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  1. Chapter Three: Demand, Supply and Price

Chapter Three: Demand, Supply and Price

1
Question 1

The price of coffee beans fell by 10% last year and quantity purchased fell by 10%. Which of the following statements best explains this?

a)
b)
c)
d)
e)
Correct. Incorrect. The answer is e) Results of large-scale health survey suggested that coffee drinkers were more likely to get cancer than non-coffee drinkers and this led to a fall in demand.Your answer has been saved.
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2
Question 2

There has been an increase in input prices for all producers of a good sold in a competitive industry. Assuming this is a normal good, the effect of this change on market price and quantity will be:

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is d) A higher price and lower quantity.Your answer has been saved.
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3
Question 3

In a market, like agriculture, where the government fixes the price above the market-clearing price (and restricts imports) and buys up production surpluses, which one of the following outcomes will characterise the market outcome (as compared to the free market outcome):

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is b) Consumers pay more for their food but producers get higher revenue.Your answer has been saved.
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4
Question 4

The price of orange juice fell by 20% last year and quantity purchased increased by 10%. Which of the following statements best explains this?

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is a) There was an increase in supply as a result of a bumper orange harvest.Your answer has been saved.
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5
Question 5

The price of coffee beans rose by 10% last year and quantity purchased fell by 7%. Which of the following statements best explains this?

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is d) There was a major frost in Brazil that reduced its coffee production, and Brazil has a big share of world production.Your answer has been saved.
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6
Question 6

Cinema (movie) attendance fell this year compared to last while admission prices also fell. Which of the following statements best explains this?

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is b) There was a fall in the price of TV, theatre and DVDs, which are all substitutes for the cinema.Your answer has been saved.
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7
Question 7

There has been a fall in the prices of raw materials that are used as inputs by all producers of a manufactured product that is sold in a perfectly competitive market for the finished product. Demand conditions for the final product are unchanged, and the demand curve has the normal negative slope. The effect of this change on the market price and quantity bought and sold of the final product will be:

a)
b)
c)
d)
e)
Correct.Incorrect. The answer is c) A lower price and higher quantity.Your answer has been saved.
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8
Question 8

Theatre attendances fell last year even though prices of admission also fell. Which one of the following on its own could explain this:

a)
b)
c)
d)
e)
Correct. Incorrect. The answer is c) There was a reduction in prices of cinema seats as many new multiplex cinemas opened up.Your answer has been saved.
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9
Question 9

What is the difference between a 'stock variable' and a 'flow variable'? Is it important that we should make such a distinction?

Hint: see 'The nature of demand' and Box 3.1, p38.Hint

10
Question 10

What does the Latin phrase 'ceteris paribus' mean? Why is ceteris paribus an important assumption to make?

Hint: see 'The determinants of quantity demanded: the demand function' on p38.Hint

11
Question 11

What variables would you include in the demand function for the following products?

(a) football matches;
(b) owner-occupied houses;
(c) coffee;
(d) lap top computers;
(e) clothes.

Hint: consider the content of pages 38-39 ('Individuals and motives', 'The nature of demand' and 'The determinants of quantity demanded: the demand function'). Identify which variables are common to each of the products listed (a) to (e) above and which are more product-specific.Hint

12
Question 12

The table below shows the number of biscuits demanded by Alice, William and Sarah at different prices.

(a) Fill in the gaps (download a word document to complete the table)

Price of biscuits

(in pence)

 Quantity of biscuits demanded by Alice Quantity of biscuits demanded by William Quantity of biscuits demanded by Sarah Total quantity of biscuits demanded
20p 30 50 9  
40p   40 8 73
60p 20 30 7  
80p 15 25   46
100p 10   5 35
120p 5   4 24
140p 0 12 3 15
160p   5   7
180p   2   3
200p       0

(b) Sketch out the demand curves for the three individuals.
(c) Draw the demand curve that measures the total demand for biscuits by the three individuals.

Hint: this task seeks to emphasise the relationship between individual demand curves and the market demand curve and is based on the material contained in pages 39-41 ('The demand schedule and the demand curve'). Hint


13
Question 13

Under what circumstances could a product be both normal and inferior at the same time?

Hint: re-read 'Changes in total income' on page 43 if you are unsure of what the two terms mean. Then think of the different consumers who might be buying the product.Hint

14
Question 14

Name ten products for which the weather is an important influence on the amount that is demanded. How might firms which produce these products react to this knowledge?

Hint: re-read the section on 'environmental factors' on page 43 and Box 3.2 (p44).Hint

15
Question 15

Assume that we have estimated a demand curve for a particular brand of motor car. Using a diagram, show the potential impacts of the following:

(a) a rise in the price of petrol;
(b) a rise in the price of the car;
(c) the release of a report that links car exhaust emissions to global warming;
(d) a fall in the price of the car;
(e) an advertising campaign by a competing car manufacturer;
(f) a general rise in incomes;
(g) the invention of a water-powered car;
(h) the introduction of a road congestion levy in all major cities;
(i) the introduction of a new model by a competing car manufacturer.

Hint: re-read 'Movements along demand curves versus shifts' pp43-45.Hint

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Question 16

On page 45 (Firms' Motives), the assumption that firms seek to profit maximise is noted as an analogous goal to utility maximisation by consumers. Can you think of any other objectives that a producer might follow? Intuitively, how might this affect output?

Hint: to help start answering this question, you may also wish to re-read pages 2-4 and 12-14.Hint

17
Question 17

On page 45, quantity supplied is defined as 'The amount of a product that firms are able and willing to offer for sale'. Why are the words 'able and 'willing' important to the definition?

Hint: re-read 'nature of supply' p45Hint

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Question 18

Assuming that we have estimated a supply curve for a particular brand of motor car. Using a diagram, show the potential impacts of the following:

(a) a rise in the price of cars;
(b) an improvement in car manufacturing technology that enables each car to be produced more cheaply;
(c) a rise in the price of labour;
(d) the introduction of a road congestion levy in all major cities;
(e) an increase in the price of iron ore;
(f) a fall in the price of cars.

Hint: re-read 'movements along supply curves versus shifts' pp47-48.Hint

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Question 19

Imagine that you are choosing to buy a new cd player. What are the advantages and disadvantages of buying it:

(a) from a high street departmental store;
(b) from a local family-run shop;
(c) from an internet-based seller.

Hint: re-read 'the concept of a market' p48Hint

20
Question 20

What do you understand by the 'law of price adjustment'?

Hint: re-read 'Changes in price when quantity demanded does not equal quantity supplied' p49.Hint

21
Question 21

Assume that we have estimated the demand curve and the supply curve for a particular brand of car. Draw diagrams to show the impact on the equilibrium price and equilibrium quantity of the following:

(a) a rise in consumers' incomes;
(b) a rise in the price of petrol;
(c) a successful advertising campaign by the car manufacturer;
(d) an improvement in car manufacturing technology that enables each car to be produced more cheaply;
(e) the introduction of a road congestion levy in all major cities;
(f) the introduction of a new model by a competing car manufacturer.

Hint: re-read 'The predictions of demand and supply analysis' pp51-52.Hint

22
Question 22

Why might governments choose to alter market outcomes?

Hint: re-read 'Government intervention in markets' pp55-57Hint

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Question 23

If the government chooses to impose a price ceiling within a market, how might the available supply be distributed amongst potential purchasers?

Hint: re-read 'allocation of available supply' p56.Hint