Week 5 Business Economics – seminar exercises

1. Explain each of the following using Supply and Demand diagrams

a. When there is a drought (severe lack of rain) in southern Europe,
the price of olive oil rises in supermarkets throughout Europe.
b. When the Olympic Games were held in London in 2012, the price
of hotel rooms in central London rose sharply.
c. When conflict breaks out in the Middle East, the price of petrol in
Europe rises and the price of used Mercedes cars falls.

2. “An increase in the demand for mozzarella cheese raises the quantity of
mozzarella demanded, but not the quantity supplied.” Is this statement
true or false? Explain.

3. Suppose business travellers and holidaymakers have the following

demand for airline tickets from Birmingham to Naples.
Price (€) Quantity demanded by Quantity demanded by
business travellers holidaymakers
150 2100 1000
200 2000 800
250 1900 600
300 1800 400

a. As the price of tickets rises from €200 to €250, what is the price
elasticity of demand for (i) business travellers and (ii)
holidaymakers? (Use the midpoint method in your calculations)
b. Why might holidaymakers have a different price elasticity of
demand from business travellers?
4. The cost of producing DVD players has fallen over the past few years.
a. Use a Supply and Demand diagram to show the effect of falling
production costs on the Price and Quantity of DVD players sold.
b. In your diagram, show what happens to consumer surplus and
producer surplus.
c. Suppose the supply of DVD players is very elastic. Who benefits
most from the falling production costs, consumers or producers of
DVD players?

5. The government decides to reduce air pollution by reducing the use of

petrol. It imposes a €0.50 tax on each litre of petrol sold.
a. Should it impose the tax on petrol companies or motorists?
Explain carefully using a supply-and-demand diagram.
b. If the demand for petrol were more elastic, would this tax be
more or less effective in reducing the quantity of petrol
consumed? Explain with both words and a diagram.
c. Are consumers of petrol helped or hurt by this tax? Why?
d. Are workers in the oil industry helped or hurt by this tax? Why?