ABBE1543 Basic Economic Principles Tutorial 3

Chapter 2: Demand and Supply (Part II)

Section A: Multiple Choice Questions
Instructions: Pick the best answer.

1. Supply refers to the willingness and ability of ______ to _______ different quantities of a good at
different prices during a specific period of time.
A. buyers; produce
B. buyers; purchase
C. sellers; produce
D. sellers; purchase
2. The law of supply states that there is a positive relationship between ________ and _________.
A. price; supply
B. price; quantity supplied
C. price; demand
D. price; quantity demanded
3. Under the law of increasing opportunity cost, opportunity cost of producing successive units
of a good ______ as the amount produced______.
A. decreases; increases
B. remains unchanged; decreases
C. increases; decreases
D. increases; increases
4. When supply equals to demand, the market is in ________.
A. Shortage
B. Surplus
C. Equilibrium
D. Disequilibrium
5. When the market is in shortage,
A. quantity demanded is equal to quantity supplied.
B. quantity demanded is more than quantity supplied.
C. quantity demanded is less than quantity supplied.
D. quantity supplied is zero.
6. Which of the following statements are TRUE?
I. When the price increases, we have an outward shift in the supply curve.
II. When the price increases, we have a movement along the supply curve.
III. When the price of inputs decreases, we have an outward shift in the supply
curve.
IV. When the price of inputs decreases, we have a movement along the supply
curve.

A. I and II
B. I and III

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ABBE1543 Basic Economic Principles Tutorial 3

C. II and III
D. II and IV

7. Which of the following statements are TRUE about supply?

I. If the price of vegetables is expected to increase, supply increases.
II. If the price of oil is expected to increase, supply decreases.
III. If more companies start producing rubber gloves, supply increases.
IV. If more people plant durian trees, supply decreases.
A. I and II
B. II and III
C. I and III
D. II and IV
8. Which of the following statements are TRUE?
I. When the price of rubber increases, supply of rubber gloves increases.
II. When the price of copper decreases, supply of copper wires decreases.
III. When the price of chicken increases, supply of chicken rice decreases.
IV. When the price of chicken feed increases, supply of eggs decreases.
A. I only
B. I and II
C. III and IV
D. I, II and III
9. Which of the following statements are TRUE?
I. When price is above the equilibrium price, the market is in surplus.
II. When the market is in surplus, quantity supplied is greater than quantity
demanded.
III. When price is below the equilibrium price, the market is in shortage.
IV. When the market is in shortage, quantity supplied is greater than quantity
demanded.
A. I, II and III
B. I, II and IV
C. I, III and IV
D. II, III and IV

Section B: Essay Questions

Question 1

a) Using diagrams, differentiate between price floors and price ceilings.

(10 marks)
b) Consider the market for tennis balls. For the following situations, describe the effect on
equilibrium price and quantity using a supply-demand diagram:
i) The government imposes a 6% tax on the sales of tennis balls. (5 marks)
ii) The price of tennis rackets decrease. (5 marks)
iii) Tennis ball manufacturers expect the price of tennis balls to increase in the future.
(5 marks)

Question 2

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ABBE1543 Basic Economic Principles Tutorial 3

This is a guided question to build intuition. You should not expect questions like this in the exam.

Consider the market for Manchester United jerseys.

a) Explain the market equilibrium using a supply-demand diagram.

b) Suppose people fall in love with Donny van der Beek, and now everyone wants to buy
his jersey. Describe the effect on equilibrium price and equilibrium quantity on the
supply-demand diagram in (a).
Hint: You just need to add one curve and show the shift.
c) Now, suppose that due to Covid-19, the factories in China that make Manchester United
jerseys face higher costs of production. Describe the effect on equilibrium price and
equilibrium quantity on the supply-demand diagram in (b).
Hint: Again, you just need to add one curve and show the shift.
d) Can you say for sure whether equilibrium price has increased?
e) What about equilibrium quantity? Definitely increase? Definitely increase? Don’t know?
Hint: Think about the shifts you drew. What happens if you shifted the curves a little less or
a little more? What happens if you shift demand by a lot but supply by less?