ECON 1001 AB
Introduction to Economics I
Dr. Ka-fu WONG
Third week of tutorial sessions
KKL 925, K812, KKL 106
Clifford CHAN
KKL 1109
givencana@yahoo.ca
Covered and to be covered
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Covered last week
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Dr. Wong finished kf002.ppt and covered up to #68 of kf003.ppt
You should have at least read up to Chapter 3 Supply and
Demand: An Introduction. If not, please press hard on them.
We are getting to the first midterm!
Start reading chapter 3 and 4
Your first midterm will cover chapter 1 – chapter 4
To be covered in the tutorial sessions this week
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Problems in chapter 3: #1, #3, #5, #7, #9, #11 and #13
You are advised to work on the even ones as well
Problem #1, Chapter 3
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State whether the following pairs of goods are
complement or substitutes. (If you think a pair is
ambiguous in this respect, explain why.)
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Tennis courts and squash courts
Squash racquets and squash balls
Ice cream and chocolate
Cloth diapers and paper diapers
Substitutes- goods that can be used / consumed
interchangeably, i.e. Coca Cola and Pepsi
Complements- goods that have to be used / consumed
at the same time, i.e. Computer hardware and software
Solution to Problem #1 (2)
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Tennis courts and squash courts
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Squash racquets and squash balls
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Complements- to play squash, you will need both
Ice cream and chocolate
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Substitutes- you cannot play tennis in a squash court, and you
cannot play squash in a tennis court. Two kinds of sport venue
Substitutes for some people who regard them as desert
Complement for some people who want to have chocolate (chips)
on top of the ice cream
Cloth diapers and paper diapers
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Substitutes- just different materials! We can use them
interchangeably
Problem #3, Chapter 3
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Indicate how you think each of the following would shift
demand in the indicated market
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Incomes of buyers in the market for Adirondack vacation increase
Buyers in the market for pizza read a study linking hamburger
consumption to heart disease
Buyers in the market for CDs learn of an increase in the price of
audiocassettes
Buyers in the market for CDs learn of an increase in the price of
CDs
Demand shifts up (right)- increase in demand at any given level of
price
Demand shifts down (left)- decrease in demand at any given level of
price
Solution to problem #3 (1)
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Incomes of buyers in the market for Adirondack
vacations increase
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The demand curve will shift up (right)
Assume vacations are a normal good. Buyers will increase their
consumption in vacations when their incomes increase.
Buyers in the market for pizza read a study linking
hamburger consumption to heart disease
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The demand curve will shift up (right)
Pizza and hamburger are both junk food and can be consumed
interchangeably. If a study shows proven connection between
hamburger consumption and heart disease, people will consume
less pizza for now. People will probably switch to consume pizza
going forward.
Solution to problem #3 (2)
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Buyers in the market for CDs learn of an increase in the
price of audiocassettes.
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The demand will shift up (right)
CDs and audiocassettes are substitutes . They both can be used
to record and play music or soundtrack.
If price of audiocassettes increases, people will probably switch
to CDs
Buyers in the market for CDs learn of an increase in the
price of CDs
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As price of CDs goes up, people will buy less
But the demand curve will not shift- why?
 Change in Quantity Demanded versus Change in Demand
Solution to problem #3 (3)
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Change in Quantity Demanded
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Endogenous factors affecting the demand
A demand graph consists of price on the Y-axis and quantity on
the X-axis. Thus, price and quantity are endogenous factors
Change in an endogenous factor itself (price of CDs) will only
cause movement along the demand curve
Change in Demand
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Exogenous factors affecting the demand
Factors other then the endogenous factors (price and quantity)
are going to shift the demand curve
 Price of substitutes, price of complements, increase in
wealth (exogenous factors)
Problem #5, Chapter 3
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What will happen to the equilibrium price and quantity of
oranges if the wage paid to orange pickers rises?
Solution to problem #5 (1)
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Wage paid to orange pickers is actually one of the
production costs of orange
If now the production cost increases, suppliers will find it
less profitable and so they will begin producing less
orange to the market
As a result, the supply of orange will decrease
Is it a change in supply or a change in quantity supplied?
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Change in supply
Increase in wage paid is an exogenous factor affecting the supply
curve. It will cause the supply curve shift up (left)
Supply curve shifts up (left)- decrease in supply at any given
level of price
Solution to problem #5 (2)
Price of orange (P)
S1
S0
P1
P0
D0
0
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Quantity of orange (Q)
Q1 Q0
Equilibrium is achieved where a demand curve and a supply curve
intersect
Equilibrium price of orange increases and equilibrium quantity
of orange decreases when the wage paid to orange pickers
increases
Problem #7, Chapter 3
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What will happen to the equilibrium price and quantity of
fish if fish oils are found to help prevent heart disease?
Solution to problem #7 (1)
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If fish oil is found to help prevent heart disease, people
will probably increase their consumption in fish so that
they can be healthier
As a result, the demand for fish will increase
Is it a change in demand or a change of quantity
demanded?
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Change in demand
Increase in fish consumption is an exogenous factor affecting the
demand curve. It will cause the demand curve shift up (right)
Demand curve shifts up (right)- increase in demand at any given
level of price
Solution to problem #7 (2)
Price of fish (P)
S0
P1
P0
D1
D0
0
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Quantity of fish (Q)
Q0 Q1
Equilibrium is achieved where a demand curve and a supply curve
intersect
Both the equilibrium price and quantity of fish increase when
fish is found healthy
Problem #9, Chapter 3
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Use supply and demand analysis to explain why hotel
room rental rates near your campus during parents’
weekend and graduation weekend might differ from rates
charged during the rest of the year.
Solution to problem #9 (1)
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As many parents visit the campus and participate in their
children’s activities during parents’ weekend and
graduation weekend, there will be a higher demand for
hotel rooms near the campus than other periods in the
year
The demand for hotel rooms near the campus during the
weekends during the special weekends will increase
Is it a change in demand or a change in quantity
demanded?
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Change in demand
Increase in demand for hotel rooms during the time is an
exogenous factor affecting the demand curve. It will cause the
demand curve shift up (right)
Demand curve shifts up (right)- increase in demand at any given
level of price
Solution to problem #9 (2)
Price of hotel
rooms (P)
S0
P1
P0
D1
D0
0
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
Quantity of hotel rooms (Q)
Q0 Q1
Equilibrium is achieved where a demand curve and a supply curve
intersect
Both the equilibrium price and quantity of hotel rooms increase
when it is a special weekend for parents
Problem #11, Chapter 3
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Suppose the current issue of the New York Times reports
an outbreak of mad cow disease in Nebraska, as well as
the discovery of a new breed of chicken that gains more
weight than existing breeds that consume the same
amount of food. How will these developments affect the
equilibrium price and quantity of chickens sold in the
United States?
Solution to problem #11 (1)
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Beef and chicken are substitutes
If there is an outbreak of mad cow disease, people will
generally switch from consuming beef to consuming
chicken
As a result, the demand for chicken will increase
Is it a change in demand or a change in quantity
demanded?
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Change in demand
Increase in demand for chicken is an exogenous factor affecting
the demand curve. It will cause the demand curve shift up (right)
Demand curve shifts up (right)- increase in demand at any given
level of price
Solution to problem #11 (2)
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If there is a discovery of a new breed of chicken that
gains more weight than existing breeds that consume
the same amount of food, it will be more profitable for
chicken suppliers
As a result, the supply of chicken will increase
Is it a change in supply or a change in quantity supplied?
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Change in supply
Increase in supply of chicken is an exogenous factor affecting the
supply curve. It will cause the supply curve shift down (right)
Supply curve shifts down (right)- increase in supply at any given
level of price
Solution to problem #11 (3)
Price of chicken
(P)
S0
S1
P1
P0
D1
D0
0
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
Q0
Quantity of chicken (Q)
Q1
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 chicken increase
Solution to problem #11 (4)
Price of chicken
(P)
S0
S1
P0
P1
D1
D0
0


Q0
Quantity of chicken (Q)
Q1
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 will decrease and the
equilibrium quantity will increase
Solution to problem #11 (5)
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To summarize, the equilibrium quantity of chicken will
definitely increase
The equilibrium price of chicken, however, is ambiguous
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It depends on the relative change in demand and change in
supply
Problem #13, Chapter 3
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What will happen to the equilibrium price and quantity of
apples if apples are discovered to help prevent colds and
a fungus kills 10 percent of existing apple trees?
Solution to problem #13 (1)
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If apples are discovered to help prevent colds, people
will probably increase their consumption in apples so
that they can be healthier
As a result, the demand for apples will increase
Is it a change in demand or a change in quantity
demanded?
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Change in demand
Increase in demand for apples is an exogenous factor affecting
the demand curve. It will cause the demand curve shift up (right)
Demand curve shifts up (right)- increase in demand at any given
level of price
Solution to problem #13 (2)
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If a fungus kills 10% of existing apple trees, there will be
a decrease in supply of apples
As a result, the supply of apples will decrease
Is it a change in supply or a change in quantity supplied?
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Change in supply
Decrease in supply for apples is an exogenous factor affecting
the supply curve. It will cause the supply curve shift up (left)
Supply curve shifts up (left)- decrease in supply at any given
level of price
Solution to problem #13 (3)
Price of apples
(P)
S1
S0
P1
P0
D1
D0
0
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Quantity of apples (Q)
Q0 Q1
Equilibrium is achieved where a demand curve and a supply curve
intersect
IF THE INCREASE OF DEMAND IS GREATER THAN THE
DECREASE IN SUPPLY, both the equilibrium price and quantity
of apples increase
Solution to problem #13 (4)
Price of apples
(P)
S1
S0
P1
P0
0


D1
D0
Quantity of apples (Q)
Q1 Q0
Equilibrium is achieved where a demand curve and a supply curve
intersect
IF THE INCREASE OF DEMAND IS LESS THAN THE DECREASE
IN SUPPLY, the equilibrium price will increase and the
equilibrium quantity will decrease
Solution to problem #13 (5)
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To summarize, the equilibrium price of apples will
definitely increase
The equilibrium quantity of apples, however, is
ambiguous
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It depends on the relative change in demand and change in
supply
The end
Thanks for coming!
See you next week!