Practice questions

Demand and supply analysis

Find the shape of the PPC
Production possibilities cloth wheat
A 0 15
B 1 14
C 2 12
D 3 9
E 4 5
F 5 0
solution
Production cloth wheat MRT
possibilities
A 0 15 -
B 1 14 1
C 2 12 2
D 3 9 3
E 4 5 4
F 5 0 5
Demand Equation
• QD = a- bp
• a= constant
• b= shows the relation between price and quantity demanded
Eg
• Qd = 20 – 2 Px

• Construct a demand schedule and demand curve

solution
Px Qx
0 20
1 18
2 16
3 14
4 12
Example
The original demand function is Qd = 40 -5p.

Find out the changes if

Qd1 = 60-5p and
Qd2 = 40-6p
solution
price 40-5p 60-5p 40-6p
0 40 60 40
1 35 55 34
2 30 50 28
3 25 45 22
4 20 40 16
5 15 35 10
Example
• Following is a demand schedule for milk
price demand

9 18

10 16

11 14

12 12

13 10

14 8
Questions…..Find out
• Draw the demand curve for milk
• Derive the demand function
• What is the maximum quantity of milk that can be demanded?
• At what price there will be no demand for milk?
solutions
• Demand function
• Qd = a –bp

• b = ∆Q / ∆P
• = -2/1 = -2
• So 18 = a – 2 (9)
• A= 36
• Thus Qd = 36 – 2P
Sol…contd

• Maximum qty dd = 36 units

• At price of rs. 18 there will be no demand for milk
example
• The weekly supply schedule for a product is given as
price supply

9 9

10 10

11 11

12 12

13 13

14 14
Questions….find out

• Derive the supply function

• At what price no milk will be supplied?

Example
• If Qd = 120 – 20P , find the following:
• Demand schedule
• Price elasticity when price changes from
Rs. 3 to Rs. 5
Rs. 5 to Rs. 3
Price elasticity when quantity changes from
6o units to 100 units
100 units to 60 units
Example
• The Demand function for pens is as follows

• Qd = 100 – 0.5 P

• Compute price elasticity of demand when the price is Rs. 10

solution

• Qd = 100 – 0.5(10)
• Qd = 95

• ∆Q/ ∆P = -0.5
• Ep = ∆Q/ ∆P * P/Q
• So Ep = -0.5 * 10/95
• Ep = -0.056
Find the cross price elasticity between
x and y
x and z

good before after

price quantity price quantity
Y 13 30 11 40
X 8 15 8 10
Z 10 10 11 9
solution

• Ec between x and y = + 2.17

• ( x and y are substitute goods)

• Ec between x and z = -3
• ( x and z are complementary goods)
Example
• The demand function for wheat is as follows:
• Qw = 5850 – 6Pw + 2 Pr + 0.15 y ……. Where

• Y = income rs. 8000

• Pw = price of wheat = rs 125
• Pr = price of rice = rs 70
Find out

• Income elasticity and comment

• Cross elasticity and comment

• What happens to the demand for wheat if the price of rice increases
by 10% ??
solution

• Ey = 0.18
• Wheat is a necessary product

• Ec = 0.02
• Wheat and rice are substitutes

• New Qd for wheat = 6454 units

Example

• Q1 = 100 -6P1 – 4P2 + 2P3 + 0.003Y where

• P1= Rs . 7
• P2 = Rs. 15
• P3 = Rs. 4
• Y = Rs. 8000
Find out
• Find out the relationship between good 1 and the other goods

• Find out the price elasticity of demand

• Find out the effect on Q1 due to a 10% increase in the price of good 2
and 3.
solution
• Ec between good 1 and 2 is -2

• So goods 1 and 2 are complementary

• Ec between good 1 and 3 is 0.26

• So goods 1 and 3 are substitutes

• New Q1 = 24.8 units

Example

• In a year, no. of cars sold decreased by 20%. During

the same year, the prices of cars increased by 5%, per
capita income declined by 2%, and price of petrol
increased by 10%. Income elasticity of demand for
cars is estimated to be 1.5 and cross elasticity
between petrol and cars is estimated to be -0.30.
Find out
• Find out the impact of decline in per capita income on the demand
for cars

• Find out the impact of increase in the price of petrol on the demand
for cars

• Find out the price elasticity of demand for cars

solution
• 1. Ey = ∆Q/∆Y
• 1.5 = ∆Q/ 2%
• demand of cars declined by 3%

• 2. Ec = ∆Qcars/∆Ppetrol
• -0.30 = ∆Q/10
• Demand for cars declined by 3%
Sol…contd
• 3. Ep = ∆Q cars /∆p price

• Ep = 14 %/ 5% (14 because 6% decrease is deu to income and price of

related good i.e petrol)

• Ep = 2.8
Example
• If the demand and supply curve for computers are:
• D = 100 - 6P,
• S = 28 + 3P

• Where P is the price of computers, what is the quantity of computers

bought and sold at equilibrium.
Example
• After doing some market research, a manufacturer notices the
following pattern for selling an item.

• Price (Rs.) Demand(Units) Supply(Units)

•1 3600 600
•4 900 4200
•6 600 6600
•9 400 10200
Find out..

• Construct a demand and supply equation from the following

information and find out the equilibrium price