Worksheet 3 2.

2 How markets work

1. Match the key terms with their correct definitions or explanations in the table below. One has been
done for you.

B Joint demand C Excess demand

A Effective demand

E Substitutes F Market equilibrium

D Excess supply

H Market supply I Price elastic supply

G Complement

K Supply L Market demand

J Price inelastic demand

M Price elasticity of demand N Price elasticity of supply

Definition or explanation Key term

An economic situation in which a market is in disequilibrium because product supply D
exceeds demand for it. As a result, there will be pressure on the product price to fall
The sum of individual consumer demands for a given product L
Products that compete to satisfy the same consumer demand, such as butter and E
margarine or tea and coffee
Demand is relatively price insensitive. A small percentage change in the price of the J
product will result in a smaller percentage change in the quantity demanded
The responsiveness of the supply of a product to a change in its price N
The willingness and ability of consumers to buy a product A
An economic situation in which a market is in disequilibrium because product demand C
exceeds its supply. There will be upward pressure on the product price
The sum of supply decisions by all the firms producing a given product H
When the demand for two or more products is related because they are consumed B
together, for example razors and razor blades or cartridges
Supply is highly price sensitive. A small percentage change in the price of a product will I
cause a far greater percentage change in the quantity supplied
An economic situation in which the market demand for a product is exactly equal to its F
market supply. As there is neither a surplus or shortage of the product, the market price
tends to be stable in this situation
A good or service that is in joint demand with another, for example, cars and petrol G
The desire and ability of producers to make and sell a given product K
The responsiveness of consumer demand for a product to a change in its price M

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© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
2. The following diagram shows the impact of a rise in demand for coffee beans, i.e. market conditions
have changed, shown by the movement between a number of points marked on the diagram. Match
the labels to the movements listed in the table below. One has been done for you.
Price per kilo
S A rise in the market price
D D1

An extension of demand
a c
P2 An increase in the equilibrium quantity traded
b
P1 An extension of supply

A rise in market demand

S D D1
0
Q1 Q2
Quantity of coffee beans (kilos per month)

Change in market conditions Label giving the correct description

a to b An extension of demand
a to c A rise in market demand
b to c An extension of supply
P1 to P2 A rise in the market price
Q1 to Q2 An increase in the equilibrium quantity traded
3. Suggest five reasons why the market demand for coffee beans may rise.

i) Consumer
incomes rise and they buy more coffee 

ii) The
 price of a substitute rises (e.g. tea)

iii) Consumer
 preferences change (towards drinking more coffee)

iv) There
 is an increase in advertising

v) The
 population expands

4. The Association of Coffee Bean Suppliers has observed that reducing the price of a kilo of coffee beans
from $20 to $18 increased the quantity sold from 1,000 kilos per week to 1,200 kilos per week.
i) Use this information to calculate the price elasticity of demand for coffee beans.
Percentage change in price = $2/$20 × 100 = 10%; percentage change in quantity

demanded = 200/1,000 × 100 = 20%; so price elasticity of demand = 20%/10% = 2

ii) Which of the following statements is correct?

The demand for coffee beans is relatively price
elastic. The increase in the quantity demanded per
week is proportionally greater than the 10% cut
in price. As a result, total revenue from the sale of
coffee beans has increased.
The demand for coffee beans is relatively price
inelastic. The increase in the quantity demanded
per week is proportionally less than the 10% cut
in price. As a result, total revenue from the sale
of coffee beans has fallen.

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© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
5. The following diagram shows the impact of a rise in the market supply of laptop computers, i.e. market
conditions have changed, shown by the movement between a number of points marked on the
diagram. Match the labels to the movements listed in the table below.

Price
D S S1
A fall in the market price

x y An extension of demand
P1
z A rise in the equilibrium quantity traded
P2
A contraction of supply

S S1 D A rise in market supply

0
Q1 Q2 Q3
Quantity of laptops (thousands per month)

Change in market conditions Label giving the correct description

x to y A rise in market supply
y to z A contraction of supply
x to z An extension of demand
P1 to P2 A fall in the market price
Q1 to Q2 A rise in the equilibrium quantity traded
6. Suggest three reasons why the market supply of laptop computers may rise.

i) Increase in supply of labour and/or capital; fall in cost of labour and/or capital;

ii) rise in productivity of labour and/or capital; technological advance reduces production

iii) costs; other goods become less profitable; government subsidizes laptop manufacturers;

increase in confidence among laptop producers and their expectations of profit

7. Apex Computers is a manufacturer of laptop computers. Its laptops currently sell for $500 each. The
owners of Apex have stated that if the price was to rise to $550, they could increase production
immediately from 80 laptops a week to 100 using their existing resources. If the market price stays at
$550, the company would expand its factory and install additional equipment over the next six months
allowing it to increase production from 80 to 120 laptops per week.
i) Calculate the initial price elasticity of supply at Apex Computers.
Percentage change in price = $50/$500 × 100 = 10%;

Percentage change in qty supplied = 20/80 ×100 = 25%, so PES = 25%/10% = 2.5

ii) 
Calculate what the firm’s price elasticity of supply could be after six months.

Percentage
 change in price = $50/$500 × 100 = 10%;

Percentage change in qty supplied = 40/80 ×100 = 50%, so PES = 50%/10% = 5

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© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute
 iii) Explain why the price elasticity of supply at Apex could be different after six months.
Supply becomes more price elastic over time because it takes time for Apex to

install new equipment, expand its factory and hire and train more employees in

order to increase its scale of production

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© Brian Titley 2012: this may be reproduced for class use solely for the purchaser’s institute