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
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)
Solution to Problem 8 (2)
Price of beef (P)
S0
P1
P0
D1
D0
0
Q0
Quantity of beef (Q)
Q1
• Equilibrium is achieved where a demand curve and a supply curve
intersect
• Resulting in an increase in equilibrium price and equilibrium quantity of
beef.
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?
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)
Solution to Problem 10 (2)
Price of new
automobiles (P)
S0
D1
P0
P1
D0
0
Q1
Q0
Quantity of new
automobiles (Q)
• 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.
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?
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)
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)
Solution to Problem 12 (3)
Price of Potato (P)
D1
S0
S1
P1
P0
D0
0
Q0
Quantity of Potato (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 corn increase
Solution to Problem 12 (4)
Price of Potato (P)
S0
D1
S1
P0
P1
D0
0
Q0
Quantity of Potato (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 of potato decrease and the equilibrium quantity of
potato increase
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
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?
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)
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)
Solution to Problem 14 (3)
Price of corn (P)
S0
S1
D1
P0
P1
D0
0
Quantity of corn (Q)
Q1 Q0
• 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
Solution to Problem 14 (4)
Price of chicken
(P)
S0
S1
P0
P1
0
Q0
Q1
D0
D1
Quantity of chicken (Q)
• 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
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
End of Chapter 3