The Market Forces of Demand and Supply

HOMEWORK-2
PROBLEM I
Use the demand and supply framework to qualitatively
analyze the market in each of the scenarios given in a)
through f). How would the demand and/or supply
curves shift? (Leftward/rightward/no shift) What are
the effects on equilibrium price and quantity?
(Increase/decrease/ambiguous) Summarize the
result in the below table format.
SCENARIO-A

A recent study claims that the tapioca pearls in

bubble tea are linked to increase risk for
cancer, creating fear among consumers.
SCENARIO - A
A FEAR AMONG CONSUMERS
SCENARIO-B

In addition to the study report in a), you are

also told that fruit smoothies are good
alternatives to bubble tea. At the same time,
you know that the extended summer has
invigorated fruit harvests.
SCENARIO - B
FRUIT SMOOTHIES ARE GOOD ALTERNATIVES TO BUBBLE TEA AND THE EXTENDED
SUMMER HAS INVIGORATED FRUIT HARVESTS.

The Fruit Market

SCENARIO-C

Teaching assistants consider microwaveable

meals an inferior good. This semester, they are
greeted with bad news as the Department of
Economics cuts their stipends by 15%.
SCENARIO-C CUTS IN INCOME
SCENARIO-D

Wisconsin produces fine cheese using cow's

milk; however, mad cow disease has wiped out
half the population of cows in Wisconsin.
SCENARIO-D A SHIFT IN SUPPLY
SCENARIO-E

Banana Inc. introduces the latest incarnation of

its smartphone, the iPhone 6. A flood of
consumers rushes to order this famous
smartphone. At the same time; however, the
production line of Banana Inc. is plagued by
riots, cutting production in half.
SCENARIO-E A SHIFT IN BOTH SUPPLY AND DEMAND
SCENARIO-F

The economic slump and oil shocks have

caused consumers to delay excessive
spending, particularly, the purchase of exotic
supercars. Automobile firms correctly anticipate
the economic crisis and cut down production of
exotic models.
SCENARIO-F EXOTIC CARS

P
SUMMARY
 PROBLEM II
The demand and supply schedule for sweatshirts is given as follows:

Price level Quantity demanded Quantity supplied

($)
10 4000 400
20 3200 800
30 2400 1200
40 1600 1600
50 800 2000
60 0 2400
DRAW THE DEMAND AND SUPPLY CURVES.
DETERMINE THE PRICE AND THE QUANTITY AT THE EQUILIBRIUM. AT THIS
EQUILIBRIUM, HOW MUCH IS SPENT ON SWEATSHIRTS?

Equilibrium price: the price that equates

quantity supplied with quantity demanded

P* = 40 ; Q*= 1600
The amount spent on sweatshirt : 1600*40 =
$64000
PROBLEM II

Suppose the price of cotton (an input in the

production of sweatshirts) falls such that at
each price, quantity supplied changes by 1200
units.
CREATE A NEW COLUMN LABELED QS' AND DETERMINE THE
NEW QUANTITY SUPPLIED AT EACH PRICE LEVEL.

Price QS '
10 1600
20 2000
30 2400
40 2800
50 3200
60 3600
DRAW THE NEW SUPPLY CURVE IN YOUR FIRST FIGURE. LABEL
IT S'.

On the graph, we note that S’ shifted rightward

since the quantity supplied (QS’) has increased.
WHAT IS THE NEW EQUILIBRIUM PRICE? QUANTITY? AT THIS
EQUILIBRIUM, HOW MUCH IS SPENT ON SWEATSHIRTS?

Price QS' QD
10 1600 4000
20 2000 3200
30 2400 2400
40 2800 1600
50 3200 800
60 3600 0

the new P* = 30; Q* = 2400

The total amount spent on sweatshirts;
30*2400 = $72000
PROBLEM II

Starting with the original demand and supply

schedule, suppose that the price of sweatpants
(a complement to sweatshirts) falls. As a result,
the quantity of sweatshirts demanded changes
by 1200 units at each price.
CREATE A NEW COLUMN LABELED QD' AND FIND THE NEW
QUANTITY DEMANDED AT EACH PRICE LEVEL.

Price Qd'
10 5200
20 4400
30 3600
40 2800
50 2000
60 1200
 DRAW THE NEW DEMAND CURVE IN YOUR FIRST FIGURE. LABEL
ITS D'.

On the graph, we note that the D’ shifted rightward since the quantity demanded (Qd') has increased.
 WHAT IS THE NEW EQUILIBRIUM PRICE? QUANTITY? AT THIS EQUILIBRIUM,
HOW MUCH IS SPENT ON SWEATSHIRTS?

Price Qd' QS
10 5200 400
20 4400 800
30 3600 1200
40 2800 1600
50 2000 2000
60 1200 2400

New P* = 50 and new Q* = 2000

The total amount spent on sweatshirts = 50*2000 = $100000
PROBLEM III
Consider the market for gasoline in Dane
County, Wisconsin. Units of quantity and price
are in Thousands of Gallons and $/gallon,
respectively. Suppose the gasoline demand is
given by:
Qd = 2000 – 200P
Qs = 100P + 800
where Qd = Quantity Demanded, Qs is Quantity
Supplied, and P = Price
FIND THE EQUILIBRIUM PRICE AND QUANTITY

From the demand and supply functions, quantity demanded, and quantity
supplied must be equal at equilibrium.
Thus, =

So, 2000 − 200 = 100 + 800

∗ ∗
=$4/gallon and =1200 thousands of gallons
PLOT THE DEMAND AND SUPPLY CURVE WITH QUANTITY ON X-AXIS AND
PRICE ON Y-AXIS. CLEARLY WRITE THE EQUILIBRIUM POINTS.

P*

Q*
PROBLEM III

Suppose there is a pipeline rupture in the

Midwest, causing a gasoline shortage.
Engineers have determined that pipeline
capacity is reduced by 300 thousand gallons –
meaning that, at every price level, there are
300 thousand fewer gallons of gasoline
supplied to Dane County.
USE THE THREE STEPS METHOD TO DETERMINE WHICH CURVE (DEMAND OR SUPPLY)
IS SHIFTED? WHICH DIRECTION (LEFTWARD OR RIGHTWARD)? AND ITS IMPACT ON
THE EQUILIBRIUM.

The 3 step method analyses:

Step 1: Supply
Step 2: to the left
Step 3 : Quantity decrease and Price increase
DRAW THE DEMAND AND SUPPLY CURVE AFTER THE PIPELINE
RUPTURE (AFTER SHIFTING) CLEARLY INDICATE THE SHIFTING.
DETERMINE THE NEW EQUATION OF THE SHIFTED CURVE.

Take the supply function from part a), since at every price,
quantity supplied is decreased by 300 thousand gallons. So, the
new Equation of Supply 2 will be equal as the following :

2 =100 + 800 − 300

2 = 100 + 500
DETERMINE THE NEW EQUILIBRIUM PRICE AND QUANTITY
AFTER THE PIPELINE RUPTURE (THE SHIFTING).

From the demand function and the shifted supply function,

quantity demanded, and quantity supplied must be equal at
equilibrium. Equate the two to receive that = 2.
Hence, 2000 − 200 = 100 + 500
∗ ∗
So, =$5/gallon and =1000 thousands of gallons

Graphically : check the Figure N.2