
good Y being sold. This implies that X and Y are
Ⓐ complementary goods
...................
Ⓑ normal goods
Ⓒ inferior goods
Ⓓ substitute goods
8. If a study by medical researchers found that brown sugar caused weight
loss while white sugar caused weight gain, then we likely would see
Ⓐ an increase in demand for brown sugar and a decrease in demand for
white sugar
Ⓑ a decrease in demand for brown sugar and an increase in demand for ...................
white sugar
Ⓒ an increase in demand for both brown sugar and white sugar
Ⓓ no change in demand for either type of sugar because weight loss is
not a determinant of demand
9. If Juan expects to earn a higher income next month, he may choose to
Ⓐ save more now and spend less of his current income on goods and
...................
services
Ⓑ move along his current demand curves for goods and services
 Ⓒ save less now and spend more of his current income on goods and
services
Ⓓ decrease his current demand for goods and services
Figure 2-1
Firm A Firm B
price
20 price
20
18
18
16
16
14
14
S
12
12
10
10
8 S
8
6 6
4 4
2
..................
2

2 4 6 8 10 12 14 16 18 20 quantity 2 4 6 8 10 12 14 16 quantity

10. Refer to Figure 2-1. If these are the only two sellers in the market, then the
market quantity supplied at a price of $6 is
Ⓐ 2 units
Ⓑ 10 units
Ⓒ 12 units
Ⓓ 22 units
11. Wheat is the main input in the production of flour. If the price of wheat
decreases, then we would expect the
Ⓐ demand for flour to increase
....................
Ⓑ demand for flour to decrease
Ⓒ supply of flour to increase
Ⓓ supply of flour to decrease
12. Wheat is the main input in the production of flour. If the price of wheat
decreases, then we would expect the
Ⓐ demand for flour to increase
....................
Ⓑ demand for flour to decrease
Ⓒ supply of flour to increase
Ⓓ supply of flour to decrease
13. An advance in production technology will
Ⓐ increase a firm's costs and increase its supply
....................
Ⓑ increase a firm’s costs and decrease its supply
Ⓒ decrease a firm’s costs and increase its supply
 Ⓓ decrease a firm’s costs and decrease its supply
14. A dress manufacturer recently has come to expect higher prices for dresses
in the near future. We would expect
Ⓐ the dress manufacturer to supply more dresses now than it was
supplying previously
Ⓑ the dress manufacturer to supply fewer dresses now than it was ....................
supplying previously
Ⓒ the demand for this manufacturer's dresses to fall
Ⓓ no change in the dress manufacturer's current supply; instead, future
supply will be affected
15. Which of the following would shift the supply curve for gasoline to the
right?
Ⓐ An increase in the demand for gasoline
Ⓑ An increase in the price of gasoline ....................
Ⓒ An increase in the number of producers of gasoline
Ⓓ An increase in the price of oil, an input into the production of
gasoline
16. Suppose roses are currently selling for $40 per dozen, but the equilibrium
price of roses is $30 per dozen. We would expect a
Ⓐ shortage to exist and the market price of roses to increase
....................
Ⓑ shortage to exist and the market price of roses to decrease
Ⓒ surplus to exist and the market price of roses to increase
Ⓓ surplus to exist and the market price of roses to decrease
17. Suppose roses are currently selling for $20 per dozen, but the equilibrium
price of roses is $30 per dozen. We would expect a
Ⓐ shortage to exist and the market price of roses to increase.
....................
Ⓑ shortage to exist and the market price of roses to decrease.
Ⓒ surplus to exist and the market price of roses to increase.
Ⓓ surplus to exist and the market price of roses to decrease.
Figure 2-2
....................
 price
20

18 S
16

14

12

10

2 D

10 20 30 40 50 60 70 80 90 quantity

18. Refer to Figure 2.2. In this market, equilibrium price and quantity,
respectively, are
Ⓐ $10 and 30
Ⓑ $10 and 50
Ⓒ $10 and 70
Ⓓ $4 and 50
19. Refer to Figure 2.2. If price in this market is currently $14, then there
would be a(n)
Ⓐ surplus of 20 units and the law of supply and demand predicts that
the price will rise from $14 to a higher price.
Ⓑ excess supply of 20 units and the law of supply and demand predicts
....................
that the price will fall from $14 to a lower price.
Ⓒ surplus of 40 units and the law of supply and demand predicts that
the price will rise from $14 to a higher price.
Ⓓ excess supply of 40 units and the law of supply and demand predicts
that the price will fall from $14 to a lower price.
20. Refer to Figure 2.2. If there is currently a shortage of 20 units of the
good, then
Ⓐ the law of demand predicts that the price will rise by $2 to eliminate
the shortage.
Ⓑ the law of supply predicts that the price will rise by $2 to eliminate ....................
the shortage.
Ⓒ the law of supply and demand predicts that the price will rise by $2
to eliminate the shortage.
Ⓓ the law of supply and demand predicts that the price will fall by $2
 to eliminate the shortage.
21. What would happen to the equilibrium price and quantity of coffee if the
wages of coffee-bean pickers fell and the price of tea fell?
Ⓐ Price would fall and the effect on quantity would be ambiguous.
....................
Ⓑ Price would rise and the effect on quantity would be ambiguous.
Ⓒ Quantity would fall and the effect on price would be ambiguous.
Ⓓ Quantity would rise and the effect on price would be ambiguous.
22. What will happen to the equilibrium price and quantity of new cars if the
price of gasoline rises, the price of steel rises, public transportation
becomes cheaper and more comfortable, and auto-workers negotiate higher
wages?
Ⓐ Price will fall and the effect on quantity is ambiguous. ....................
Ⓑ Price will rise and the effect on quantity is ambiguous.
Ⓒ Quantity will fall and the effect on price is ambiguous.
Ⓓ Quantity will rise and the effect on price is ambiguous.
23. Which of the following events will definitely cause equilibrium quantity to
rise?
Ⓐ demand increases and supply decreases
....................
Ⓑ demand and supply both decrease
Ⓒ demand decreases and supply increases
Ⓓ demand and supply both increase
24. Equilibrium price will unambiguously increase when
Ⓐ demand increases and supply does not change, when demand does
not change and supply decreases, and when demand decreases and
supply increases simultaneously.
Ⓑ demand increases and supply does not change, when demand does
not change and supply decreases, and when demand increases and
supply decreases simultaneously. ....................
Ⓒ demand decreases and supply does not change, when demand does
not change and supply increases, and when demand decreases and
supply increases simultaneously.
Ⓓ demand decreases and supply does not change, when demand does
not change and supply increases, and when demand increases and
supply decreases simultaneously.
25. If a price ceiling is not binding, then ....................
 Ⓐ the equilibrium price is above the price ceiling.
Ⓑ the equilibrium price is below the price ceiling.
Ⓒ it has no legal enforcement mechanism.
Ⓓ More than one of the above is correct.
26. A price floor is binding when it is set
Ⓐ above the equilibrium price, causing a shortage.
Ⓑ above the equilibrium price, causing a surplus. ....................
Ⓒ below the equilibrium price, causing a shortage.
Ⓓ below the equilibrium price, causing a surplus.
27. If a price floor is a binding constraint on a market, then
Ⓐ the equilibrium price must be above the price floor.
Ⓑ the quantity demanded must exceed the quantity supplied. ....................
Ⓒ sellers cannot sell all they want to sell at the price floor.
Ⓓ buyers cannot buy all they want to buy at the price floor.
28. If a binding price floor is imposed on the video game market, then
Ⓐ the quantity of video games demanded will decrease.
Ⓑ the quantity of video games supplied will increase. ....................
Ⓒ a surplus of video games will develop.
Ⓓ All of the above are correct.
Figure 2-3
price
20

18

16
S
14

12

10

4
D ....................
2

10 20 30 40 50 60 70 80 quantity

29. Refer to Figure 2-3. Which of the following price ceilings would be
binding in this market?
Ⓐ $8.
Ⓑ $10.
 Ⓒ $12.
Ⓓ $14.
30. Refer to Figure 2-3. Which of the following price floors would be binding
in this market?
Ⓐ $6.
....................
Ⓑ $8.
Ⓒ $10.
Ⓓ $12.
31. Refer to Figure 2-3. Which of the following statements is correct?
Ⓐ A price ceiling set at $12 would be binding, but a price ceiling set at
$8 would not be binding.
Ⓑ A price floor set at $8 would be binding, but a price ceiling set at $8 ....................
would not be binding.
Ⓒ A price ceiling set at $9 would result in a surplus.
Ⓓ A price floor set at $11 would result in a surplus.
32. Refer to Figure 2-3. If the government imposes a price ceiling of $8 on
this market, then there will be a
Ⓐ shortage of 0.
....................
Ⓑ shortage of 10.
Ⓒ shortage of 20.
Ⓓ shortage of 40.
33. Refer to Figure 6-3. If the government imposes a price ceiling of $12 on
this market, then there will be a
Ⓐ shortage of 0.
....................
Ⓑ shortage of 10.
Ⓒ shortage of 20.
Ⓓ shortage of 40.
34. Refer to Figure 2-3. If the government imposes a price floor of $6 on this
market, then there will be a
Ⓐ surplus of 0.
....................
Ⓑ surplus of 20.
Ⓒ surplus of 30.
Ⓓ surplus of 40.
35. Refer to Figure 2-3. In which of the following cases would sellers have to
develop a rationing mechanism?
Ⓐ A price ceiling is set at $8.
....................
Ⓑ A price ceiling is set at $12.
Ⓒ A price floor is set at $8.
Ⓓ A price floor is set at $12.