Supply and Demand Practice Problems
1)
Mad Cow Disease has struck to cattle market. Determine what will occur in the:
a) market for ground beef
b) market for ground turkey
2)
An increase in the price of ice cream would cause what to occur in the market for
frozen yogurt?
3)
If there is an increase in the price of leather what will occur in the baseball glove
market?
4)
A sudden increase in the supply of peanuts has drastically reduced the price of
peanut butter. What will occur to the market for Jelly?
5)
What would happen the market for restaurant pizza if the price of flour increased
and the price of Chinese restaurant meals increased?
6)
If the price of DVD players fall, what would occur in the market for VCRs?
7)
Medical society has recently announced that a glass of red wine in the evening
can reduce the risk of heart disease. An arctic front has caused a large freeze in
Central California and greatly reduced the crop of grapes. What will occur to the
red wine market?
Answers to Demand and Supply Practice Problems
Provided are outlines of the worded answers to the Demand and Supply practice
problems. Please practice drawing the graphs on your own.
1a) One can assume that Mad cow disease has struck the cattle industry and one would
not want to consume any tainted beef. For that reason, demand would immediately
decrease. This would be considered a Fad or Fashion. The decrease in demand is an
inward (leftward shift of the demand curve and results in a decrease in price and a
decrease in quantity). You could further argue that supply will decrease since cattle
are dying (thus you have a double shift which results in a decrease in quantity and an
indeterminant effect on prices.)
1b) Turkey is a substitute for ground beef. Since beef has drastically decreased in
demand, one may assume that Demand for turkey has increased. (Due to all of the
checks for tainted beef, the supply of beef should drop, thus increasing the price of
beef). An increase in demand is an outward or rightward shift of the demand curve
and results in an increase in both prices and quantities of ground turkey.
2) One should assume that ice cream and frozen yogurt are substitutes. Thus, if the price
of ice cream increases, the demand for frozen yogurt should increase as well. This
demand increase is an outward or rightward shift of the demand curve and results in an
increase of both prices and quantities.
3) Leather is an input to baseball gloves. If there is an increase in the price of the input
good, the result is a decrease in supply. A decrease in supply is an inward (leftward)
shift of the supple curve. This decrease in supply results in higher prices and lower
quantities of baseball gloves.
4) One should assume that peanut butter and jelly are compliments. If the price of peanut
butter decreases then the demand for jelly should increase. The increase in demand is an
outward or rightward shift of the demand curve and results in an increase in prices and
quantities.
5) First off, break this down. Flour is an input for pizza. An increase in the cost of flour is
an increase in the cost of an input good. This results in a decrease in supply. The decrease
in supply results in an increase in price and a decrease in quantity. Also, there is an
increase in the cost of Chinese food. If one assumes that Chinese food and pizza are
substitutes, then the demand for pizza should increase. An increase in demand results in
an increase in price and an increase in quantity. Putting the two effects together results in
an increase in price, but the effect on quantity is indeterminant.
6) If the price of DVD’s fall, then the demand for VCR’s should go down. This decrease
in demand results in a decrease in price and quantity.
7) Reducing the risk of heart disease is a fad or fashion that will increase the demand for
red wine (an increase in price and quantity). Yet, the freeze in California, destroys the
grape supply for red wine. This results in a decrease in supple (an increase in price and a
decrease in quantity). The result of both effects is an increase in the price and an
indeterminant effect on quantity.