U52002-3 Seminar Work Introduction to demand and supply: Some demanding questions

Problem 1 Price(P) (pence per pack) Quantity demanded(Qd) (millions of packs a week) Quantity supplied(Qs) (millions of packs a week) 20 30 40 50 60 70 80
1. a) If demand = Qd = 220-2P and supply = Qs = 20+2P, fill in the demand and supply schedules for chewing-gum.
2. b) At what price and quantity does demand equal supply? Show this numerically.
3. c) Draw a graph of the gum market and mark in the equilibrium price and quantity
4. d) Suppose that the price of chewing-gum is 70 pence a pack. Describe the situation in the chewing-gum market and explain how the price of gum adjusts.
5. e) Suppose that a fire destroys some gum-producing factories and the supply of gums decreases by 40 million packs a week.
  1. i) Has there been a shift of or a movement along the supply curve of gum?
  2. ii) Has there been a shift of or a movement along the demand curve for gum?
  3. iii) Use the graph you have drawn in a) above to illustrate the change in the market.
  4. iv) What are the new equilibrium price and equilibrium quantity of chewing-gum?
6. d) Suppose that an increase in the teenage population increases the demand for chewing-gum by 40 million packs per week at the same time as the fire in the production plan occurs.
  1. i) Has there been a shift of or a movement along the supply curve of gum?
  2. ii) Has there been a shift of or a movement along the demand curve for gum?
  3. iii) Use the graph you have drawn in c iii) above to illustrate the change in the market.
  4. iv) What are the new equilibrium price and quantity of chewing-gum?
Problem 2 What is the effect on the market for DVD players if:
1. a) The price of a DVD rises?
2. b) The price of a DVD falls?
3. c) The supply of DVD players increases?
4. d) Consumers’ incomes decrease?
5. e) The wage rate of workers who produce DVD players increase?
6. f) The wage rate of workers who produce DVD players rises and at the same time the demand for DVDs increases? Explain the two stages to your answer.
Problem 3 Find the flaws in reasoning in the following statements, paying particular attention to the distinction between shifts of and movements along the supply and demand curves. Draw a diagram to illustrate what actually happens in each situation.
1. a) “A technological innovation that lowers the cost of producing a good might seem at first to result in a reduction in the price of the good to consumers. But a fall in price will increase demand for the good, and higher demand will send the price up again. It is not certain therefore, that an innovation will really reduce price in the end.”
2. “A study shows that eating a clove of garlic a day can help prevent heart disease, causing many consumers to demand more garlic. This increase in demand results in a rise in the price of garlic. Consumers, seeing that the price of garlic has gone up, reduce their demand for garlic. This causes the demand for garlic to decrease and the price of garlic to fall. Therefore, the ultimate effect of the study on the price of garlic is uncertain.”
Problem 4 In the news: Demand and Supply in the Oldest Profession on Earth. Read the following Times Online article: ‘Freakonomics returns: vice work if you can get it’, October 18 2009 http://entertainment.timesonline.co.uk/tol/arts_and_entertainment/books/book_extracts/article6879237.ece which gives an extract from Stephen Levitt’s and Stephen Dubner’s book Superfreakonomics. http://entertainment.timesonline.co.uk/tol/arts_and_entertainment/books/book_extracts/article6879237.ece
1. (i) Explain using appropriate economic concepts and a relevant diagram why the average earnings of a typical street prostitute has declined markedly in comparison to their earnings 100 years ago.
2. (ii) The article suggests Allie would be distraught if prostitution were legalised. Using appropriate economic concepts and a diagram, critically evaluate the reasoning behind this.
Problem 5 Read the news article from the Belfast Telegraph (5/8/09) on the next page.
1. http://www.istockanalyst.com/article/viewiStockNews/articleid/3460817
  1. Shoppers Turning to Food for Recession Comfort ; The Economy Needs Demand to Stimulate Growth, but is It Possible to Eat Our Way Out of Recession, Asks Donald C McFetridge Saturday, September 05, 2009 2:19 AM (Source: Belfast Telegraph)When the going gets tough, the tough go shopping -- or so the saying goes. But what do they buy? It appears that during this recession -- as with most previous ones -- consumers have continued to spend but, true to form, they have substituted spending on big ticket items and gone instead for smaller treats. Instead of splashing out on a new kitchen, consumers have opted instead for a new set of saucepans, a new kettle and toaster or some new cutlery to brighten up their existing furniture and fittings. But one thing more than anything else never ceases to amaze, and amuse: that is, we seem to change our eating behaviour as well. To the extent that Cadbury's has recently indicated that their UK sales have risen by an astonishing 12% in the first half of the financial year. It would appear that, in times of economic doom and gloom, we tend to try to eat our way out of a recession. We turn away from the expensive consumer durables which we previously relished, either because we cannot afford them or simply because we are concerned/worried about continuity of employment and focus instead of treating ourselves to some of life's little luxuries. Interestingly, the prices of sugar and cocoa have increased considerably during the past year -- pushing up the price of chocolate bars -- but this has not proved to be a deterrent to chocoholics. According to the latest data from the CBI, shoe shops and grocers were the only sectors which appeared to buck the trend of falling sales. This data has also been borne out by recent information provided by the Office of National Statistics. Retailers have had to change their marketing tactics in order to fit the current mood in consumer spending. Seldom has a day passed without some of the leading players in the marketplace advertising special deals on upmarket food products or "meal deals". Consumers, it appears, have grasped the notion and are eclectically shopping for these deals with retailers radically reducing prices and offering special promotions wherever, and whenever, they possibly can. Until we hear that the recession is well and truly over, consumers will continue to be much more prudent and careful in terms of their spending on food. However, consumers need some comfort and one of the ways in which they can gain this is by treating themselves to special food which is not costing them a fortune. Retailers, of course, are faced with the eventual problem of knowing exactly when they can start to increase their prices again. http://www.istockanalyst.com/article/viewiStockNews/articleid/3460817# Page 1 of 2Shoppers Turning to Food for Recession Comfort ; The Economy Need...ssible to Eat Our Way Out of Recession, Asks Donald C McFetridge 11/10/2011 07:31 Consumers, who have become used to the proliferation of promotions on food and food deals, will be most unwilling to accept these prices increases when they eventually arrive -- and arrive they will. Previous prime ministers suggested that we could spend our way out of a recession. This is the first recession (which I can remember) where we appear to be trying to eat our way out of it! CAPTION: Consumers have replaced big spending in the recession with spending on smaller treats for themselves like chocolate (c) 2009 Belfast Telegraph. Provided by ProQuest LLC. All rights Reserved. A service of YellowBrix, Inc.
2. a) according to the article the price of chocolate has risen substantially in the past year, yet the sales of this product have been increasing. Does this fact mean that the inverse relationship between price and quantity demanded does not hold for this product?
3. b) Make use of appropriate demand and supply diagrams to illustrate the changes that have been taking place in the market for foods such as chocolate.