Answers to Questions in Chapter 2
Note: No. before  indicates a page number
Page
45 
Assume that there are 200 consumers in the market. Of these, 100 have schedules like
Rachael’s and 100 have schedules like David’s. What would be the total market
demand schedule for potatoes now?
Price
Total Market Demand
4
8
12
16
20
46 
4400
2600
1400
800
600
1. How much would be demanded at a price of 60c per kilogram?
Reading off from the graph: at a price of 60c per kg, total market demand is 600 000
tonnes per month (or a little under).
46  2. Assuming that demand does not change from month to month, plot the annual market
demand for potatoes.
The amount demanded would be 12 times higher at each price. If the scale of the
horizontal axis were unaltered, the curve would shift way out to the right. A simple way
of showing the new curve, therefore, would be to compress the scale of the horizontal
axis. (If each of the numbers on the axis were multiplied by 12, the curve would remain
in physically the same position.)
46 
1. Draw Rachael’s and David’s
demand curves for potatoes on
one diagram. Note that you will
use the same vertical scale as in
Figure 2.1, but you will need a
quite different horizontal scale.
This is shown in Diagram 2.1
opposite.
46

2. At what price is their demand
the same?
The two curves cross at a price
of 10p per kg and at a demand of
10 kg per month.
Diagram 2.1 Rachael’s and David’s demand for
potatoes (monthly)
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Answers to questions in Economics by Sloman and Norris
46  3. What explanations could there be for the quite different shapes of their two demand
curves?
One explanation could be that Rachael is quite happy to eat rice, pasta or bread instead
of potatoes. Thus when the price of potatoes goes up she switches to these other foods,
and switches to potatoes when the price of potatoes comes down. David, by contrast,
may not see these other foods as close substitutes and thus his demand for potatoes will
be less price sensitive. (See section 2.4 on elasticity.)
47 
Do all these six determinants of demand affect both an individual’s demand and the
market demand for a product?
All except the distribution of income. The (national) distribution of income simply
affects an individual’s income and thus is not a separate determinant from income.
48 
1. Assume that in Table 2.1 the total
market demand for potatoes increases
by 20 per cent at each price - due, say,
to substantial increases in the prices of
bread and rice. Plot the old and the
new demand curves for potatoes. Is the
new curve parallel to the old one?
See Diagram 2.2 opposite. As you can
see, the curves are not parallel. A
constant percentage increase in
quantity demanded gives a bigger and
bigger absolute increase as quantity
increases.
48 
2. The price of pork rises and yet it is
Diagram 2.2 Market demand for potatoes (monthly)
observed that the sales of pork
increase. Does this mean that the
demand curve for pork is upward sloping? Explain.
No not necessarily. For example, the price of substitutes such as beef, chicken or lamb
may have risen by a larger amount. In such cases the demand curve for pork will have
shifted to the right. Thus although a rise in the price of pork will cause a movement up
along this new demand curve, more pork will nevertheless be demanded because pork
is now relatively cheaper than the alternatives.
50 
1. How much would be supplied at a price of 14c per kilo?
About 430 000 tonnes per month.
50 
2. Draw a supply curve for farmer X. Are the axes drawn to the same scale as in Figure
2.3?
The supply curve for farmer X will merely plot the relevant two columns from Table
2.2. The vertical axis can be drawn to the same scale as in Figure 2.3, but a different
scale will have to be used for the horizontal axis (e.g. tonnes rather than thousands of
tonnes).
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Chapter 2
51 
1. For what reasons might the supply of potatoes fall?
Examples include:
51 

The cost of producing potatoes rises.

The profitability of alternative crops (e.g. carrots) rises.

A poor potato harvest

Farmers expect the price of potatoes to rise (short-run supply falls).
2. For what reasons might the supply of leather rise?
Examples include:
52 

The costs of producing leather fall.

The profitability of producing alternative products decreases.

The price of beef rises.

A long-running industrial dispute involving leather workers is resolved.

Producers expect the price of leather to fall (short-run supply increases).
This question is concerned with the supply of oil for the generation of electricity. In
each case consider whether there is a movement along the supply curve (and in which
direction) or a shift in it (and whether left or right).
(a) New oil fields start up in production. (b) The demand for electricity rises. (c) The
price of gas falls. (d) Oil companies anticipate an upsurge in demand for oil in
electricity generation. (e) The demand for petrol rises. (f) New technology decreases
the costs of oil refining.
(a) Shift right.
(b) Movement up along (as a result of a rise in price).
(c) Movement down along (as a result of a fall in price resulting from a fall in demand
as suppliers switch to coal fired stations).
(d) Shift left (if companies want to conserve their stocks in anticipation of a price
rise).
(e) Shift right (more of a good in joint supply is produced).
(f) Shift right.
53 
Explain the process by which the price of houses would rise if there were a shortage.
People with houses to sell would ask a higher price than previous sellers of similar
houses (probably with the advice of a real estate agent). Potential purchasers would be
prepared to pay a higher price than previously in order to obtain the type of house they
wanted.
54 
What would happen to price and quantity if the demand curve shifted to the left? Draw
a diagram to illustrate your answer.
Both price and quantity will fall. Imagine in Figure 2.6 that the original curve were D2
and that it shifted to D1. Price would fall from Pe2 to Pe1 and quantity would fall from
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Answers to questions in Economics by Sloman and Norris
Qe2 to Qe1.
55 
What will happen to the equilibrium price and quantity of butter in each of the
following cases? You should state whether demand or supply (or both) have shifted and
in which direction. (In each case assume ceteris paribus.)
(a) A rise in the price of margarine; (b) A rise in the demand for yoghurt; (c) A rise in
the price of bread; (d) A rise in the demand for bread; (e) An expected rise in the price
of butter in the near future; (f) A tax on butter production; (g) The invention of a new,
but expensive, process for removing all cholesterol from butter plus the passing of a
law which states that all butter producers must use this process.
(a) Price rises, quantity rises (demand shifts to the right: butter and margarine are
substitutes).
(b) Price falls, quantity rises (supply shifts to the right: butter and yoghurt are in joint
supply).
(c) Price falls, quantity falls (demand shifts to the left: bread and butter are
complementary goods).
(d) Price rises, quantity rises (demand shifts to the right: bread and butter are
complementary goods).
(e) Price rises, quantity rises or falls depending on relative sizes of the shifts in
demand and supply (demand shifts to the right as people buy now before the price
rises; supply shifts to the left as producers hold back stocks until the price does
rise).
(f) Price rises, quantity falls (supply shifts to the left).
(g) Price rises, quantity rises or falls depending on the relative size of the shifts in
demand and supply (demand shifts to the right as more health-conscious people
start buying butter; supply shifts to the left as a result of the increased cost of
production).
58 
Will a general item of expenditure like food or clothing have a price-elastic or inelastic
demand? (Consider both the determinants we have considered so far.)
The income effect will be relatively large (making demand relatively elastic). The
substitution effect will be relatively small (making demand relatively inelastic) The
actual elasticity will depend on the relative size of these two effects.
58 
Demand for oil might be relatively elastic over the longer term, and yet it could still be
observed that over time people consume more oil (or only very slightly less) despite
rising oil prices. How can this apparent contradiction be explained?
Because there has been a rightward shift in the demand curve for oil. This is likely to
be the result of rising incomes. Car ownership and use increase as incomes increase.
Also tastes may have changed so that people want to drive more. There may also have
been a decline in substitute modes of transport such as rail transport and buses. Finally,
people may travel longer distances to work as a result of a general move to the suburbs.
60 
Assume that demand for a product is inelastic. Will consumer expenditure go on
increasing as price rises? Would there be any limit?
So long as demand remains inelastic with respect to price, then consumer expenditure
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Chapter 2
will go on rising as price rises. However, if the price is raised high enough, demand
always will become elastic.
61  Can you think of any examples of goods which have a totally inelastic demand (a) at all
prices; (b) over a particular price range?
(a) No goods fit into this category, otherwise price could rise to infinity - but people
do not have infinite incomes!
(b) Over very small price ranges, the demand for goods with no close substitutes may
be totally inelastic.
61 
To illustrate these figures, draw the demand curve corresponding to the following
table.
P
Q
TE
$2.50
$5
$10
$20
$40
400
200
100
50
25
$1000
$1000
$1000
$1000
$1000
The curve will be a ‘rectangular hyperbola’: it will be a smooth curve, concave to the
origin which never crosses either axis. (See Figure 2.13 (c) in text.)
If the curve had an elasticity of -1 throughout its length, what would be the quantity
demanded (a) at a price of $1; (b) at a price of 10c?
(a) 1000 units.
(b) 10 000 units.
62 
(Box 2.1) 1. Why may a restaurant charge very high prices for wine and bottled water
and yet quite reasonable prices for food?
Because the demand for food is relatively elastic: people may well compare restaurant
food prices when deciding where to eat. The demand for drinks in restaurants, however,
is likely to be relatively inelastic. People’s decision where to eat is unlikely to be
influenced by drink prices. Then, once people are eating in a restaurant, there is no
alternative supply of drinks to the restaurant’s own. People either have to pay the high
prices or go without.
62 
(Box 2.2) 2. Why are clothes with designer labels so much more expensive than ‘own
brand’ clothes from a chain store, even though they may cost a similar amount to
produce?
Because fashion is an important determinant of demand. The more fashionable a
product, the higher will be the demand, and the less elastic will be the demand, at any
given price. Thus it is profitable for shops to charge higher prices for fashion products
than for own brand products.
61 
(Box 2.2) 1. Think of some advertisements which deliberately seek to make demand less
elastic.
Those that strongly promote a brand, so that in the consumer’s mind there is no close
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Answers to questions in Economics by Sloman and Norris
substitute.
61  (Box 2.2) 2. Imagine that ‘Sunshine’ sunflower margarine, a well-known brand, is
advertised with the slogan, ‘It helps you live longer’. What do you think would happen
to the demand curve for a supermarket’s own brand of sunflower margarine? Consider
both the direction of shift and the effect on elasticity. Will the elasticity differ markedly
at different prices? How will this affect the pricing policy and sales of the
supermarket’s own brand?
It depends on the extent to which the consumer is led to believe that sunflower
margarines generally help you to live longer, in which case the demand for the
supermarket’s brand is likely to shift to the right and become less elastic as consumers
are less prepared to switch to non-sunflower margarines. If, however, the consumer was
led to believe that it was specifically ‘Sunshine’ margarine that made you live longer,
then the demand for the supermarket’s brand (and all others) will shift to the left.
63  How else could you have worked out that the elasticity of demand is 1 between P=6
and P=4?
Because total expenditure is unchanged at $120. Demand increases in exactly the same
proportion that price falls.
63 
Referring to Table 2.4, use the mid-point formula to calculate the price elasticity of
demand between (a) P = 8 and P = 6; (b) P = 4 and P = 2. What do you conclude
about the elasticity of a straight-line demand curve as you move down it?
Using the formula: (Q/mid Q)  (P/mid P) gives the following answers:
(a)
10/15  –2/7
= .67  .29
= 2.3 (which is elastic)
(b)
10/35  2/3
= .29  .67
= -0.43 (which is inelastic)
The elasticity decreases as you move down a straight-line demand curve.
64 
(Box 2.3) 1. Estimate the price elasticity of demand between 8c and 10c and between
10c and 12c.
The mid-point formula (see pages 62-3 of the text) for price elasticity is Qd/average Qd
 P/average P.
Thus between 8c and 10c, price elasticity equals –2/5  2/9
= –9/5 = –1.8 (elastic)
And between 10c and 12c, price elasticity equals –1/3.5  2/11
= –11/7 = –1.57 (elastic)
64 
(Box 2.3) 2. Was the 10c fare the best fare originally?
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Chapter 2
No. A profit of $400 000 – $360 000 = $40 000 was made. At a price of 8c, however, a
higher profit of $480 000 – $360 000 = $120 000 could have been made.
64 
(Box 2.3) 3. The company considers lowering the fare to 6c, and estimates that demand
will be 81/2 million passenger kilometres. It will have to put on extra buses, however.
How should it decide?
If it lowers the price to 6c, the revenue will rise to $510 000 (6c  8.5m). But putting on
extra buses will also increase costs. It will only, therefore, be worth lowering the price
if the increase in revenue is greater than the increase in costs. (See Chapter 5, section
5.6 of the text.)
65 
Given the following supply schedule:
P:
Q
2
0
4
10
6
20
8
30
10
40
(a) Draw the supply curve.
(b) Using the arc method calculate price elasticity of supply (i) between P=2 and
P=4; (ii) between P = 8 and P = 10.
(c) Does the elasticity of the supply curve increase or decrease as P and Q increase?
Why?
(d) What would be the answer to (c) if the supply curve had been a straight line but
intersecting the horizontal axis to the right of the origin?
(a) The supply curve will be an upward sloping straight line crossing the vertical axis
where P = 2.
(b) (i) Using the formula Q/average Q  P/average P, gives:
10/5  2/3 = 3
(ii) 10/35  2/9 = 1.29
(c) The elasticity of supply decreases as P and Q increase. It starts at infinity where the
supply curve crosses the vertical axis (Q = 0 and thus P/Q = ).
(d) No. At the point where it crossed the horizontal axis, the elasticity of supply would
be zero (P = 0 and thus P/Q = 0). Thereafter, as P and Q increased, so would the
elasticity of supply.
66 
(Box 2.4) Would you expect the demand for developing countries’ raw material exports
to grow rapidly or slowly over time? Does their growth over time give a good
indication as to their income elasticity of demand?
Slowly, because of the development of artificial substitutes (e.g. plastics for metal and
rubber). Such developments therefore make the income elasticity of demand seem
lower than it really is.
67 
Which are likely to have the highest cross elasticity of demand: two brands of coffee, or
coffee and tea?
Two brands of coffee, because they are closer substitutes than coffee and tea.
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Answers to questions in Economics by Sloman and Norris
68 
The income elasticity of demand for good x is 0.5 and that for good y is 2.0. Over a
given period income rises by 10%. Compare the effect on the sales of the two goods,
ceteris paribus.
Sales of x will rise by 5% and those of y will rise by 20%.
8