PROBLEM 11

The following table presents the supply and demand plans for chewing gum.
Price
Quantity demanded Quantity offered
(millions of packages per week)
(cents per package)
20 180 60
40 140 100

50 120 120
60 100 140

80 60 180
100 20 220

a. Plot a graph of the chewing gum market, name the axes and curves
and point out the equilibrium price and quantity.

QUANTITY DEMANDED AND OFFERED

The graph shows the following: ▪

The break-even price and
quantity is
120 million packages per week at 50 cents per package.
 Week 3: Market equilibrium

b. Suppose the price of chewing gum is 70 cents per pack. Describe the
situation of the chewing gum market and explain how the price is
adjusted.

Price
Quantity demanded Quantity offered
(millions of packages per week)
(cents per package)
60 100 140
70 80 (100 – 20) 160 (140 + 20)
80 60 (80-20) 180 (160 + 20)
90 40 (60 – 20) 200 (180 + 20)
100 20 (40 – 20) 220 (200 + 20)

QUANTITY DEMANDED AND OFFERED

The graph shows the following:

▪ Considering the equilibrium price and quantity, by increasing the
price to 70 cents per pack, the quantity offered increases to
160 million packs per week.

▪ Considering the equilibrium price and quantity, by increasing the

price to 70 cents per pack, the quantity demanded decreases
to 80 million packs per week.
 Week 3: Market equilibrium

▪ From the above it can be deduced that the quantity offered is

greater than the quantity demanded, causing abundance. As a
result, 80 million packages per week will remain unsold.
 Week 3: Market equilibrium

c. Assume that the price of chewing gum is 30 cents per pack. Describe the
situation of the chewing gum market and explain how the price is adjusted.

Price
Quantity demanded Quantity offered
(millions of packages per week)
(cents per package)
20 180 60
30 160 (180 – 20) 80 (60 + 20)
40 140 (160-20) 100 (80 + 20)
50 120 (140 – 20) 120 (100 + 20)
60 100 (120 – 20) 140 (120 + 20)

QUANTITY DEMANDED AND OFFERED

The graph shows the following:
▪ Considering the equilibrium price and quantity, by decreasing the price to
30 cents per pack, the quantity offered decreases to 80 million packs per
week.

▪ Considering the equilibrium price and quantity, by decreasing the price to

30 cents per pack, the quantity demanded increases to 160 million packs
per week.

▪ From the above it can be deduced that the quantity demanded is greater
than the quantity offered, causing shortages. As a result, there will be a
demand for 80 million more packages per week, which the company
cannot meet.
 Week 3: Market equilibrium

d. If a fire destroys some chewing gum factories and the quantity offered of this
item decreases by 40 million packs per week at each price, explain what
happens in the chewing gum market, and illustrate the changes in the graph
you plotted for this market.

QUANTITY DEMANDED AND OFFERED

Price
Quantity demanded Quantity offered
(cents per package) (millions of packages per week)
(millions of packages
per week)
Original New
20 180 60 20
40 140 100 60
50 120 120 80
60 100 140 100
80 60 180 140
100 20 220 180

The graph shows the following:

▪ Considering at the original equilibrium price, as supply decreases and
shifts to the left, the equilibrium price increases from 50 to 60 cents per
bundle.

▪ Considering the original equilibrium quantity, as the supply and quantity

offered decrease, the equilibrium quantity decreases from 120 to 100
million packages per week.
 Week 3: Market equilibrium

e. If an increase in the teenage population increases the quantity demanded of

chewing gum by 40 million packs per week at each price at the same time the
fire occurs, what are the new equilibrium price and quantity of chewing gum?
Illustrate these changes in your chart.

QUANTITY DEMANDED AND OFFERED

Price
Quantity demanded Quantity offered
(cents per package) (millions of packages per week)
(millions of packages
per week)
Original New Original New
20 180 220 60 20
40 140 180 100 60
50 120 160 120 80
60 100 140 140 100
70 80 120 160 120
80 60 100 180 140
100 20 60 220 180

The graph shows the following:

▪ Considering the equilibrium price resulting from the decrease in supply,
now as demand increases and shifts to the right, the equilibrium price
increases from 60 to 70 cents per bundle.

▪ Considering the equilibrium quantity resulting from the decrease in supply,

now by increasing demand and the quantity demanded, the equilibrium
quantity increases from 100 to 120 million packages per week.
 Week 3: Market equilibrium

PROBLEM 23

The following figure illustrates the pizza market:

Quantity (pizzas per day)

a. Name the curves and say which curve shows the willingness to pay for a pizza.

The graph shows the supply and demand curves of the pizza market. The
increasing curve is supply and the decreasing curve is demand.
By identifying these curves, we determine that the demand curve shows what
people have available to pay for a pizza.

b. If the price of a pizza is $16, is there a shortage or a surplus and the price goes
up or down?
Procedure:
Step 1: Identify if it is a shortage or a surplus
Price Quantity
Quantity offered Shortage (-) Surplus (+)
demanded
(dollar per (Pizzas per day)
pizza)
16 100 300 300 – 100 = +200

The table shows the following:

If the price of pizza is $16, the demand is 100 pizzas per day, while the supply is
300 pizzas per day. Therefore, there is a surplus of 200 pizzas per day.

Step 2: Point out whether the price is going up or down

As the supply is 300 pizzas per day and exceeds the demand, which is 100 pizzas
per day, then the price decreases according to the law of supply and demand.
c. Sellers want to receive the highest possible price, so why would they be willing
to accept less than $16 for a pizza?
 Week 3: Market equilibrium

▪ Vendors would be willing to accept less than $16 for a pizza because if
they continue at that price, they would be left with a surplus of 200
pizzas, which would not be sold.
▪ Consequently, it is more convenient for sellers that the price of pizza
decreases to reach a point of equilibrium between supply and demand.

d. If the price of a pizza is $12, is there a shortage or a surplus and the price goes
up or down?
Step 1: Identify if it is a shortage or a surplus
Price Quantity
Quantity offered Shortage (-) Surplus (+)
demanded
(dollar per (Pizzas per day)
pizza)
12 300 100 100 – 300 = -200
The table shows the following:
If the price of pizza is $12, the demand is 300 pizzas per day, while the supply is
100 pizzas per day. Therefore, there is a shortage of 200 pizzas per day.
Step 2: Puantualize if the price goes up or down
As demand is 300 pizzas per day and exceeds supply, which is 100 pizzas per
day, then the price increases according to the law of supply and demand.
e. Shoppers want to pay the lowest possible price, so why would they be willing to
pay more than $12 for a pizza?
▪ Buyers would be willing to pay more than $12 for a pizza, since the higher the
price of it, then the better quality it is.
▪ In addition, a lower price contributes to a lower quantity of pizza offered and
in order to supply a larger quantity demanded, the price of each pizza will
have to be increased.
▪ In conclusion, a price increase would lead to a point of equilibrium between
supply and demand for pizza.
 Week 3: Market equilibrium

PROBLEM 24
Excess of "for sale" signs, but backlog of actual sales
Like flowers in spring, "for sale" signs sprout in front of gardens across the country.
However, anxious sellers are facing the most brutal environment in decades, with a
slumping economy, falling home prices and rising foreclosures.
The New York Times, May 26, 2008.

a. Describe the changes in demand and supply in the U.S. mortgage market.

▪ Demand falls and shifts to the left precisely because the economy had
entered a recession. For, even if the mortgage policies grant a
guarantee, if you cannot pay what is stipulated in the foreclosure, nor
the loan (if there is one), the house will be auctioned and it is not
convenient.

▪ S upply increases and shifts to the right because of the subprime

mortgage crises in 2006 that ended up creating the housing bubble
until 2008.

b. There is a surplus of houses

▪ Yes, there is a surplus of home sales because there are too many
people who cannot afford them due to the economic recession.

c. What are the implications of this news information on price adjustments and
what is the role of price as a regulator of the mortgage market?
▪ A s demand decreases and supply increases, both shifts cause a
decrease in price, but we do not know what will happen to the
equilibrium quantity.

▪ It is also necessary to mention that, as supply exceeds demand, the

price tends to decrease until it reaches its equilibrium point,
according to the law of supply and demand.
 Week 3: Market equilibrium

PROBLEM 25

The 'popcorn movie' experience goes up in price...

...movie theaters raise... their prices... Demand for feed corn, used as animal feed, ...
corn honey and... ethanol, have skyrocketed in price. This caused some farmers to switch
from popcorn to feed corn, which is easier to grow, cutting supply and also increasing its
price....
USA Today, May 24, 2008.
Explain and illustrate in a graph the events described in the news item about the markets
of
a. Popcorn

In the news item we note that popcorn is immediately affected. The increase in the
price of feed corn was an incentive for farmers. Therefore, they decided to stop
growing popcorn to grow feed corn because it is more convenient for them. This
resulted in a decrease in the supply of popcorn, which would not be able to meet
demand, thus increasing its price as well.
b. Movies in theaters.
Popcorn is the input for popcorn movies. As a result, the film company's
production cost goes up and its profits go down. For this reason, the price of
movies in theaters also rises, their quantity offered falls and their supply shifts to
the left.

Decreasing movements in the supply of popcorn and film in

QUANTITY
 Week 3: Market equilibrium

PROBLEM 26
Price
Quantity demanded Quantity offered
(million bags per week)
(cents per bag)

50 160 130
60 150 140
70 140 150
80 130 160
90 120 170
100 110 180

a. Plot a graph of the potato chip market and point out the equilibrium price and
quantity.

To establish the break-even point it is necessary to determine the supply and

demand equations:

Step 1: In order to find the demand equation, it is necessary to find

the slope. Where p = y; q = x

(q1, p1) = (150,60) NOTE:

(q2, p2) = (160,50)
Demand has a
p2-p1 50-60 -10
q2 - q1 160 - 150 10 negative slope

We replace the values in the

equation point slope to obtain
the demand equation:

p-p1=m (q-q1)
p-60 = -1(q - 150)
p-60=-1q+150)
p = -q+ 210
Step 2: Find the equation of the offer, making use of the equation point slope, for
this it will first be necessary to find the slope. where p = y; q = x (q1, p1) = (130.50)
(q2, p2) = (140.60)
NOTE:
p2- p1 60 - 50 10
q2 - q1 140 - 130 10
The offer has a
positive slope
▪ We replace the values in the
equation point slope to obtain the bid equation:

p-p1=m (q-q1)
p-50=1(q-130)
p-50=1q-130
p = q - 80
 Week 3: Market equilibrium

Step 3: Find the equilibrium price and quantity with the demand and supply
equation already established.
▪ We will find the equilibrium quantity by equating the supply and demand
equations:
Qe= -q+210=q-80
Qe= 210 + 80 = 2q - 80
Qe= 145 = q
Qe= 145
▪ We will find the equilibrium price by replacing the equilibrium quantity in
any of the equations:
p = -q+ 210
p = -(145) + 210
p = 65
▪ In conclusion, the equilibrium quantity is 145 million bags per week and
the equilibrium price is 65 cents per bag.

Step 4: Graph

QUANTITY DEMANDED AND OFFERED

b. If this product costs 60 cents per bag, is there a shortage or surplus and how is the
price adjusted?

Step 1: Identify if it is a shortage or a surplus

Price Quantity Quantity Shortage (-) Surplus
demanded offered (+)
(million bags per week)
(cents per bag)
60 150 140 140 – 150 = -10
The table shows the following:
In this case there is a shortage, as the quantity demanded is greater than the
 Week 3: Market equilibrium

quantity being offered, because consumers plan to buy 150 million bags per week
and producers plan to sell 140 million bags per week. As a result, there is a
shortage of 10 million bags per week.
Step 2: Puantualize if the price goes up or down
Faced with this situation, producers, in order to adjust the demand for potato chips,
decide to produce more, increasing the price of their product, and in this way the
price is driven to increase towards the break-even point.
c. If a new dressing increases the quantity demanded of potato chips by 30 million
bags per week at each price, in what way do they change the demand and/or
supply of potato chips?

According to what was mentioned in the statement, about the increase of French
fries by 30 million bags per week, a new table was elaborated:

Price
Quantity demanded Quantity offered
(cents per package) (millions of packages per week)
(millions of packages
per week)
Original New Original
50 160 190 130
60 150 180 140
70 140 170 150
80 130 160 160
90 120 150 170
100 110 140 180
 Week 3: Market equilibrium

QUANTITY DEMANDED AND OFFERED

The graph shows the following:

▪ If the quantity demanded of potato chips increases, demand also increases, as the
demand curve shifted to the right. Generating a new equilibrium price and quantity.

d. If a new topping produces the effect described in item c, in what way do the price
and quantity of french fries change?

▪ In the previous statement we realized that, due to the new dressing the demand
increased, that is why the price increases and so does the quantity of potato chips.

▪ Considering the initial break-even price, the price increased from 65 to

80 cents per bag. While the balancing quantity increased from 145 to
160 million bags per week.
 Week 3: Market equilibrium

e. If a virus destroys potato crops and the quantity produced of potato chips
decreases by 40 million bags per week at each price, in what way does the supply
of potato chips change?

Price
Quantity demanded Quantity offered
(cents per bag) (million bags per week)
(million bags per week)
Original New
50 160 130 90
60 150 140 100
70 140 150 110
80 130 160 120
90 120 170 130
100 110 180 140

QUANTITY
The graph shows the following:
▪ If the quantity produced of potato chips decreases, the supply of potato chips also
decreases, as the supply curve shifted to the left.

▪ Considering at the initial equilibrium price, we observe that the price rises from 65 to
85 cents. Likewise, the equilibrium quantity decreases from 145 to 125 million
bags per week.
 Week 3: Market equilibrium

f. If the virus that destroys the potato crops in item e affects them at the same time
that the new dressing in item c comes on the market, how do the price and
quantity of French fries change?

Price
Quantity demanded Quantity offered
(cents per bag) (million bags per week)
(million bags per week)
Original New Original New
50 160 190 130 90
60 150 180 140 100
70 140 170 150 110
80 130 160 160 120
90 120 150 170 130
100 110 140 180 140

QUANTITY

The graph shows the following:

▪ The break-even price we obtained in item e increased from 85 cents to 100 cents.
▪ O n the other hand, the amount of equilibrium we obtained in item e product of a
virus, increased from 125 to 140 million bags per
week.

PROBLEM 28

After studying the Reading between the lines of pp. 76-77, answer the following
questions:
 Week 3: Market equilibrium

a. How much did the price of copper rise from 2008 to 2009?

The price of copper increased for 2009 by approximately 7% compared to the 2008 price.

b. What caused the increase in the price of copper?

▪ Because China increased the demand for copper considerably, it even
overshadowed the little demand there was in developed countries. This
strong demand required an increase in price.

▪ Because of high recovery expectations for 2010.

▪ The rapid recovery of Asian countries and increased bank lending by the
Chinese government.
c. What is the relationship between copper demand and oil demand?
These two goods are often part of the same production of a good. As is the case
with industrial production, engineering and information technology, as demand for
one good increases by nature, demand for the other good must increase in order
to continue the production of goods.

d. What were the main factors that influenced the increase in copper demand even in
times of world crisis?
1. Future prices: as the price of this metal is expected to continue to increase.
2. Care for the environment: thanks to this metal, cheaper and cleaner energy can
be obtained.
3. China's technological population: which is demanding this good considerably.
4. Preferences: of this metal in the market for the renewable energies it provides.

e. What was the most important factor influencing copper supply during 2008 and
2009 and how did it change supply?

The offer was maintained and remained unchanged.

 Week 3: Market equilibrium

f. How did the combination of the factors you noted in d and e influence the price
and quantity of copper?
Influenced by demand exceeding supply. Therefore, in order to find a balance in
the market, suppliers had to raise the price of copper and increase the quantity
offered in the long term, since many are opting for this metal to produce other
goods, as they prefer it because it does not pollute like other metals.

g. Was the change in quantity a change in quantity demanded or quantity supplied?

The change occurred in the quantity demanded since this metal is being
accumulated for a large part to produce other goods.
It is worth mentioning that it was being accumulated to stabilize the world
economy, as they faced a crisis in the dollar, which governs almost the entire
world economy.