1. 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?
  2. 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.
  3. 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.”
  4. 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.
    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.
  5. Problem 5 Read the news article from the Belfast Telegraph (5/8/09) on the next page.
    1. Subtopic 3
    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.