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The Basics of Supply and Demand

This chapter discusses the basics of supply and demand, including definitions of demand and supply, factors that influence them, the laws of demand and supply, equilibrium, price ceilings and floors, and elasticity. It addresses how economists focus on price while holding other factors constant when defining demand and supply. Questions are provided about demand and supply curves, movement along and shifts in the curves, market equilibrium, government price controls, and the concept and application of elasticity, including own-price elasticity, cross-price elasticity, and income elasticity. Short problems apply elasticity concepts to specific goods.

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157 views7 pages

The Basics of Supply and Demand

This chapter discusses the basics of supply and demand, including definitions of demand and supply, factors that influence them, the laws of demand and supply, equilibrium, price ceilings and floors, and elasticity. It addresses how economists focus on price while holding other factors constant when defining demand and supply. Questions are provided about demand and supply curves, movement along and shifts in the curves, market equilibrium, government price controls, and the concept and application of elasticity, including own-price elasticity, cross-price elasticity, and income elasticity. Short problems apply elasticity concepts to specific goods.

Uploaded by

James Baratheon
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOC, PDF, TXT or read online on Scribd
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CHAPTER 2

THE BASICS OF SUPPLY AND DEMAND


MICROECONOMICS, 8 TH EDITION
ROBERT S. PINDYCK AND DANIEL RUBENFELD

Demand and Supply


Questions

1. Define demand. Define supply


2. List non price factors that influence demand and
supply
3. In defining demand and supply, why do you think
economists focus on price while holding constant
other factors that might have an impact on the
behavior of buyers and sellers?
4. The law of demand and the law of supply
5. Movement along the demand and the supply
6. Shift the demand curve and supply curve
7. What is the market equilibrium and restriction of
market equilibrium?
8. Government controlled prices
What is the price ceilings?
What is the price floors?
Concept and Application
of Elasticity
Chp 2 - Pindyck

1. Explain what an elasticity of demand represents and how it is


measured
2. Identify what factors determine whether demand is elastic or
inelastic
3. Factors affecting the own price elasticity of demand
4. Relation of elasticity and total revenue
5. Perfectly elastic demand
6. Perfectly inelastic of demand
7. Explain the meaning of cross price elasticity of demand
8. Explain the meaning of income elasticity of demand
9. Explain the meaning elasticity of supply
10. Understand the distinction between arc elasticity and
point elasticity

Short Problems for elasticity.

1. (a) Would you expect the price elasticity of demand to be higher for
Chevrolet automobiles or for automobiles in general ? Why ? (b)
Would you expect the price elasticity of demand for electricity for
resindential use to be higher or lower than for industrial use ? Why ? (c)
Would you expect the price elasticity of demand for electricity to be higher
or lower in the short run as compared with the long run ? Why ?

2. Agricultural commodities are known to have a price – inelastic demand


and to be necessities. How can this information allow us to explain why
the income of farmers falls (a) after a good harvest ? (b) In relation to the
incomes in other sectors of the economy ?

3. A researcher estimated that the price elasticity of demand for automobiles


in the United States is – 1.2, while the income elasticity of demand is 3.0.
Next year, U.S. automakers intend to increase the average price of
automobiles by 5 percent, and they expect consumers; disposable
income to rise by 3 percent. (a) If sales domestically produced
automobiles are 8 million this year, how many automobiles do you
expect U.S. automakers to sell next year ? (b). By how much should
domestic automakers increase the price of automobiles if they wish to
increase sales by 5 percent next year ?

4. The management of the Mini Mill Steel Company estimated the following
elasticities for a special type of steel : Ep = - 2, EI= 1, and Exy = 1,5,
where X refers to steel and Y to aluminum. Next year, the firm would like
to increase the price of the steel it sells by 6 percent. The management
forecasted that income will rise by 4 percent next year and that the price of
aluminum will fall by 2 percent. (a) If the sales this year are 1,200 tons of
the steel, how many tons can the firm expect to sell next year ? (b)
By what percentage must the firm change the price of steel to keep its
sales at 1,200 tons next year ?

5. Suppose the own price elasticity of demand for good X is - 2, its income
elasticity is 3, its advertising elasticity is 4, and its cross price elasticity
of demand between it and good Y is – 6. Determine how much the
consumption of this good will change if:
a. The price of good X increases by 5%
b. The price of good Y increases by 10%
c. Advertising decreases by 2 %
d. Income falls by 3%

7.
8. Integrating Problem
The research depertment of the Corn Flakes Corporation (CFC) estimated
the following regression for the demand of the cornflakes it sells :
Qx = 1.0 – 2.0 Px + 1.5I + 0.8Py – 3.0 Pm + 1.0A

Where Qx = sales of CFC cornflakes, in millions of 1- ounce boxes per


year
Px = the price of CFC cornflakes, in dollars per 10 ounce box
I = personal disposable income, in trillions of dollars per year
Py = price of competitive brand of cornflakes, in dollars per 10
ounce box
Pm = price of milk, in dollars per quart
A = advertising expenditures of CFC cornflakes, in hundreds of
thousands of dollars per year

This year, Px = $2, I=$4, Py = $2,50, Pm= $1, and A =$2. (a) Calculate the sales
of CFC cornflakes this year; (b) calculate the elasticity of sales with respect to
each variable in the demand function; (c) estimate the level of sales next year if
CFC reduces Px by 10 percent, increase advertising by 20 percent, I rises by 5
percent, Py is reduced by 10 percent, and Pm remains unchanged. (d) By how
much should CFC change its advertising if it wants its sales to be 30 percent
higher than this year ?

Consumer Behavior
Chp 3 – Pindyck
Questions

1. What is the difference between ordinal utility and cardinal


utility
2. What are the four basic assumptions about individual
preferences. Explain the significances or meaning of
each.
3. Suppose that a set of indifference curves was not
negatively sloped. What could you say about the
desirability of the two goods?
4. Explain why two indifference curves cannot intersect.
5. Explain why MRS between two goods must equal the
ratio of the price of the goods for the consumer to achieve
maximum satisfaction
6. Explain the derivation of a demand curve using
indifference analysis(PCC)
7. Distinguish between the income and substitution
effects when price change (increase and decrease)
8. Distinguish between the inferior and normal goods
when income change(Engel curve)
9. Describe the indifference curves associated with two
goods are perfect substitutes and perfect
complements.
10. Explain the difference between each of the
following term:
a. Price consumption curve and demand curve
b. An individual demand curve and a market demand
curve
c. An Engel curve and demand curve
d. An income effect and substitution effect
The Production Process and Costs
1. What is the production function
2. Distinguish between short run, long run and very long run
production function
3. Explain 3 stages of production function
4. What is increasing, decreasing and negative marginal return
5. Define isoquant and isocost and compare with indifference
curve and budget line
6. Explain cost minimizing rule
7. What is fixed cost and variable cost
8. Why is sunk cost irrelevance by decision maker?
9. When is it economies of scale/diseconomies of scale and
constant return to scale exist?

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