Economics (MCR001)

Tutorial Homework exercise for Lecture 2: The supply / demand Model

1. What is a market and what are the characteristics of a competitive market? Give an example of a
competitive market.
Ans: A market is where buyers & sellers get together to exchange goods & services.

A competitive market is a market that has or (the characteristics of a competitive market):

a) Many buyers and seller
b) No barriers to entry
c) Homogenous (identical) product

Examples of competitive market:

farm produce (fruit, grocery, meat, seafood…), shares, foreign exchange, commodity (gold, iron ore.)

2. Use the Supply / Demand model to show:

2i) What causes a movement along the demand curve (change in Qd)?
Ans: Price (P) only

P ($)

$10

$5

Q
7 9

2ii) If the price increases from $5 to $10, the Quantity demand (Qd) reduces from 9 to 7 units.
2 iii) These movements along occur following the law of Demand.
2iv) What causes a movement along the supply curve (change in Qs)? Ans: Price
3) How is this different from a change (or shift) in the supply or demand curves?
A change in Demand (shift) in the curves is caused by a change in the Non-Price Factors.
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4. Use the Supply & Demand model to determine the new equilibrium price (Pe) & quantity (Qe):

a. A decrease in the future price of the latest electrical cars.

Ans: Demand goes down because people put off their purchasing, the demand curve shifts to the
left, Price & quantity down.

b. An improvement in technology of producing electric cars.

Ans: Improvement in technology leads to lower production costs, the supply curve shifts to the right,
price down and quantity up.

c. An increase in population on the demand for hospitals.

Ans: More people will use hospitals therefore the demand for hospitals will increase, the demand
curve shifts to the right, price and quantity will go up.

d. An increase in the transportation costs on imported machine(s).

Ans: Transportation costs increase, the supply curve shifts to the left, price up and quantity down.

e. The price of tomato rises.

Ans: A change in price will lead to a movement along the Demand curve, so the Qd will fall.
A change in price will lead to a movement along the Supply curve, so the Qs will rise.

5. Use the Supply / Demand Model (Label the x and y axis, the curves and their movements) to
determine what would happen to the Demand Curve or Supply Cure, and therefore equilibrium
price (Pe) and equilibrium quantity (Qe) for face masks when:

a. The demand for face masks when the government announce that it is compulsory to wear
face masks in public areas.

b. The price of ‘mask elastic’, an essential component to make face masks, has risen by 50%.

a. Face mask b. Face mask

P P S1
S
S

D1
D D
Q
Q

Ans: Use the S/D diagram above:

a) The demand for face masks would increase, the demand curve would shift to the right, driving
up the equilibrium price (Pe) and quantity (Qe, output).
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b) The supply for face masks would reduce due to the input price (mask elastic) has risen. The
supply curve should shift to the left, driving up the equilibrium price (Pe) and decrease the
equilibrium quantity (Qe).

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6. Consider the following table to answer the questions. Demand and supply data for fillet beef per
kilo.
Quantity Quantity supplied
Price (P$) demanded (Qd) (Qs)
of fillet of beef of fillet of beef
75 400 800
70 450 750
65 500 700
60 550 650
55 600 600
50 650 550
45 700 500
40 750 450

6a) Sketch the Supply and Demand curve, label the axis and curves.
What are the equilibrium price (Pe) and quantity (Qe) of radios? Why?

Ans: Pe = $ 55, Qe = 600; as this is where quantity demanded (Qd) = quantity supplied (Qs).

6b) When the price (P) falls from $75 to $70 what happens to quantity supplied (Qs)?
Is this a movement along the supply curve or a shift in supply?

Ans: Quantity Supply (Qs) decreases from 800 to 750

Quantity supplied (Qs) also falls from $75 to $70. This is a movement along the supply curve or a
shift of the Supply Curve.

6c) When the price is $50 is there a surplus or shortage in the market? Why?

Ans: At $50, Qd = 650, Qs = 550, there is a shortage of 100 units.

(as Qd > Qs (Shortage).
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7. Market Demand and Supply curves for Strawberries:

7a) What are the equilibrium price (Pe) and quantity (Qe) in this market?
Is equilibrium achieved straight away?

Ans:
The equilibrium is where Qe: Qd = Qs, so at Pe = $ 2 and Qe = 9 million kg per week.
Yes or No.

7b) Imagine the market had just opened and suppliers decide to charge $1.50. What would be the
quantity demanded (Qd) and supplied (Qs) at this price?

Ans:
At $1.5, Qs is 11 million kg and the Qd is 7 million kg, Qd greater or smaller Qs,
(7 – 11), therefore, a shortage or surplus of 4 million kg of strawberries.

7c) The price is $1.5, and if you were a consumer in this market what would you do with this price,
(ie buying or not buying)? If so, how would this affect the price?

Ans: $1.5 is lower than the equilibrium price (Pe), consumers would buy more. Therefore consumers
would push up the price in the long run.
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Revision Exercise: S-D Model
Substitutes or Complements:
Q8) Ford and General Motors (GM) are direct competitors (substitutes).

Q8a) If there is a decrease in the price of a GM vehicle, what will happen to the GM vehicle
market?
Ans: If the price of a GM vehicle decreases, the Quantity demanded (Qd) for GM would
rise.

Q8b) What will happen to the Ford Motor vehicle market? (Hints: the new equilibrium price
(Pe) and quantity (Qe).
Ans: The demand for Ford Motor vehicle would fall. The demand curve (Ford) vehicle
would shift to the left, therefore, leading to lower price and lower quantity demanded.

Q8a) P$ Q8b) P$
GM Ford
D D

D1

Qd Qd
==
Question 9: Coke and Big Mac are complements for one another.

Q9a) If the price of a Big Mac decreases, then what will happen to the Big Mac market?
Q9b) What will happen to the Coke market?
Ans: Q9a) Ans: Q9b)

P$ Big Mac P$ Coke

D

D1
6

Qd
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Qd
 Ans: If the price of a Big Mac decreases, the Quantity demanded (Qd) for Big Mac
would rise. The demand for Coke would also rise. (Because Big Mac and Coke are
complements). The demand curve (Coke) would shift to the right, therefore, leading to
higher price and higher quantity demanded for Coke.

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