Download Solution Sheet for 1st exam-2016

Solution Sheet for 1st Exam 2016-17 session
1. What is demand and quantity of demanded?
The demand for a product is the amount that buyers are willing and able
to purchase at a given price.
Quantity demanded refers the quantity of a commodity that
buyers (consumers) are willing to buy at a particular price at a particular
point of time when other things constant.
2. What is ‘law of demand’?
The “law of demand” states that changes in the quantity demanded of a
good are inversely related to changes in its price.
3. What are the main factors (determinants) that change demand?
Explain how it works. The main factors (determinants) of demand are
 The prices of related goods [Substitutes (can serve as
replacements for one another) & Complements (go together)]
Example: For substitutes goods, if an increase in the price of one,
the demand for the other increase and demand curve shifts to
rightward and, conversely, if a decrease in the price of one shifts
the demand for the other good leftward (Example: Pepsi & Coca
Cola)
For complementary goods, if an increase in the price of one shifts
the demand for the other leftward and a decrease in the price of
one shifts the demand for the other rightward (car & petrol).
 Expected future prices, future income and credit: A change in
consumer expectations with respect to future prices, future incomes
& credit shifts current demand.
Example: If individuals expect income and credit to increase in the
future, current demand increases and demand curve shift
rightward. Vice versa also true.
If individuals expect prices to increase in the future, current
demand increases and demand curve shift rightward. Vice versa
also true.
 Income: A change in consumer income change current demand.
Example: Normal goods: the demand increases when income
increases and demand curve shift rightward. The demand
decreases when income decreases and demand curve shift leftward
(example: New car).
Inferior goods: the demand decreases when income increases and
demand curve shift leftward. The demand increases when income
decreases and demand curve shift rightward (example: Used car)
 Population (number of buyers and consumers): Increase in the
number of consumers, increase in market demand it means market
demand curve will shift rightward. Decrease in the number of
consumers, decrease in market demand it means market demand
curve will shift leftward.
 Preferences (tastes): A favorable change in consumer preferences
means If consumer preferences increase for a particular good then
more of this good will be demanded at each price. Demand will
increase and demand curve will shift rightward. An unfavorable
change in consumer preferences will decrease demand and
demand curve will shift leftward.
4. If people buy more of good 1 when the price of good 2 rises. What
types of goods are these?
If people buy more of good 1 when the price of good 2 rises, these goods
are substitute goods.
5. What is supply and quantity of supplied?
Supply refers how much of a particular good producers are willing and
able to sell at a given price during a given period.
Quantity supplied refers the quantity of a commodity that producers
are willing to sell at a particular price at a particular point of time when
other things constant.
6. Consider the figure above showing supply curves for soft drinks.
Suppose the economy is at point ‘a’. What is the reflection of a
movement to point ‘c’?
Suppose the economy is at point ‘a’. A movement to point ‘c’ reflects a
decrease in the price and quantity supplied of soft drinks.
7. Consider the figure above showing supply curves for soft drinks.
Suppose the economy is at point ‘a’. If the price of soft drinks
increase, the movement will be from point ‘a’ to which point?
If the price of soft drinks increase, the movement will be from point ‘a’ to
point ‘d’.
8. Consider the figure above showing supply curves for soft drinks.
Suppose the economy is at point ‘a’. If the price of sugar that used to
make soft drinks decrease, the movement will be from point ‘a’ to
which point?
If the price of sugar that used to make soft drinks decrease, the movement
will be from point ‘a’ to ‘b’.
9. Consider the figure above showing demand curves for fruit snacks.
Suppose the economy is at point ‘a’. Which movement reflects an
increase in demand?
The demand curve will move to the right when demand increase. The
movement from ‘a’ to ‘d’ reflects an increase in demand.
10. Consider the figure above showing demand curves for fruit snacks.
Suppose the economy is at point ‘a’. Which movement reflects a
decrease in demand?
The demand curve will move to the left when demand decrease. The
movement from ‘a’ to ‘c’ reflects a decrease in demand.
11. Consider the figure above showing demand curves for fruit snacks.
Suppose the economy is at point ‘a’. Which movement reflects a
decrease in quantity demanded but NOT a decrease in demand?
The quantity demanded will decrease when the price increase. The
movement from ‘a’ to ‘b’ reflects a decrease in quantity demand.
12. Consider the figure above showing demand curves for fruit snacks.
Suppose the economy is at point ‘a’. Which movement reflects an
increase in the price of a substitute for fruit snacks?
When the price of substitute good increase then demand will increase for
the fruit snakes. So it reflects the movement from ‘a’ to ‘d’.
13. Consider the figure above showing demand curves for fruit snacks.
Suppose the economy is at point ‘a’. Which movement reflects an
increase in the price of a complement for fruit snacks?
When the price of complementary good increase then demand will
decrease for the fruit snakes. So it reflects The movement from ‘a’ to ‘c’.
14. Consider the figure above showing demand curves for fruit snacks.
Suppose the economy is at point ‘a’. Which movement reflects how
consumers would react to an increase in the price of a fruit snack
that is expected to occur in the future?
An increase in the expected future price of fruit snake, right now demand
will increase. So it reflects the movement from ‘a’ to ‘d’.
15. Consider the figure above showing demand curves for fruit snacks.
Suppose the economy is at point ‘a’. Which movement reflects a
decrease in population?
When population (buyers/consumers) decrease then demand will
decrease and it reflects the movement from ‘a’ to ‘c’.
16. What is market equilibrium?
Market equilibrium refers a situation in which the supply of an item is
exactly equal to its demand. Since there is neither surplus nor shortage in
the Market. A price below the equilibrium price results in a shortage and
a price above the equilibrium price results in a surplus.
17. What is the market equilibrium price in the above figure?
The equilibrium price is $6.
18.What is the market equilibrium quantity in the above figure?
The equilibrium quantity is 300 units.
19. What is the market situation at a price of $10 in the above figure?
The surplus will occur by 400 units (supply is 500 but demand is 100. So
surplus = 500 – 100 = 400).
20. What is the market situation at a price of $4 in the above figure?
The shortage will occur by 200 units (demand is 400 but supply is 200. So
shortage = 400 – 200 = 200).
21. What are the main factors (determinants) that change demand?
Explain how it works. The main factors (determinants) of demand are
a. Prices of Relevant Resource (Factors of production)
Relevant resources are those employed in the production of the good in
question. If the price of some relevant resource increases then production
cost increase. As a result the amount of production will decrease and
supply decreases. The supply curve shifts to the left.
If the price of some relevant resource decreases then production
cost decrease. As a result the amount of production increase and supply
increases. The supply curve shifts to the right.
b. Technology
If a more efficient technology is discovered, same resource can produce
more. The suppliers will be more willing and able to supply the good and
the supply curve will move to the rightward.
If firm does not use technology, the production will be less. The
supply will be less and the supply curve will move to the left.
c. Prices of Related Goods produced
If the price of substitute good increase, the supply of the original good
decrease and decrease the price of substitute good will lead higher the
supply of original good. For example, if the price of Soybean oil
increases then firm will use more resources to produce it and less
resources to produce corn oil. The supply of corn oil declines and supply
curve for corn oil shifts leftward. Conversely, a fall in the price of
soybean makes corn oil production more profitable. The supply for corn
oil increases and supply curve shifts rightward.
If the price of complementary good increase, the supply of the
original good increase and decrease the price of complementary good
will lead lower the supply of original good.
d. Producer Expectations on future prices.
Changes in producer expectations with respect to the future can change
current supply. If suppliers expect higher prices in the future, they may
begin to stock their product today current supply decreases  supply
curve shifts leftward.
If suppliers expect lower prices in the future, they will try to sell all
of their products today current supply increases  supply curve shifts
rightward.
e. Number of Sellers (suppliers)
If the number of producers increases, supply increases  supply curve
shifts to the right. If the number of producers decreases, supply will
decrease  supply curve shift to the left.
f. Taxes, Subsidies, & State of Nature
Businesses treat most taxes as costs. An increase in sales or property
taxes will increase production costs and reduce supply, supply curve
shifts leftward. Vice versa also true. If government subsidizes the
production of a good, it reduce the producers production costs and
supply increase and supply curve shifts rightward. Vice versa also true.
The state of nature includes all the natural forces that influence
production—for example, the weather. Any favorable natural forces
increases amount of production which turn to increase supply and shifts
the supply curve rightward. Any unfavorable natural forces decreases
amount of production which turn to decrease supply and shifts the supply
curve leftward.