Topic two: Demand, supply and elasticity

1. QD = 200 5P
Qs = -25 + 4P

(a) Sketch QD & QS?

(i)

(ii)

Ceteris paribus means nothing affects to quantity of demand, except the price
of product have inverse relation to.

(iii)

+ Pe = ?
QD = QS
200 - 5Pe = -25 + 4Pe
Pe = 225/9 = 25 ($)
Qe = Qd = Qs = 200 5*25 = 75 (unit)
+ Total purchasers expenditure (TPE) = Pe * Qe
TPE = 25 * 75 = 1875

(b) Qs = -7 + 4P

(i)

Pe = ?
QD = QS
200 5Pe = -7 + 4Pe
Pe = 207/9 = 23 ($)
Qe = QD = QS = -7 + 4*23 = 85 (unit)

(ii)

TPC = Pe * Qe = 23*85 = 1955

Consumption is raised
QD = 200 5P
2. QD = 600 7.5P
Qs = -100 + 10P
(a) Sketch QD & QS?

Qd
0
40

Qs
600
100

-100
3900

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(b) + Pe = ?
QD = QS
600 7.5P = -100 + 10P
Pe = 700/17.5 = 40 ($)
Qe = Qd = Qs = 600 7.5*40 = 300 = 300,000 (kgs)
(c) If the price of substitute good for Y were to increase, the quantity demanded of
substitute good would be decrease so that costumer would change to use product Y.
Quantity of products Y increase while the price were no change that mean we have a
shift of demand.

And the supply curve is no changed because this is the change of non-price
determinant of supply

As the result, the change equilibrium price quantity is increase.

(d) The price of labor used to produce of good Y increased the cost of good Y would
increase also quantity supplied will be decreased at each price and the curve will shift
as below. On the other hand, the demand curve is no change

Demand & Supply curves

45
40
35
30
P

25
20

Qd

15

Qs

10
5
0
0

1000

2000

3000
Q

4000

5000

As the result, the change equilibrium price is increased but equilibrium quantity is
decreased.
3. QD = 15 1.5P
Qs = 0 + 1.0P
(a) Sketch QD & QS

Demand & Supply curves

12
10

e
ric
P

8
6

Qd

Qs

2
0
0

10

12

14

16

Quantity

(b) Pe = ?
Qe = ?
QD = QS
15 1.5P = 0 + 1.0P
Pe = 15/2.5 = 6 ($)
Qe = QD = QS = 6 = 600 (liters)
(c) Consumer surplus is the deference between value customers are willing to pay and
avalue they actually pay.
It is calculated of the area between the demand curve and the equilibrium price.
CS = 6*(10 6)/2 = 12 = 1200 ($)
(d) Producer surplus is the value producer received between the price they want to sell
and the price they actuallu sell.

It is calculated of the area between the supply curve and the equilibrium price.
PS = 6*6/2 = 18 = 1800 ($)
4.

Demand & Supply curves

300
250

e
ric
P

200
150

100

50
0
0

10

15

20

25

30

Quantity

(a)
Pe = 180 ($)
Qe = 18,500 (unit/year)
(b) Ed = ?
Ed = ((17 20)*(200 + 160))/((200 160)*(17 + 20)) = -3/40= -0.72973
A 1% increase in price reduces the quantity demanded by 0.72973%
Ed < 1,
The demand for bicycles is inelastic
(c) Es = ?
Es = ((21 16)*(200 + 160))/((200 160)*(21 + 16)) = 1.216216216
A 1% decrease in price reduces the quantity demanded by 1.216216216%
5. Explain precisely why it is not possible to estimate the magnitude of an own price
elasticity of demand, simply by looking at the slope of the demand curve. [Ti sao khng
th c lng c co gin ch bng cch nhn vo dc ca ng cu]
6. P0 = 4 Q0 = 1800

P1 = 5 Q1 = 1250
(a) Ed = ?
Ed = ((Q1 Q0)*(P1 + P0))/(( P1 - P0)*( Q1 + Q0)) = ((1250 1800)*(5 + 4))/((5 4)*( 1800 + 1250)) = -1.62295082
A 1% increase in price reduces the quantity demanded by 1.62295082%
Ed >1
The demand for DVDs hired is elastic
(b) Ed >1
%Q > % P
TR = P*Q
%TR = %P + %Q
Because %Q > % P, when P increase => Q decrease a lot => TR falls
Hence stores revenue falls
7. Demand curves are always negatively sloped. Discuss.
8.
(a) Cigarettes
The demand curve of cigarettes is vertical line that means total quantity demand is no
change if the price is changed.

 Demand is perfectly inelastic (Ed = 0)

The factors determining the cigarettes price elasticity is duty. The effects of indirect
taxes on a producers costs and the importance of price elasticity of demand in
determining the effects of a tax on market price and quantity
(b) A well-known brand of soap
This is product for daily necessities, no matter how much soap costs people will buy
it because personal hygiene is important and for which there are few alternatives
The factor the products price is quantity of product is increased that mean there are
supplement on product. It is cross elasticity of demand.
9.

Explain the likely cross elasticity of demand between the following products: (a) rice
and noodles
(b) electricity and electric stoves
(c) paper bags, aluminium foil, plastic wrap

10. Bookworm and Easyread are both publishers of popular novels. (a)
Assume that demand for Bookworm novels is elastic.
(i) Explain the meaning of the underlined term.
(ii) Outline one important factor that you feel has helped to determine the size of
this own price elasticity.
(iii) How would a fall in Bookworms price affect their total revenue?
(b) When the price of Easyread novels increased from $20 to $23, Bookworms sales
increased from 105,000 to 120,000 novels. Calculate the arc cross price elasticity.
Are the two brands of novels close substitutes? Explain.

(c) An increase in average weekly earnings from $290 to $310 caused

Bookworms sales to increase from 120,000 to 130,000 novels. Calculate
and interpret the income elasticity.
(c) When the average price of womens magazines increased by 6%, the demand for
novels increased by 2% per month. Do these figures suggest that novels and
womens magazines belong to the same market? Explain.
Topic Three: Applications of Demand and Supply
1. Suppose the demand and supply curves for good M are as follows:
QD = 70 - 2P
QS = -10 + 2P
(a)

P is price per kg measured in dollars

and Q is quantity measured in 000kgs
Sketch the demand and supply curves.

where

Qd
0
35

Qs
70
0

-10
60

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b. Determine the equilibrium price and quantity.

Qd = Qs => 70 2Pe = -10 + 2Pe
Pe = 20 => Qe = 30
c. Calculate the value of the consumer and producer surplus at the equilibrium price.
Pe = 20
Qd = 0 => P = 35
Qs = 0 => P = 5

CS1 = [(35 20) x 30]/2 = 225

PS1 = [(20 5) x 30]/2 = 225
d.
e. Pc = 15 => Qs = Q0 = 20

35

25
20
15

5
20

30

CS2 = {[(35 15)+(25 15)] x 20}/2 = 300

PS2 = [(15 5) x 20]/2 = 100
f. Consumer.
2.

Suppose the demand and supply curves for good W are as follows: QD =
100 - 2P
QS = -20 + 4P

where P is price per kg measured in dollars

and Q is quantity measured in 00kgs

(a)

Sketch the demand and supply curves.

Demand & Supply curves

60
50

e
ric
P

40
30

Qd

20

Qs

10
0
0

50

100

150

Quantity

(b) Determine the equilibrium price and quantity.

Qd = Qs => 100 2P = -20 + 4P => Pe = 20, Qe = 60
c.
Pe = 20
Qd = 0 => P = 50
Qs = 0 => P = 5
CS1 = [(50-20)x 60]/2 = 900
PS1 = [(20 5)x 60]/2 = 450
d.
e.

200

50

30
20
15

40

60

Pf = 30 = > Qd = Q0 = 40
CS2 = [(50 30)x40]/2 = 400
PS2 = (30 15 + 30 5) x 40]/2 = 800
f. Producer
3.

With the introduction of a unit tax, to be paid by producers, the supply curve shifts
upwards. Explain why, when the same tax is levied directly on consumers, the
demand curve shifts downwards.
The increase in the amount of tax on the buyers will affect the demand curve greatly while the
supply curve for the supply of this commodity will remain the same. Consumers purchasing
power has been reduced by taxing their income hence they will purchase less from the market.
Consumers will also purchase less in the market when the prices of the commodities go up due to
increase in the amount of value added tax levied on the goods and services. The demand curve
will therefore shift downwards with an increase in the amount of tax. The reduction in the
amount of taxation will also affect the demand curve by shifting the demand curve upwards. This
is because consumers income is increased by reduction in consumers income or the prices of
commodities are reduced by reduction in the amount of value added tax increasing quantities
demanded.
4.
Suppose the government is considering the imposition of a unit tax to be levied on beer

producers. The view of companies is that this is just one more cost for them to bear.
Consumers disagree saying that the companies pass the taxes on to them in terms of
higher prices.
(a) Given that the demand for beer is inelastic, which viewpoint is correct? (b)
Would the burden of the tax be any different if the government levied the
tax on consumers (over the counter) rather than on beer producers?
Explain your answers fully and use diagrams in your analysis.