Answers to the in-class demand and supply hand-outs.

Determining Equilibrium Price and Quantity for the bicycle market (using the graph)

Both the demand and supply curves should be straight lines, intersecting at a price of $140 and a quantity of 24 million bicycles.

Pe = $140 Qe = 24 million units

At a price of $180, the Qd = 12 million units and the Qs = 32 million units. Thus there would be a surplus

of 32 -12 = 20 million bicycles.

Because of the surplus, there will be competitive pressures placed upon the bicycle producers to reduce the price of bicycles. The most important point to remember here is that the price of $180 is not sustainable - it will not last. The price will head down towards $140 where the market will clear.

At a price of $80, the Qd = 42 million units and the Qs = 12 million units. Thus there would be a shortage

of 42 -12 = 30 million bicycles.

Because of the shortage, there will be competitive pressures placed upon the bicycle buyers to bid up the price of bicycles in an attempt to obtain bicycles. The most important point to remember here is that the price of $80 is not sustainable - it will not last. The price will head up towards $140 where the market will clear.

At a price of $140, Qd = 24 million units and Qs = 24 million units. The market will clear in the sense that the amount of bicycles put on the market by bicycle producers will match the amount of bicycles that buyers are willing to buy at that price. There will be no surplus or shortage of bicycles and therefore no competitive pressures to change the price.

Looking at the changes that affect the bicycle market:

1. As a result of this change, cost of making bicycles will increase and anything that increases costs will decrease the supply of bicycles. The supply curve will shift to the left as a result of this change, demand is unaffected by this change and as a result, the equilibrium price will increase and the equilibrium quantity will decrease.
2. As a result of this change, buyers will buy more bicycles right now to avoid the expected future price increases. Demand will shift to the right. As a result, the equilibrium price and quantity will both increase.
3. More domestically produced bicycles will be demanded since foreign made bicycles will be more expensive that they were before. The demand curve will shift to the right and as a result, the equilibrium price and quantity will both increase.
4. Increase in demand. Same results as 2 and 3.
5. I think the best answer is an increase in demand, with results being the same as 2,3,4. But one could also argue that the costs of production and distribution for bicycles has also increased and in that case there would be a double shift --- an increase in demand and a decrease in supply. When double shifts occur, then either the equilibrium price or the equilibrium quantity will be indeterminate because it will be dependent upon how much each curve shifted relative to the other. In this case, with an increase in demand and a decrease in supply, both those changes will lead to an increase in price, but whether the equilibrium quantity will increase or decrease will depend upon whether demand shifted more than supply or supply shifted more than supply. Draw a diagram and you'll see what's happening.
6. Decrease in supply because factor costs have increased. Same results as in #1.
7. Decrease in demand and no change in supply. Equilibrium price will fall as will equilibrium quantity.
8. No shift in either demand or supply since the price of the commodity itself is not a shifter. Price as indicated is higher but quantity is ambiguous since Qd no longer equals Qs.
9. Decrease in current supply as firms withhold from the market in order to sell more at the higher future price. Equilibrium price will increase and equilibrium quantity will decrease.
10. Shift to the right in supply as more bicycles are produced by larger number of firms. Equilibrium price decreases and equilibrium quantity increases.
11. The last sentence should read " Demographers predict that there will be more children in the next 10 years." It that is the case, the supply for bicycles will decrease as firms put more of their resources into the production of tricycles. Same result then as for #9.
12. Assuming that helmets are expensive and that some people don't like to wear helmets, the demand for bicycles should decrease. Same result as for #7.
13. Higher incomes should lead to an increase in demand. Increase in both equilibrium price and quantity.
14. Increase in the supply of bicycles. Lower equilibrium price and larger equilibrium quantity.
15. Lower costs for bicycle firms will lead to an increase in supply, resulting in the same outcomes as #14.

Demand Problems: The Demand Curve and Changes in Demand

1. Answer provided in worksheet.
2. No shift, only the price of the commodity changes.
3. Decrease in demand.
4. Decrease in demand.
5. Decrease in demand
6. Increase in demand
7. Increase in demand
8. Decrease in demand
9. Decrease in demand as the price of complementary good increases.
10. Increase in demand as the price of a complementary good decreases.
11. Increase in demand.
12. Decrease in demand.
13. Decrease in demand as consumers substitute out of store brand tuna.
14. Increase in demand.
15. Increase in demand.

Supply Problems: The Supply Curve and Changes in Supply

1. Answer provided on worksheet.
2. Decrease in supply as farmers get out of growing potatoes.
3. Decrease in supply.
4. Increase in supply because of lower factor costs.
5. Decrease in supply - smaller number of firms.
6. Decrease in the supply of barley.
7. Decrease in supply because of increased costs.
8. Decrease in supply because of tax.
9. Decrease in supply because of lower productivity.
10. Decrease in supply because of increased costs.
11. Decrease in supply because of increased factor costs.
12. Increase in supply because of institutional change.
13. No shift in supply, just an increase in quantity supplied at higher price.
14. Decrease in supply because of higher costs.

Applying the Concepts of Demand and Supply to the "Real World"

1. Decrease in supply because of the loss of oil and higher insurance costs in transporting oil.
2. Increased supply of domestic wheat since wheat formerly exported to the Soviet Union now stays here in the United States.
3. Decrease in supply since "little critters" will now destroy more of the crop. Farmers wouldn't be in favor of such a move because more crops would be lost. But, the number one farm problem is that farmers produce too much and as a result the price is too low. Maybe this would be a way to decrease supply and get prices up.
4. Increase in demand. Big difference! With an inelastic supply, the increase in demand results mainly in higher priced solar panels, whereas with elastic (or price responsive supply), the result is mainly more solar panels (which is what we want).
5. Increase in demand. What about frisbee cats??
6. Increase in supply since the subsidy effectively lowers the firms' costs. With a tax credit, demand shifts to the right as more units are demanded. With a subsidy the market price decreases, with tax credits, the price increases.
7. Effectively removes (decreases) the legal supply altogether. In fact, the legal market ceases to exist. Such a ban is much more effective if all the major consuming countries act in unison; otherwise, furs that were headed to the United States would simply go to Europe or Japan if the United States undertook this action unilaterally (by itself).
8. Toughest situation of this group. No shift in either demand or supply since only the price changes. In this case the price is an interest rate. There would be a price ceiling imposed, effectively preventing the price from reaching its equilibrium level. At the imposed price ceiling, there would be a shortage. In my humble opinion, legislation like this is designed to protect low income households that couldn't otherwise afford to borrow. But, since there is a shortage at the usury rate of interest (at the price ceiling), I think lending institutions would tend to provide those loans to its best customers, not to low income customers. With a shortage situation, the bank does the rationing according to any criteria it wants, instead of the market rationing according to income and preferences. This is bad public policy.
9. Using a labor market, with wages as the price and the quantity of employment on the horizontal axis. The new harvesting machines would decrease the demand for unskilled labor that normally picks the produce. Such a decrease in demand would lower wages and the quantity of employment. The most interesting question about this case is whether or not technological change, as illustrated by this example, is in society's best interest? Many of these unskilled workers will probably end up on welfare. At least under the old system they had employment. Now society as a whole will pay much of the bill. Think about this issue.
10. Decrease in demand for succrose. They could decrease the supply in order to offset the decrease in demand. Or perhaps they could increase their advertising to increase the demand through another route.
11. Increase in supply, lowering the equilibrium price and increasing the equilibrium quantity. There probably is also a demand effect with consumers postponing their purchase decisions because they expect prices to get lower and lower. That would put further downward pressure on prices.
12. Increase in the demand for oat bran cereals and decrease in the demand for non-oat bran cereals as consumers switch to the healthier cereal. The demand for oats shifts to the right as more oats are demanded as input into the cereal-making process. That is called a derived demand.
13. This is another difficult one. Most exporters would like to be paid in their own currency so when you buy a Japanese car, you are implicitly demanding yen as well. Thus, when an imported car or other imported commodity is purchased, there is an increased demand for the foreign currency and that increases it value (the currency is said to appreciate). To obtain Yen or some other foreign currency, we have to supply dollars to the foreign exchange market (FX) and that decreases the value of the dollar in terms of other currencies (the dollar is said to depreciate against the other currency). So imports cause the currency of the exporting country to appreciate and the currency of the importing country to depreciate - all because you wouldn't buy American!!!
14. Imported steel would increase the total supply of steel available in the American steel market, causing the price to fall. Restricting steel imports would reduce the total supply of steel available in the American steel market, causing steel prices to rise. You could look at this another way: a tariff on imported steel would increase the demand for domestically produced steel and decrease the demand for imported steel. Higher priced steel would raise the cost of producing an automobile and would result in a decrease in supply of autos - causing the price of autos to increase, ceteris paribus.
15. Well it depends on whether you think hamburger is a normal good or an inferior good. If it is a normal good, then the increase in incomes will shift the demand for hamburger to the right. If it is considered to be an inferior good, then as incomes rise, consumers will substitute out of hamburger into higher priced, better quality cuts of meat. In that case, the demand for hamburger will shift to the left. I think everyone would agree that VCRs are a normal good and an increase in incomes will result in an increase in demand.
16. Stricter pollution would raise firms' costs and supply would decrease.

More Demand and Supply Exercises

1. Increase in demand.
2. Increase in demand.
3. No shift in either demand or supply. A price floor has been imposed and there would be a surplus of domestic cotton.
4. Decrease in supply. Supply would shift upward in a parallel fashion by the amount of the tax.
5. Decrease in supply.
6. Decrease in supply.
7. Decrease in demand.
8. Increase in supply.
9. Decrease in demand.
10. Increase in demand.
11. The infamous "double shifter". Decrease in supply and increase in demand. Equilibrium price will rise but the direction of change in equilibrium quantity will depend on the magnitude of the shifts.