ECON 100 Tutorial: Week 2
www.lancaster.ac.uk/postgrad/alia10/
a.ali11@lancaster.ac.uk
office hours: 3:45PM to 4:45PM
tuesdays LUMS C85
Moodle
• Moodle:
https://modules.lancs.ac.uk/
– Coursepaper, Tutorial worksheets, Lecture
Recordings, General Announcements
• My tutorial page:
www.lancaster.ac.uk/postgrad/alia10/
– Tutorial Slides (will be posted Tuesday evening),
General Tutorial-related announcements
Question 1
• Normal Good:
– A good for which, other things equal, an increase in
income leads to an increase in demand (and vice
versa). Normal goods have a positive income
elasticity of demand.
– Examples:
• Inferior Good:
– A good for which, other things equal, an increase in
income leads to a decrease in demand (and vice versa)
– Examples:
Question 1 ctd.
• Complementary Good:
– Two goods for which an increase in the price of
one leads to a decrease in the demand for the
other (and vice versa)
– Examples:
• Substitute Goods:
– Two goods for which an increase in the price of
one leads to an increase in the demand for the
other
– Examples:
Question 2
Suppose we have the following market supply
and demand schedules for bicycles:
a. Plot the supply curve and the demand
curve for bicycles.
b. What is the equilibrium price of bicycles?
c. What is the equilibrium quantity of
bicycles?
Price
(£)
Quantity
Demanded
Quantity
Supplied
100
200
300
400
500
600
70
60
50
40
30
20
30
40
50
60
70
80
Question 2
Suppose we have the following market supply and demand schedules for bicycles:
700
600
500
400
300
200
100
0
0
10
20
30
40
Quantity Demanded
50
60
70
80
90
Quantity Supplied
d. If the price of bicycles were £100, is there a surplus or a shortage? How
many units of surplus or shortage are there? Will this cause the price to rise
or fall?
e. If the price of bicycles were £400, is there a surplus or a shortage? How
many units of surplus or shortage are there? Will this cause the price to rise
or fall?
Question 2 Ctd.
f. Suppose that the bicycle maker's labour union bargains for an
increase in its wages. Further, suppose this event raises the cost
of production, makes bicycle manufacturing less profitable, and
reduces the quantity supplied of bicycles by 20 units at each
price of bicycles. Plot the new supply curve and the original
supply and demand curves. What is the new equilibrium price
and quantity in the market for bicycles?
original
new
Price
(£)
100
200
300
400
500
600
Quantity
Demanded
70
60
50
40
30
20
Quantity
Supplied
30
40
50
60
70
80
Price
(£)
100
200
300
400
500
600
Quantity
Demanded
70
60
50
40
30
20
Quantity
Supplied
10
20
30
40
50
60
Question 2 Ctd.
700
600
500
400
300
200
100
0
700
600
500
400
300
200
0
20
40
60
80
100
100
0
Quantity Demanded
0
20
40
60
80
Quantity Supplied (original)
Quantity Demanded
Quantity Supplied (original)
Quantity Supplied (new)
Price
(£)
100
200
300
400
500
600
Quantity
Demanded
70
60
50
40
30
20
Quantity
Supplied
30
40
50
60
70
80
Price
(£)
100
200
300
400
500
600
Quantity
Demanded
70
60
50
40
30
20
Quantity
Supplied
10
20
30
40
50
60
100
Question 3
For each event, which curve is affected (supply or
demand for bicycles), what direction is it shifted,
and what is the resulting impact on equilibrium
price and quantity of bicycles?
a. The price of cars increases.
demand, shifts right, equilibrium price and
quantity rise.
b. Consumer’s income decreases and bicycles are a
normal good.
demand, shifts left, equilibrium price and
quantity fall
Question 3 ctd.
c. Price of steel used to make bicycle frames increases.
supply, shifts left, equilibrium price rises,
equilibrium quantity falls
d. An environmental movement shifts tastes towards
bicycling.
demand, shifts right, equilibrium price and
quantity rise
e. Consumers expect the price of bicycles to fall in the
future.
demand, shifts left, equilibrium price and
quantity fall.
Question 3 ctd.
f. A technological advance in the manufacturing of
bicycles occurs.
supply, shifts right, equilibrium price falls,
equilibrium quantity rises.
g. The price of bicycle helmets and shoes is reduced.
demand, shifts right, equilibrium price and
quantity rise.
h. Consumers’ incomes decrease, if bicycles are an
inferior good.
demand, shifts right, equilibrium price and
quantity rise .
Question 5
Suppose an econometrician uses a long dataset of pork
sales, prices and income and estimates that the
demand function for pork is given by:
Dp = 165 – 20Pp + 20Pb + 3Pc + 2Y
Where:
Dp is the demand (in millions of kg),
Pp is the price of pork,
Pb is the price of beef,
Pc is the price of chicken, and
Y is the average income level of households (in C$,000).
Question 5 ctd.
Dp = 165 – 20Pp + 20Pb + 3Pc + 2Y
Is beef a substitute or complement to pork?
substitute
The coefficient on Pb is positive; this indicates that if Pb ↑, then
Dp ↑. (if the price of a good goes up, then demand for it’s
substitutes will go up. )
And chicken?
substitute
Is pork a normal good?
yes, pork is a normal good.
The coefficient on income (Y) is positive. So if Y↑, then D also ↑.
Dp = 165 – 20Pp + 20Pb + 3Pc + 2Y
Suppose Pb=4, Pc=3.33 and Y=12.5 then write
down the demand curve as a function of Pp alone.
The demand curve is the relationship between
Price and Quantity.
To find the demand curve, we plug in Pb, Pc, and Y
into our demand function.
Dp = 165 – 20Pp + 20(4) + 3(3.33) + 2(12.5)
Dp = 165 – 20Pp + 80 + 9.99 + 25
Dp = 280 – 20Pp
Question 5 ctd.
Using Excel draw a diagram of what the inverse demand curve looks
like (i.e. with Pp on the vertical axis and Dp on the horizontal).
HINT: Enter a column headed Pp (in the top left cell – labelled A1) and
then enter 0, 1,2,3,4 ….. up to 14 in the cells below the heading. Head
the next (B) column Dp and in the cell below this heading enter the
“formula” for the demand curve. Draw the inverse demand curve
using Excel’s chart facility. HINT highlight the two columns and then
click on CHARTS and then the SCATTER icon and chose Straight Marked
Scatter. It should produce dots connected by a line. If you have an
older EXCEL it may be different - but probably easier! And there are
many ways of doing this in the EXCEL – so do whatever works for you.
What is the slope and intercept? If all else fails draw it with pencil and
ruler!
Question 5 ctd: Find the slope and intercept.
We can solve for the slope and intercept algebraically.
We start with the equation for our demand curve:
Dp = 280 – 20Pp
And put it into Y=mX+b form, (slope-intercept form), where
Pp is our Y variable and Dp is our X variable.
Dp = 280 – 20Pp
Dp + 20Pp - Dp = 280 – 20Pp + 20Pp - Dp
20Pp = 280 – Dp
20Pp ÷ 20 = (280 – Dp ) ÷ 20
Now we have an equation that is in slope-intercept form,
that we can easily graph by hand:
Pp = 14 – (1/20)Dp
Our slope is -1/20 and our intercept is 14.
Using Excel draw a diagram of the inverse demand
curve. Find the slope and intercept.
First, we start with the equation for our demand curve:
Dp = 280 – 20Pp
Ian wants us to plot what he calls the “inverse demand
curve”, with Pp on the vertical axis and Dp on the
horizontal. We just solved it algebraically.
To graph in Excel, we actually use our original Demand
Curve:
Dp = 280 – 20Pp
And set up a Demand schedule by plugging in values for
P and solving for D.
Question 5 ctd.
Suppose Pb rises by $1.00 what happens to this
demand curve – show this in Excel.
What are the new values of the slope and
intercept?
Answer: -1/20 and 15.
Question 5 ctd.
Suppose incomes rise to 22.5? What happens to
the slope and intercept?
Answer: Nothing, also rises by 1.
Question 5 ctd. (part b)
Now, suppose the supply of pork were given by
Sp = 170 + 40Pp – 60Ph
where Ph is the price of hogs (pork products are made from
dead hogs). If Ph=$1.50 per kg then write the supply curve as a
function of Pp alone. Draw the inverse supply curve in Excel
(i.e. with Pp on the vertical axis and Sp on the horizontal).
First, plug in Ph:
Sp = 170 + 40Pp – 60Ph
Sp = 170 + 40Pp – 60(1.50)
Sp = 170 + 40Pp – 90
This is our supply curve, that we can graph in Excel:
Sp = 80 + 40Pp
This is the supply curve, re-written in slope-intercept form:
Pp= 2 + (1/40)Sp
Question 5 ctd. (part b)
Now Suppose Ph rises by $1 what happens to
the slope and intercept of the supply curve.
Show this using Excel.
Sp = 170 + 40Pp – 60Ph
Answer: slope remains the same at 1/40 and the
intercept rises from -2 to -½
Question 5 ctd. (part c)
(c) Suppose Dp = 280 – 20Pp and Sp = 80+ 40Pp
what is the equilibrium price and demand level?
Show this using Excel.
Answer: Pp*=3.33 and Dp*=213
Question 5 ctd. (part c, ctd.)
What would happen to the equilibrium if the
price of hogs rose by $1.
Answer: the equilibrium price rises to $4.50 and
demand is 190.
Question 5 ctd.
For Next Week
• Attend lectures.
• Read relevant pages in book.
• Work through and complete the tutorial
worksheet prior to coming to tutorial.
(Working together is fine, as long as you
understand the material.)
• Bring your questions to the tutorial or email
them to me.
• Be prepared to participate in tutorial.