ECON 262

More Practice Problems on Supply and Demand

You might want to check out this web site on supply and demand to help you study. 

http://ecedweb.unomaha.edu/Dem_Sup/econqui2.htm

Graphically and in words show what will happen to the market clearing price (P*), market clearing quantity (Q*) and resource allocation in each case.  Be sure to label your axes correctly and make it clear which way you are shifting your graphs.  Assume ceteris paribus.

1.  Assume tape and tape dispensers are complements.  What will happen in the tape market if the price of tape dispensers increases?

2.  Assume eggs and bacon are complements.  Chickens are necessary to produce eggs.  What will happen in the egg market if the price of bacon increases and at the same time the price of chickens increases?

3.  Assume Rice Cereal and Corn Flakes are substitutes.  Assume Rice Cereal and Corn Flakes are substitutes in production.  Assume rice is used to make Rice Cereal.  What will happen in the Rice Cereal market if the price of Corn Flakes increases (hint:  this will cause two shifts) and the price of rice decreases?

4.  Assume CDs and CD players are complements.  Assume CDs are normal goods.  Assume a new technology is developed in producing CDs.  What will happen in the CD market when the new technology is introduced, the price of CD players decreases, and the income of the people who buy CDs increases?

5.  Assume peaches and milk are complements.  Assume milk and butter are complements in production.  What will happen in the milk market if the price of peaches decreases and the price of butter decreases?

ANSWERS

1.  The demand for tape will decrease (shift to the left).  This will bring the price of milk down, the quantity traded will go down, so resources will move out of the milk market.

2.  The demand for eggs will decrease due to the increase in the price of bacon (buy less of both) - so the demand curve will shift left; the supply curve will also shift left because chickens are a resource and as their price increases suppliers can't buy as many chickens so they can't produce as many eggs.  Therefore quantity traded will go down and resources will move out of the egg market.  However, price of eggs is unknown.

3.  The demand for rice cereal will increase (shift right) because of the increase in price of corn flakes (customers are substituting out of corn flakes and into rice cereal).  The supply will decrease (shift left), however, as the price of corn flakes increases.  This is because suppliers will want to produce more higher priced corn flakes and less rice cereal.  However, since the price of rice has decreased, suppliers can buy more rice and produce more rice cereal.  Therefore, the supply curve also shifts to the right.  Since the supply curve is shifting both directions - price, quantity traded and resource allocation are all unknown.

4.  The demand curve for CDs will shift to the right (increase) twice.  This is due to the drop in price of the CD players and the increase in income of buyers.  The supply curve will also shift right due to the increase in technology.  Since this market is clearly growing, quantity traded will increase and resources will move in.  Price is unknown.

5.  The demand curve for milk will shift to the right (increase) because the price of peaches, a complement, has gone down.  The supply curve will shift to the left (decrease) because as the price of butter decreases, less of it will be supplied.  Since butter and milk are supplied together, there will be less supply of milk as well.  The price of milk will increase but quantity traded and resource allocation are unknown.