Econ ch.1

1. The following passage refers to the operation of a free-market economy. Cross-out the words (in

italics) which are incorrect. In a totally free-market economy, the quantities of each type of good that are bought and sold,

and the amounts of factors of production (labor, land and capital) that are used, are determined by the decisions of individual households and firms through the interaction of demand and supply.

In goods markets, households are suppliers / demanders and firms are suppliers / demanders.

In labour markets, households are suppliers / demanders and firms are suppliers / demanders. Demand and supply are brought into balance by the effects of changes in price. If supply

exceeds demand in any market (a surplus), the price will rise / fall / stay the same. This will lead to a rise in the quantity both demanded and supplied / a fall in the quantity both demanded and supplied / a rise in the quantity demanded but a fall in the quantity supplied / a rise in the quantity supplied but a fall in the quantity demanded. If, however, demand exceeds supply in any market (a shortage), the price will fall / rise / stay the same. This will lead to a fall / rise in the quantity demanded and a fall / rise in the quantity supplied. In either case the adjustment of price will ensure that demand and supply are brought into equilibrium, with any shortage or surplus being eliminated.

2. How will the market demand curve for a 'normal' good shift (i.e. left, right or no shift) in each of

the following cases? (a) The price of a substitute good falls ................................................................. left / right / no shift (b) Population rises ................................................................................................ left / right / no shift (c) Tastes shift away from the good ...................................................................... left / right / no shift (d) The price of a complementary good falls ........................................................ left / right / no shift (e) The good becomes more expensive ................................................................ left / right / no shift

Workshop 1 Markets, Demand and Supply

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D1

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Q1

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3. How will the market supply curve of a good shift (i.e. left, right or no shift) in each of the following cases?

(a) Costs of producing the good fall. .................................................................... left / right / no shift (b) Alternative products (in supply) become more profitable. ............................. left / right / no shift (c) The price of the good rises............................................................................... left / right / no shift (d) Firms anticipate that the price of the good is about to fall. ............................ left / right / no shift 4. How will the following changes affect the market price of wheat flour (assuming that the market is

initially in equilibrium)? In each case, sketch what happens to the demand and/or supply curves and, as result, what happens to the equilibrium price.

(a) People consume more bread. (b) The discovery of a new cheaper way of milling flour.

(c) The prices of other grains rise. (d) Rice and potatoes fall in price.

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5. The diagram below shows the demand for and supply of gasoline. The market is initially in equilibrium at point x.

There is then a shift in the demand and/or supply curves, with a resulting change in equilibrium price and quantity. To which equilibrium point (a, b, c, d, e, f, g or h) will the market move from point x after each of the following changes?

S0

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x

a

b

c

d

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f

g

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Quantity

P ric

e

The market for gasoline

(a) A rise in the cost of refining gasoline. .......................................................................................... (b) A fall in bus and train fares. .......................................................................................................... (c) A fall in the price of crude oil and an increase in the price of cars. ............................................ (d) A rise in tax on gasoline and a reduction in tax on cars. .............................................................

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6. The demand and supply schedules for wheat in a free market are as follows:

Price per ton ($) 120 160 200 240 280 320 360 400

Tons demanded per week 725 700 675 650 600 550 500 425

Tons supplied per week 225 300 400 500 600 750 1000 1300

(a) Draw the demand and supply curves on the following diagram:

120

160

200

240

280

320

360

400

0 200 400 600 800 1000 1200 1400 1600

Quantity (tons per week)

P ri

ce (

$ pe

r to

n )

(a) What is the equilibrium price?......................................................................................................

(b) Suppose the government fixes a maximum price of $200 per tonne. What will be the effect?

.......................................................................................................................................................

(c) Suppose that supply now increases by 150 tons at all prices. Enter the new figures.

Price per ton ($) 120 160 200 240 280 320 360 400

Tons demanded per week 725 700 675 650 600 550 500 425

(old) Tons supplied per week 225 300 400 500 600 750 1000 1300

(new) Tons supplied per week

(d) How much will price change from the original equilibrium (assuming that the government no

longer fixes a maximum price)? How much more will be sold?

Change in price ............................................................................................................................

Change in quantity ........................................................................................................................