Problem set 3

Part A

1. What is a competitive market? Briefly describe a type of market thats not perfectly

competitive.
A competitive market is one in which there are many buyers and many sellers so that
each has a negligible impact on the market price. If a seller were to change their price,
their buyers are likely to switch sellers. No single seller can impact the market price in a
competitive market. Monopolies and oligopolies can create imperfect competitive
markets. Along with this, imperfect competitive markets can be caused by only having
one seller where this seller sets the price, such as a local television station.

2. What are the demand schedule and the demand curve, and how are they related?
Why does the demand curve slope downward?

Demand schedule/curve: a table/graph that shows the relationship between the price of a
good and the quantity demanded.

Curve slopes downward because a lower price increases the quantity demanded.
3. Harry’s income declines, and as a result, he buys more pumpkin juice. Is pumpkin
juice an inferior or a normal good? What happens to Harry’s demand curve for
pumpkin juice?
Harry’s income declines, and as a result, he buys more pumpkin juice. Is pumpkin juice
an inferior or a normal good? What happens to Harry’s demand curve for pumpkin juice?

4. Define the equilibrium of a market. Describe the forces that move a market toward
its equilibrium.
Equilibrium of a market is the price where supply and demand are equal to one another.
Buyers and sellers naturally move the market towards equilibrium as they changes their
actions according to market changes such as price changes, changes to production
technology, and changes to income.

5. Beer and pizza are complements because they are often enjoyed together. When
the price of beer rises, what happens to the supply, demand, quantity supplied,
quantity demanded, and price in the market for pizza?

When the price of beer rises, the demand for pizza declines, because beer and pizza are
complements and people want to buy less beer.
In sum, supply is unchanged, demand is decreased, quantity supplied declines, quantity
demanded declines, and the price falls

When we say the demand for pizza declines, we mean that the demand curve for pizza
shifts to the left. The supply curve for pizza is not affected. With a shift to the left in the
demand curve, the equilibrium price and quantity both decline. Thus the quantity of pizza
supplied and demanded both fall.

Part B

1. “An increase in the demand for notebooks raises the quantity of notebooks
demanded but not the quantity supplied.” Is this statement true or false? Explain.
In general, this statement is almost always false. If there is an increase in demand there
will be an increase in supply as well to match the resulting price increase generated by
the increase in demand. As shown in the chart above, an increase in demand will increase
equilibrium price and quantity supply. The only time this statement would be true is if
supply were a straight line.

2. Using supply-and-demand diagrams, show the effects of the following events on

the market for sweatshirts.

a. A hurricane in South Carolina damages the cotton crop.

When a hurricane damages cotton crops it increases input prices which causes supply to
fall, moving the supply curve to the right, lowering quantity demanded and increasing
price.
b. The price of leather jackets falls.
A fall in the price of leather jackets will lead more people to buy later jackets, a substitute
for sweaters. An increase in the amount sold of substitute goods sold reduces demand for
sweatshirts. This reduction in demand shifts the demand curve to the right lowering both
prices and quantity demanded for sweatshirts.
c. All colleges require morning exercise in appropriate attire.
Required use of sweatshirts will increase the demand for sweatshirts, pushing the demand
curve to the right raising quantity as well as price.
d. New knitting machines are invented.
New knitting machines will increase productivity and thus lower costs of production and
increasing the supply of sweaters. This pushes the supply curve to the right which will
raise quantity and raise prices.
3. The market for pizza has the following demand and supply schedules:

Price Quantity Demanded Quantity Supplied

$4 135 pizzas 26 pizzas

5 104 53
 Price Quantity Demanded Quantity Supplied
6 81 81
7 68 98
8 53 110
9 39 121
a. Graph the demand and supply curves. What are the equilibrium price and
quantity in this market?
b. If the actual price in this market were above the equilibrium price, what
would drive the market toward the equilibrium?
c. If the actual price in this market were below the equilibrium price, what
would drive the market toward the equilibrium?
a) Equilibrium occurs where demand and supply curves intersect. Hence, Equilibrium
price=$6 And Equilibrium quantity =81 pizzas.

b) If the actual price were above the equilibrium price, i.e price is above $6 ,then quantity
supplied would exceed quantity demanded, so suppliers would reduce the price to gain
sales . And as result, market go towards the equilibrium.

c) If the actual price were below the equilibrium price i.e price is below $6, then quantity
demanded would exceed quantity supplied, so suppliers could raise the price without
losing sales. In both cases, the price would continue to adjust until it reached $6, at which
there is neither a surplus nor a shortage.

4. Consider the following events: Scientists reveal that eating oranges decreases the
risk of diabetes, and at the same time, farmers use a new fertilizer that makes
orange trees produce more oranges. Illustrate and explain what effect these
changes have on the equilibrium price and quantity of oranges.
These two events in conjuncture will both increase supply and increase demand. This will
result in both the supply curve and the demand curve shifting to the right. Although we
are not told by how much either curve will shift, this will result in a new equilibrium
price that is similar to the previous equilibrium price.

5. Suppose that the price of basketball tickets at your college is determined by market
forces. Currently, the demand and supply schedules are as follows:

Price Quantity Demanded Quantity Supplied

$4 10,000 tickets 8,000 tickets

 Price Quantity Demanded Quantity Supplied
8 8,000 8,000
12 6,000 8,000
16 4,000 8,000
20 2,000 8,000
a. Draw the demand and supply curves. What is unusual about this supply
curve? Why might this be true?
b. What are the equilibrium price and quantity of tickets?
c. Your college plans to increase total enrollment next year by students. The
additional students will have the following demand schedule:
Price Quantity Demanded

$4 4,000 tickets
8 3,000
12 2,000
16 1,000
20 0
d. Now add the old demand schedule and the demand schedule for the new
students to calculate the new demand schedule for the entire college. What
will be the new equilibrium price and quantity?

a) the demand curve is a downward-sloping line and supply curve is a vertical line. It is
possible, if the quantity supplied is fixed at any price.

b) The equilibrium price is 8 and the equilibrium quantity is 8000 tickets.

c) The new equilibrium price is 12 and the equilibrium quantity is the same: 8000 tickets.