Demand and Supply

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1) Discuss, and illustrate with a graph, how each of the following events will affect the market for

coffee:

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1a) A blight on coffee plants kills off much of the Brazilian crop.

It will increase the inputs price, and rise the suppliers production cost.

Therefore will DECREASE the quantity supply,And the supply curve will move to the LEFT.

P

Q

D1

P2

Q2

S2

P1

Q1

S1

↓

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1b) The price of tea declines.

The tea and coffee are the substitutes. When the price of tea a increase, people will decrease the demand of coffee.

Therefore will DECREASE the quantity demand,And the demand curve will move to the LEFT.

P

Q

D1

S1

P2

Q2

P1

Q1

D2

→

→

↓

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1c) Coffee workers organize themselves into a union and gain higher wages.

Union and higher wages will increase the inputs price, and rise the suppliers production cost.

Therefore will DECREASE the quantity supply,And the supply curve will move to the LEFT.

P

Q

D1

P2

Q2

S2

P1

Q1

S1

←

→

↓

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1d) Coffee is shown to cause cancer in laboratory rats.

The laboratory rats will affect the people don’t drink the coffee and decrease the demand of coffee.

Therefore will DECREASE the quantity demand,And the demand curve will move to the LEFT.

P

Q

D1

S1

P2

Q2

P1

Q1

D2

↓

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1e) Coffee prices are expected to rise rapidly in the near future.

The expectation of the suppliers will reduce supply now, and save some inventory to sell later at the higher price.

The expectation of the customers will rise the demand now.

Therefore will INCREASE

the quantity demand and

DECREASE the quantity supply,

And the demand curve will

move to the RIGHT and

the supply curve will

move to the LEFT.

P

QD1

D2

S1

P2

Q2

P1

Q1

→

↓

→

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2. Consider the markets for DVDs, TV screens, and

tickets at movie theaters.

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2a) For each pair, identify whether they are complements or substitutes:

2ai) DVDs and TV screensThey are the complements.

When the price of DVDs rise, people will REDUCE to buy TV screens and the demand curve of TV screens will move to

LEFT.

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2aii) DVDs and movie ticketsThey are the substitutes.

When the price of DVDs rise, people will buy MORE movie tickets and the demand curve of movie tickets move to

RIGHR.

2aiii) TV screens and movie tickets

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2b) Suppose a technological advance reduces the cost of manufacturing TV screens. Draw a diagram to show what happens in the market for TV screens.

Technological advance reduce the cost→ Supply ↑ (S1 → S2)

→Price ↓ (P1→ P2)

→Quantity ↑ (Q1→ Q2)

P

Q

D1

S1 S2

P2

Q2

P1

Q1

→

↓

→

TV Screen

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2c) Draw two more diagrams to show how the change in the market for TV screens affects the markets for DVDs and movie tickets.

Supply of TV screens ↑, Price ↓ , Quantity ↑ DVD(complement) movie tickets

Demand↑ (D1→D2) Demand ↓ (D1→D2 )

Price(P1→ P2) Price(P1→ P2)

Quantity(Q1→ Q2)P

QD1

D2

P1

Q1

S1

P2

Q2

→

→

DVD

Substitute

P

Q

D1

S1

D2

P2

Q2

P1

Q1

↓

Movie Tickets

→

↓

←

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3. Using the demand curve, show the effect of the

following events on the market for beef:

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4) Using the demand curve, show the effect of the following events

on the market for beef:

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4a) Consumer income increases.

Base on the demand curve,When Consumer income increases, they will rise thedemand of beef.

Therefore will INCREASE the quantity demand,And the demand curve will move to the RIGHT

P

QD1

P1

Q1 Q2

D2

→

→

Beef

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4b) The price of beef increases.

Base on the demand curve,When the price of beef increases, customer will reduce the demand of beef.

Therefore will DECREASE the quantity demand and increase the price,And move up along on demand curve.

P

QD1

P1

Q1 Q2

P2

Beef

←

↑ A

B

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4c. An outbreak of “mad cow” disease occurs.

Base on the demand curve, Demand of beef ↓ (D1→D2)

→Price ↓ (P1→P2)

→Quantity ↓ (Q1 → Q2) P

Q

D1

P2

Q2

P1

Q1

S1

↓

←

D2←

Beef

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4d) The price of chicken (a substitute) increases.

Base on the demand curve,Chicken and beef are the substitutes.When the price of chicken increases, customer will rise the demand of beef.

Therefore will INCREASE the quantity demand,And the demand curve will move to the RIGHT

P

QD1

P1

Q2 Q1

D2

←

←

Beef

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4e) The price of barbecue grills (a complement) increases.

Base on the demand curve,Barbecue grills and beef are the complements.When the price of barbecue grills increases, customer will reduce the demand of beef.

Therefore will DECREASE the quantity demand,And the demand curve will move to the LEFT.

P

QD1

P1

Q2 Q1

D2

Beef

←

←

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5) What effect will each of the following have on the

supply of auto tires?

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5a) A technological advance in the methods of producing tires.

P

Q

Auto tires

D1

P1

Q2Q1

S1 S2

←

←

P2

←

• ∵ better skills•∴Supply increase•Hences, S1 shifts to S2•Price decrease (P1 to P2)•Quantity Supply increase (Q1 to Q2)

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5b) A decline in the number of firms in the tire industry.

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Auto tires

D1

Q2 Q1

S1S2

←P2←

P1

Q

P

←

• ∵ Tire’s firms decline• ∴ Supply decrease form S1 to S2• Price increase (P1 to P2)•Quantity Supply decrease from Q1 to Q2

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5c) An increase in the prices of rubber used in the production of tires.

2222

Auto tires

D1

Q2Q1

S1

P2

P1

P

Q

← ←

←

• As prices are changed, shift along the curve•Move down along the curve to a lower P & lower Q

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5d)The expectation that the equilibrium price of auto tires will be lower in the future than currently.

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5e) A decline in the price of the large tires used for semi trucks and earth-hauling rigs(with no change in the price of auto tires).

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5f) The levying of a per-unit tax on each auto tire sold.

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5g) The granting of a 50-cent-per-unit subsidy for each auto tire produced.

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P

Q

Auto tires

D1

P1

Q2Q1

S1 S2

←

←

P2

←

•If there is subsidy, supply will increase•From S1 to S2•Price decrease from P1 to P2•Q increase from Q1 to Q2