Demand and Supply

Problems and Exercises

For each of the following events, describe in words what happens to the
supply, demand, quantity demanded and quantity supplied and price in
the market for new cars. Explain using a diagram
1. The workers in automobile sector get a wage raise.
2. A new robotic technology is introduced in the factory.
3. The government subsidizes bus tickets resulting in a large reduction in the
price of a bus ticket.
4. Income of consumers grow and new cars are normal good

to be used only for lecture purpose at NMIMS SOC

1. The workers in automobile sector get a wage
raise.
Quantity supplied reduces. Cost of production going
S2
upShift of supply leftwardincrease in pricefall in
S1 demand and rise in supply (as per the law of demand and
supply) rise in equilibrium price and fall in equilibrium
P2 quantity.

P1

D1
Q3 Q2 Q1
 2. A new robotic technology is introduced in the factory.

P
Robotic technology
S1
S2 productivity increases
per unit cost falls
cost of production falls
E1 suppliers get incentive to supply more
E3 supply curve shifts to the right
E2 equilibrium price falls
demand rises (this movement is along the
demand curve: Law of demand)
D1 Supply falls (this movement is along the supply
curve: Law of Supply
Q market settles down at a lower price and higher
quantity demanded and supplied
3. The government subsidizes bus tickets resulting
in a large reduction in the price of a bus ticket
Pcar S1

P1
P2

D1
D2
Q3 Q2 Q1 Qcar

Lower the demand for carsdemand curve will shift

leftwardequilibrium price and quantity will fall
Income of consumers
grow and new cars are • Step1: Increase in income (purchasing
Power)

normal good. • Step 2: Demand curve shifts to the

right
• Step 3: Excess demand
• Step 4: Price starts increasing
P S1
• Step 5: Supply increases as per the law
of supply (movement along the supply
P2 curve) and demand decreases as per
the law of demand.
P1 • Step 6: Market reaches a new
equilibrium at a higher price and
higher quantity demanded and
D2 supplied

D1

Q1 Q2 Q3 Quantity of cars
Consider the markets for DVDs, TV and tickets at movie theatres.
For each pair, identify whether they are complementary or substitutes:
• DVDs and TV
• DVDs and Movie tickets
• TV and movie tickets
Suppose a technological advancement reduces the cost of manufacturing TV
screens. Draw a diagram to show what happens in the TV market.

Draw two more diagrams to show how the above change in the market for TV
screens affects the markets for DVDs and movie tickets.

to be used only for lecture purpose at NMIMS SOC

Consider the markets for DVDs, TV and tickets at movie theatres.
For each pair, identify whether they are complementary or substitutes:
• DVDs and TV (complementary)
• DVDs and Movie tickets (substitutes)
• TV and movie tickets (substitutes)
Suppose a technological advancement reduces the cost of manufacturing TV
screens. Draw a diagram to show what happens in the TV market.

Draw two more diagrams to show how the above change in the market for TV
screens affects the markets for DVDs and movie tickets.

to be used only for lecture purpose at NMIMS SOC

TV MARKET
Ptv S1
S2

P1
P2

Q1 Q2 Q3 Qtv
DVD MARKET • Step1: fall in TV price
• Step 2: increase in demand for TV
• Step 3: increase in demand for DVD
(since DVD and TV are complementary)
• Step 2: Demand curve for DVD shifts
to the right
Pdvd S1 • Step 3: Excess demand(demand is
more than supply)
• Step 4: Price starts increasing
P2 • Step 5: Supply increases as per the law
of supply (movement along the supply
P1 curve) and demand decreases as per
the law of demand.
• Step 6: Market reaches a new
D2 equilibrium at a higher price and
higher quantity demanded and
D1 supplied

Q1 Q2 Quantity of DVD
Movie MARKET •
•
Step1: fall in TV price
Step 2: increase in demand for TV
• Step 3: decrease in demand for
movie(since movie and TV are substitutes)
• Step 2: Demand curve for movie shifts to
the left
Pmovie • Step 3: Excess supply(demand is less than
S1 supply)
• Step 4: Price starts decreasing
• Step 5: Supply decreases as per the law of
supply (movement along the supply
curve) and demand increases as per the
P1 law of demand.
P2
• Step 6: Market reaches a new equilibrium
at a lower price and lower quantity
D1 demanded and supplied
D2
Q3 Q2 Q1 Quantity of movie
Consider the market for chocolate ice-cream in the region of North
America. A severe drought in the Midwest causes dairy farmers to
reduce the number of milk-producing cattle in their herds by a third.
These dairy farmers supply cream that is used to manufacture
chocolate ice cream. At the same time, the discovery of cheaper
synthetic vanilla flavoring lowers the price of vanilla ice cream. What
would be the impact of these on equilibrium price and quantity on
Chocolate ice-cream? Explain your answer.
Q5
Consider the market for chocolate ice-cream in the region of North
America. A severe drought in the Midwest causes dairy farmers to
reduce the number of milk-producing cattle in their herds by a third.
These dairy farmers supply cream that is used to manufacture
chocolate ice cream. At the same time, the discovery of cheaper
synthetic vanilla flavoring lowers the price of vanilla ice cream. What
would be the impact of these on equilibrium price and quantity on
Chocolate ice-cream? Explain your answer.
(i) Price of raw material increasingincrease in cost of
productionreduced profitabilitydecrease in supplysupply
curve shifts to the left
(ii) Given that Vanilla ice-cream and chocolate icecream are
substitutesprice of substitute product fallsdemand for
chocolate icecream will falldemand curve will shift to the
left/downwards
CHOCOLATE ICE CREAM: CASE 1
(i) Price of raw material
S2 increasingincrease in cost of
productionreduced
profitabilitydecrease in
Pice-cream
S1 supplysupply curve shifts to the
left
(ii) Given that Vanilla ice-cream and
chocolate icecream are
P2 substitutesprice of substitute
P1 product fallsdemand for
chocolate icecream will
falldemand curve will shift to the
left

D1
D2
Q2 Q1 Qice-cream
CHOCOLATE ICE CREAM: CASE 2
(i) Price of raw material
increasingincrease in cost of
S2
productionreduced
profitabilitydecrease in
Pice-cream supplysupply curve shifts to the
S1
left
(ii) Given that Vanilla ice-cream and
chocolate icecream are
substitutesprice of substitute
product fallsdemand for
P1
chocolate icecream will
falldemand curve will shift to the
left

D1
D2
Q2 Q1 Qice-cream
CHOCOLATE ICE CREAM: CASE 3
(i) Price of raw material
increasingincrease in cost of
S2
productionreduced
profitabilitydecrease in
Pice-cream supplysupply curve shifts to the
S1
left
(ii) Given that Vanilla ice-cream and
chocolate icecream are
substitutesprice of substitute
P1 product fallsdemand for
P2 chocolate icecream will
falldemand curve will shift to the
left

D1
D2
Q2 Q1 Qice-cream
Other factors shifting demand and supply
curves

to be used only for lecture purpose at NMIMS SOC

The market for pizza has following demand and supply.
Price Quantity demanded Quantity Supplied
4 135 26
5 104 53
6 81 81
7 68 98
8 53 110
9 39 121

• Graph the demand and supply curves. What is the equilibrium price?
• If the price in the market is above the equilibrium price, explain the
mechanism that would drive the market to the equilibrium?
Suppose that the daily supply and demand functions for pizzas in Vile
Parle are given by the following; QS = -10 + 3P, QD = 15 – 2P where QS
and QD are quantities in thousands and P is the price.
(a) Graph the supply and demand curves. What are the slopes of the
demand and supply curves. Calculate and show the equilibrium
price and quantity.
(b) Suppose several new pizza shops open in the city. What would
happen to the new equilibrium price and quantity of pizza? Why?
(C) Let the market supply function be: QS = -5 + 3P. Find the new
equilibrium and illustrate it on your diagram.

to be used only for lecture purpose at NMIMS SOC

 P
S1
B 7.5 P=3.33+0.33Qs
S2 Slope: 0.33

P=1.67+0.33Qs

5
P = 7.5 – 0.5Qd
4 Slope: – 0.5
3.33 D1
15
0 Pizza
5 7 A
Suppose that the daily supply and demand functions for pizzas in Vile Parle are given by the following; QS = -10 + 3P QD = 15 – 2P
where QS and QD are quantities in thousands and P is the price.
(a) Graph the supply and demand curves. What are the slopes of the demand and supply curves. Calculate and show the
equilibrium price and quantity.
Market demand function (Qd in terms of P): QD = 15 – 2P (Y axis: Qd, X axis: P)
Market supply function (Qs in terms of P): QS = -10 + 3P (Y axis: Qs, X axis: P)

Market demand curve: P=7.5-0.5Qd (Y axis: P, X axis: Qd)

QD = 15 – 2P
2P=15-Qd
P=7.5-0.5Qd
Market Supply curve:P=10/3+1/3Qs (Y axis: P, X axis: Qs)
QS = -10 + 3P
-3P=-10-Qs
P=10/3+1/3Qs
P=3.33+0.33Qs
(b) Suppose several new pizza shops open in the city. What would happen to the new equilibrium price and quantity of pizza? Why?
(C) Let the market supply function be: QS = -5 + 3P. Find the new equilibrium and illustrate it on your diagram.
QS = -5 + 3P (new market supply function)
P=1.67+0.33Qs (new market supply curve)

to be used only for lecture purpose at NMIMS SOC

Annual demand and supply for the Electronics company is given by:
Qd=5000+0.5I+0.2A-100P and Qs=-5000+100P, where Q is the quantity
per year, P is the price, I is the income per household, and A is the
advertising expenditure.
a. If A=$10,000 and I=$25,000, what is the equation of the market
demand curve?
b. Given the demand curve in part a, what is the equilibrium price and
quantity?
c. If consumer incomes increase to $30,000, what will be the impact on
equilibrium price and quantity?
Annual demand and supply for the Electronics company is given by:
Qd=5000+0.5I+0.2A-100P and Qs=-5000+100P, where Q is the quantity per year, P is the
price, I is the income per household, and A is the advertising expenditure.
a. If A=$10,000 and I=$25,000, what is the equation of the market demand curve?
Qd=19500-100P
P=195-0.01Qd
b. Given the demand curve in part a, what is the equilibrium price and quantity?
In equilibrium, Qd=Qs=Q.
Q=-5000+100(195-0.01Q)
Q= 7250
P=195-0.01(7250)
P=122.5
c. If consumer incomes increase to $30,000, what will be the impact on equilibrium price
and quantity?
Qd=5000+0.5(30000)+0.2(10000)-100P
Qd= 22000-100P
P=220-0.01Qd
Qs=-5000+100P
Q=8500, P=135