1. Define demand. Define supply.

in your answers; explain the difference between demand and

quantity demanded and between supply and quantity supplied.

Ans: Demand: Demand is how much consumers are prepared to buy at the market price. An
economic principle that describes a consumer's desire and willingness to pay a price for a specific good or
service. Holding all other factors constant, the price of a good or service increases as its demand increases
and vice versa
Supply: Supply is what producers are prepared to sell at a certain price. The supply of a good or
service is defined as quantities of a good or service that people are ready to sell at various prices within
some given time period, other factors besides price held constant.
Demand is the total amount of demand at all possible prices; while quantity demanded is the
demand at a particular price.
Supply is the amount of a product offered for sale at all possible prices that can succeed in a
market; while quantity supplied is the amount that producers are willing and able to supply are a certain
price.

2. List the key non price factors that influence demand and supply.
Ans: Non-price determinants of demand
• Tastes and preferences
• Income
• Prices of related products
• Future expectations
• Number of buyers
Non-price determinants of supply
• Costs and technology
• Prices of other goods or services offered by the seller
• Future expectations
• Number of sellers
• Weather conditions

3. In defining demand and supply, why do you think economists focus on price while holding
constant other factors that might have an impact on the behavior of buyers and sellers
Ans: The reason is that consumers are willing and able to buy more of a good the lower the price of
the good and will buy less of a good the higher the price of the good. Price and quantity demanded are
negatively (inversely) related because when the price of a good rises, consumers tend to shift from that
good to other goods that are now relatively cheaper. Conversely, when the price of a good falls,
consumers tend to purchase more of that good and less of other goods that are now relatively more
expensive. Price and quantity demanded are inversely related when all other factors are held constant.
This relation between price and quantity demanded is so important that we discuss it in more detail
later.

4. Define comparative static analysis. How does it compare with sensitivity analysis or what if
analysis used in finance, accounting and statistics.
Ans: Comparative static analysis is a tool that can be used to analyze a system of equations. The use of
comparative static analysis on an economic model can provide valuable information about how an economic
system works.
Sensitivity analysis is a way to predict the outcome of a decision if a situation turns out to be different
compared to the key prediction(s).

5. Define rationing function of price, why is it necessary for price to serve this function in the market
economy
Ans: Rationing function of price features raising the price higher so that less of the consumable will be
purchased and used by the consumers and more will be conserved or rationed
The distribution or allocation of a limited commodity using markets and prices. Rationing is needed
due to the scarcity problem. Because wants and needs are unlimited, but resources are limited,
available commodities must be rationed out to competing uses. Markets ration commodities by
limiting the purchase only to those buyers willing and able to pay the price

6. Define guiding or allocating function of price.

Ans: The price in a competitive market serves two very important functions, rationing and allocating.
The rationing function relates to the buyers of the good. Price is used to ration the limited quantity of a
good among the various buyers who would like to purchase it

7. Discuss the difference between short run and the long run from the perspective of producers and
from the perspective of consumers.
Ans: The short run is a period of time in which the quantity of at least one input is fixed and the
quantities of the other inputs can be varied. The long run is a period of time in which the quantities of
all inputs can be varied.
 Sellers already in the market respond to a change in equilibrium price by adjusting variable
inputs.
 Buyers already in the market respond to changes in equilibrium price by adjusting the quantity
demanded for the good or service.
 Existing sellers may exit from a market
 Existing sellers may adjust fixed factors of production
 Buyers may react to a change in equilibrium price by changing their tastes and preferences or
buying preferences

8. Explain the difference between shortage and scarcity. In answering this question, you should
consider short run and long run in economics.
Ans: Scarcity is a term used to mean unavailability of resources. It takes a long time to recover from it.
Shortage is used to show, the unavailability of something which was formerly available. It takes a
business or an organization a short time to recover from it.

9. Why do you think it is important for managers to understand the mechanics of supply and demand
both in the short run and in the long run? Give examples of companies whose business was either
helped or hurt by changes in supply or demand in the markets in which they were working.
Ans: For mangers, it is important to understand the two as they have to understand the machinery,
labor and raw materials needed. It is important for them to know this statistics in order to help them
plan in advance during the two periods to ensure there is no shortage or surplus in production. The
knowledge of the mechanics also helps in general planning of the production in order to take care of
the market in terms of demand and supply.
E.g. Diamond industry, Gasoline industry
 10. If Congress levies an additional tax on luxury items, the prices of these items will rise. However,
this will cause demand to decrease, and as a result the prices will fall down, perhaps even to their
original levels.” Do you agree or disagree with this statement? Please explain.
Ans: I disagree with the statement as, only a small group of the society can afford luxury items. More
than a need it is a status symbol, so people to maintain the status for sure will afford to buy luxury
items even if the gov’t increases the taxes.

11. Overheard at the water cooler in the corporate headquarters of a large manufacturing concern: “The
competition is really threatening us with their new product line. I think we should consider offering
discounts on our current line in order to stimulate demand.” In this statement, is the term demand
being used in a manner consistent with economic theory? Explain. Illustrate your answer using a line
drawn to represent the demand for this firm’s product line.
Ans: Yes, the term demand is used in consistent with economic theory because it refers to the supply
of the product as a result of the competition this company is facing in the market. And the company is
applying the laws of economics to bounce back by stimulating the demand.

12. Briefly list and elaborate on the factors that will be affecting the demand for the following
products in the next several years. Do you think these factors will cause the demand to increase or
decrease?
A. Convenience food- Busier life styles, two-income families, single-parent households will continue
to cause demand for convenience foods to increase.
B. Products purchased on the Internet: Demand is already increasing drastically for goods purchased
on the Internet and is posed to Explode in the next five years.
C. Fax machines: Will decline as usage of internal fax modems and e-mail attachments continue to
rise.
D. Film and cameras: May decrease as digital cameras become less expensive and in greater demand.

E. videos rented from retail outlets : Pay-per-view and satellite TV programs will continue to erode
video rental demand
F. Pay-per-view television programming: Pay-per-view should increase as broader band connections
to the home make this form of Entertainment cheaper and easier to use.
 G. airline travel within the United States; airline travel within Europe : Longer term trends point in an
upward direction
H. gasoline: It is difficult to tell, but if demand for SUV’s and trucks continues to rise, there will also
be a Steady increase in demand

13. -Briefly list and elaborate on the factors that will be affecting the supply of the following products
in the next several years. Do you think these factors will cause the supply to increase or decrease?

a) Crude oil: Discovery of new sources of oil: supply increases. (2) Invention of new long-lasting
battery for electric car: supply decreases—particularly in the long run as companies shift their
Resources from oil production to battery production. (3) Mergers or acquisitions (as have been going on in
the late 90s with BP and Amoco as well as Exxon and Mobil):—these mergers may cause supply to
increase or decrease depending on the intentions of the larger companies that have even more power over
supply.
b) Beef: (1) Cattle ranching declines as it becomes harder to earn a good return in the market for
beef (in this case it is actually supply decreasing in response to demand falling in the long run).
(2) Increase in beef imports from countries such as Argentina (recently the U.S. government
allowed the importation of Argentine beef into the country) —supply increases
c) Computer memory chips: Increase in the building of new manufacturing facilities in Asian
countries such as Taiwan—supply increases.
d) Hotel rooms: Mergers and acquisitions in the hotel industry (could increase or decrease number
of rooms— would probably increase number of rooms as the larger companies try to expand
their market share by building new hotels
e) Fast food outlets in emerging markets: U.S. or European based multinationals such as
McDonald’s and Burger King build new restaurants in an attempt to expand their global
businesses—supply increases
f) Credit cards issued by financial institutions: New co-branded cards are offered by financial
institutions—supply increases
g) Laptop computers: More manufacturing, assembly and distribution capacity by key companies
such as Dell, Compaq, IBM and Gateway 2000—supply increases.
h) PC servers: More PC companies such as Dell and Compaq 2000 enter the server market or
increase their resources in this product segment in an attempt to offset the shrinking profit
margins in the PC business --supply increases.