## Economics Study Set 19

Business

## Quiz 3 :

Demand, Supply, and Market Equilibrium

^{1}and supply is S

^{1}, the equilibrium quantity is 7000 gallons per month. When demand is D

^{2}and supply is S

^{1}, the equilibrium price is $3.00 per gallon. When demand is D

^{2}and supply is S

^{1}, there is an excess demand of 4000 gallons per month at a price of $1.00 per gallon. If demand is D

^{1}and supply is S

^{2}, the equilibrium quantity is 8000 gallons per month. b. Compare two equilibriums. In the first, demand is D

^{1}and supply is S

^{1}. In the second, demand is D

^{1}and supply is S

^{2}. By how much does the equilibrium quantity change By how much does the equilibrium price change c. If supply falls from S

^{2}to S

^{1}while demand declines from D

^{2}to D

^{1}, does the equilibrium price rise, fall, or stay the same What if only supply falls What if only demand falls d. Suppose that supply is fixed at S

^{1}and that demand starts at D

^{1}. By how many gallons per month would demand have to increase at each price level such that the equilibrium price per gallon would be $3.00 $4.00

(a)
We are given the following table with missing information to fill out.
We are given that if demand is D^{1} and supply is S^{1} , then the equilibrium quantity is 7000 gallons per month. Looking at the information for D^{1} and S^{1} , the only price at which this can happen is $2.00 because we already have quantity supplied for all other prices, and at the equilibrium, the quantity supplied must equal the quantity demanded at some price. So, we can fill in 7000 gallons per month for the price of $2.00.
When demand is D^{2} and supply is S^{1} , we are given that the equilibrium price is $3.00. We know that at the equilibrium price, the quantity demanded is equal to the quantity supplied. Here, the equilibrium when the demand is D^{2} and supply is S^{1} happens at a quantity of 8000 because both quantities supplied and quantity demanded is 8000. This means that the corresponding equilibrium price is $3.00.
When demand is D^{2} and supply is S^{1} , we are given that there is an excess demand of 4000 gallons per month at a price of $1.00 per gallon. Here, the last row for price must be $1.00 because the quantity demanded is 9000 and the quantity supplied is 5000, which gives us the excess demand of 4000 gallons per month.
Finally, we are given that if demand is D^{1} and supply is S^{2} , the equilibrium quantity is 8000 gallons per month. Since quantity demanded must equal quantity supplied in the equilibrium, so, when demand is D^{1} and supply is S^{2} , then the equilibrium must be at $1.00 because at all other prices, the quantity demanded is not equal to the quantity supplied. Therefore, we fill in the last two cells with 8000 gallons per month.
(b)
At the equilibrium when the demand is D^{1} and supply is S^{1} , the equilibrium quantity is 7000 gallons per month at a price of $2.00. When the demand is D^{1} and the supply is S^{2} , the equilibrium quantity is 8000 gallons per month at a price of $1.00. Hence, the equilibrium quantity goes up by 1000 gallons per month and the equilibrium price goes down by $1.00 when the supply curve shifts from S^{1} to S^{2}.
(c)
If we start from the equilibrium when the supply is S^{2} and demand is D^{2} , we find that the equilibrium quantity is 8500 gallons per month at a price of $2.00. Now, if both curve shifted, the new equilibrium quantity (where quantity demanded is equal quantity supplied) will be 7000 gallons per month, at a price of $2.00. We see here that the equilibrium price stayed the same. If only supply falls, then the equilibrium quantity is 8000 gallons per month at a price of $3.00. The equilibrium price went up when only supply falls. If only demand falls i.e. when demand is D^{1} and supply is S^{2} , then the equilibrium quantity is 8000 gallons per month at the equilibrium price of $1.00. Thus, if only demand falls, the equilibrium price falls.
(d)
When supply is S^{1} and demand is D^{1} , for the price of $3.00 to be an equilibrium price then, the quantity demanded and quantity supplied must be equal. However, quantity demanded is 6000 gallons per month and quantity supplied is 8000 gallons per month. Therefore, to make $3.00 the equilibrium price, demand must increase by 2000 gallons per month so that the quantity demanded will be equal to the quantity supplied at 8000 gallons per month.
When supply is S^{1} and demand is D^{1} , for the price of $4.00 to be an equilibrium price, then, the quantity demanded and quantity supplied must be equal. However, quantity demanded is 5000 gallons per month and quantity supplied is 9000 gallons per month. Therefore, to make $4.00 the equilibrium price, demand must increase by 4000 gallons per month so that the quantity demanded will be equal to the quantity supplied at 9000 gallons per month.

Shortages or surpluses are more likely with preset prices, such as those on tickets, than flexible prices such as those on gasoline because the preset prices are set on the basis of some estimate about future demand or the present capacity so the actual demand and supply situations may differ from their expected values, creating either a surplus or shortage in the market. On the other hand, flexible prices are determined on the basis of the developments on the demand side and the supply side, in addition to their relative strength. In other words, prices are free to be determined on the basis of the real developments, so the equilibrium prices and quantities are always maintained.

(a)
We are given a table with some values missing (missing values denoted A, B, C, D, and E)
First, note that the total quantity demanded is simply the sum of all individual demand in the economy. In this sample economy with only three people, the sum of each individual demand then is equal to the total quantity demanded. So, Person 1's demand + Person 2's demand + Person 3's demand = total quantity demanded of the economy.
To find A and E, we simply have to add up the quantity demanded of each individual (person 1, person 2, and person 3) to get the total quantity demanded. That means A=3+1+0, which means A=4, and E=23+5+8, which means E=36. We can also find B, C, and D by using the fact that the sum of the three individual quantity demanded must equal the total quantity demanded.
To find B, since at each price, Person 1's demand + Person 2's demand + Person 3's demand = total quantity demanded, this also means that total quantity demanded - Person 1's demand - Person 2's demand = Person 3's demand. So, 8+2+B=12, which means B=12-8-2 or B=2. Similarly, C+3+4=19, so C=19-4-3 or C=12. Finally, 17+D+6=27, so D=27-17-6 or D= 4.
Putting in the values that we just calculated, we now have:
(b)
At a price of $5, Person 1 demandS^{1}7 units, Person 2 demands 4 units, and Person 3 demands 6 units. This means that the person who demands the least is Person 2.
At a price of $7, Person 1 demands 8 units, Person 2 demandS^{2} units, and Person 3 demandS^{2} units. This means that the person who demands the most is Person 1.
(c)
When the price is lowered from $7 to $6, we can calculate the change in quantity demanded of each person, as shown above. We see that the person who had the biggest change in quantity demanded is Person 1, which a change in quantity demanded of 4.
(d)
One of the shifters of the demand curve is the number of buyers. The idea is that if we took out a person, say Person 1, the total quantity demanded will be lower at each price level. That means that the demand curve will shift to the left (the demand curve shifting to the left means that at every single price level, the total quantity demanded is lower than it was before the shift).
If Person 2 doubled his purchases at each possible price, this will cause the total quantity demanded to be higher at each price level. This is exactly what a rightward shift of the
demand curve signifies, that the quantity demanded at each price level is higher than it was before the shift.
(e)
If the total quantity demanded at $6 increases from 19 to 38, then this is a change in demand. A change in the quantity demanded would be when we go from one price to another and see that the total quantity demanded changes. For example, going from $8 to $7 meant going from a total quantity demanded of 4 to 12. However, a change in demand happens when at the same price, there is a higher (or lower) total quantity demanded, which is what we have here when at $6, the total quantity demanded went from 19 to 38.

^{1}, what is theprice that Stromnord can charge so that it will not run out of this model of shoes in the month of July What if demand is D

^{2}b.If the price of shoes is set at $75 for both July and August and demand will be D2 in July and D1 in August, how many pairs of shoes should Stromnord order if it wants to end the month of August with exactly zero pairs of shoes in its inventory What if the price is set at $55 for both months

^{1}, for Drop Volley Tennis, a producer of tennis equipment. Use the figure and the table below to give your answers to the following questions. a. Use the figure to fill in the quantity supplied on supply curve S

^{1}for each price in the table below. b. If production costs were to increase, the quantities supplied at each price would be as shown by the third column of the table (" S

^{2}Quantity Supplied"). Use that data to draw supply curve S

^{2}on the same graph as supply curve S

^{1}. c. In the fourth column of the table, enter the amount by which the quantity supplied at each price changes due to the increase in product costs. (Use positive numbers for increases and negative numbers for decreases.) d. Did the increase in production costs cause a "decrease in supply" or a "decrease in quantity supplied"

There is no answer for this question