Student’s name: Nguyễn Đỗ Trang Nhã

Class: IP_22DQT01

Chapter 4 : Market Forces of Supply and Demand

Section A

1. If buyers and sellers in a certain market are price takers, then individually
a. they have no influence on market price.
b. they have some influence on market price, but that influence is limited.
c. buyers will be able to find prices lower than those determined in the market.
d. sellers will find it difficult to sell all they want to sell at the market price.

 Explain: If there are an infinite number of sellers and buyers in a market then each seller and
buyer takes the market price as given. It implies that the sellers sell the product at the price
determined by the market and the buyers buy the product at the market-determined price. So no
single buyer or seller has any control or command over the price of the product. In other words,
no buyer or seller can influence the market price of the product. Thus sellers and buyers become
price takers as they take the market price as given. If buyers and sellers are price takers, they
individually can not influence the market price. So the correct option is (a).

2. Two goods are substitutes if a decrease in the price of one good

a. decreases the demand for the other good.
b. decreases the quantity demanded of the other good.
c. increases the demand for the other good.
d. increases the quantity demanded of the other good.
 Explain: Substitutes are goods that can be used or consumed in place of each other. For instance,
tea and coffee are substitutes. An individual will consume one or the other, not both. When the
price of a substitute good increases, the demand of the other good increases. Similarly, when the
price of one good decreases, the demand of the other good decreases. The demand changes
because there is a shift in the demand curve for the other good. As one good is now relatively
cheaper, people substitute buying/consuming the other good for the cheaper good. The demand
curve shifts to the left. So, the option (a) is correct.

3. The law of demand says that

a. an increase in quantity demanded causes price to decrease.
b. an increase in price causes quantity demanded to increase.
c. an increase in price causes quantity demanded to decrease.
 Explain: The price and quantity demanded has an indirect relationship. The law of demand
states that when the price of a product increases, the quantity demand decreases and when
the price decreases, the quantity demanded increases. Spending power of an average
consumer is limited.
4. Which of the following events would cause a movement upward and to the right
along the supply curve for tomatoes?
a. The number of sellers of tomatoes increases.
 b. There is an advance in technology that reduces the cost of producing
tomatoes.
c. The price of fertilizer decreases, and fertilizer is an input in the production
of tomatoes.
d. The price of tomatoes rises.

5. Which of the following events could cause an increase in the supply of ceiling
fans?
a. The number of sellers of ceiling fans increases.
b. There is an increase in the price of air conditioners, and consumers regard
air conditioners and ceiling fans as substitutes.
c. There is an increase in the price of the motor that powers ceiling fans.
d. All of the above are correct.

6. If, at the current price, there is a shortage of a good,

a. sellers are producing more than buyers wish to buy.
b. the market must be in equilibrium.
c. the price is below the equilibrium price.
d. quantity demanded equals quantity supplied.

7. A decrease in input costs to firms in a market will result in

a. a decrease in equilibrium price and a decrease in equilibrium quantity.
b. an increase in equilibrium price and no change in equilibrium quantity.
c. an increase in equilibrium price and an increase in equilibrium quantity.
d. a decrease in equilibrium price and an increase in equilibrium quantity.

8. Suppose that demand decreases and supply decreases. What would you expect to
occur in the market for the good?
a. Equilibrium price would increase, but the impact on equilibrium quantity
would be ambiguous.
b. Equilibrium price would decrease, but the impact on equilibrium quantity
would be ambiguous.
c. Equilibrium quantity would decrease, but the impact on equilibrium price
would be ambiguous.
d. Both equilibrium price and equilibrium quantity would increase.

9. Which of the following would not be a determinant of the demand for a particular
good?
a. prices of related goods
b. income
c. tastes
d. the prices of the inputs used to produce the good

10. Two goods are complements if a decrease in the price of one good
a. decreases the quantity demanded of the other good.
b decreases the demand for the other good.
.
 c. increases the quantity demanded of the other good.
d. increases the demand for the other good

11. Two goods are substitutes if a decrease in the price of one good
a. decreases the demand for the other good.
b. decreases the quantity demanded of the other good.
c. increases the demand for the other good.
d. increases the quantity demanded of the other good.

12. Proton Berhad announces that it will offer RM3,000 rebates on new Waja starting
next month. As a result of this information, today’s demand curve for Waja
a. shifts to the right.
b. shifts to the left.
c. shifts either to the right or to the left, but we cannot determine the direction
of the shift from the given information.
d. will not shift; rather, the demand curve for Mustangs will shift to the right
next month.

13. Which of the following is consistent with the law of demand?

a. An increase in the price of a tape causes an increase in the quantity of tapes
demanded.
b. An increase in the price of a soda causes a decrease in the quantity of soda
demanded.
c. A decrease in the price of a gallon of milk causes a decrease in the quantity
of milk demanded.
d. A decrease in the price of juice causes no change in the quantity of juice
demanded.

14. A drop in the price of a compact disc shifts the demand curve for prerecorded tapes
leftward. From that you know compact discs and prerecorded tapes are
a. complements.
b. substitutes.
c. inferior goods.
d. normal goods.

15. A reduction in the price of a good

a. shifts the good’s demand curve leftward and also decreases the quantity
demanded.
b. shifts the good’s demand curve leftward but does not decrease the quantity
demanded.
c. does not shift the good’s demand curve leftward but does decrease the
quantity demanded.
d. neither shifts the good’s demand curve leftward nor decreases the quantity
demanded.
16.

The figure above represents the market for

candy. People become more concerned that
eating candy causes them to gain weight,
which they do not like. As a result, the

a. demand curve shifts from D2 to D1 and the supply curve will not shift.
b. demand curve shifts from D1 to D2 and the supply curve shifts from S1 to S2.
c. demand curve shifts from D2 to D1 and the supply curve shifts from S2 to S1.
d. demand curve will not shift, and the supply curve shifts from S1 to S2.

17. Which of the following correctly describes how price adjustments eliminate a
shortage?
a. As the price rises, the quantity demanded decreases while the quantity
supplied increases.
b. As the price rises, the quantity demanded increases while the quantity
supplied decreases.
c. As the price falls, the quantity demanded decreases while the quantity
supplied increases.
d. As the price falls, the quantity demanded increases while the quantity
supplied decreases.

18. Goods A and B are complementary goods (in consumption). The cost of a resource
used in the production of A decreases. As a result,
a. the equilibrium price of B will fall and the equilibrium price of A will rise.
b. the equilibrium price of B will rise and the equilibrium price of A will fall.
c. the equilibrium prices of both A and B will rise.
d. the equilibrium prices of both A and B will fall.

19. The demand for hot dogs is given by QD = 8000 – 7000P, where QD is the quantity
demanded and P is the price in dollars. The supply for hot dogs is given by
QS = 4000 + 1000P, where QS is the quantity supplied and P is the price in dollars.
Given these supply and demand relationships,
a. At the equilibrium, the price = $0.50 and the quantity = 4500 hot dogs.
b. At a price of $1, there is a shortage of 4000 hot dogs.
c. At a price of $1, there is a surplus of 4000 hot dogs.
d. Both answers A and C are correct.

Section B
Question 1 Outline the main determinants of quantity demanded and quantity supplied, and
explain how these interact to determine the market price.

When the price of the

good changes and
everything else remains
the same, there is a
movement along the
demand curve and a
change in the quantity
demanded. The
changes to the price
which affected the
quantity demanded are
due the change in the
supply of the good. When
supply increases due to,
for example, a fall in the
price of
inputs or improvement in
the technology causing
the price of the good to
fall and
quantity demanded to
increase.
When the price of the
good changes and
everything else remains
the same, there is a
movement along the
supply curve and a
change in the quantity
supplied. The changes
to the price which
affected the quantity
supplied are due the
change in the demand for
the good. When demand
increases due to, for
example, a fall in the
price of
complements or an
increase in the price of
substitutes causing the
price of the good to
increase and quantity
supplied to increase.
Equilibrium in a market
occurs when the price
balances the plans of
buyers and
sellers. The equilibrium
price is the price at which
the quantity demanded
equals the
quantity supplied. The
equilibrium quantity is the
quantity bought and sold
at the
equilibrium price
  When the price of the good changes and everything else remains the same, there is a
movement along the demand curve and a change in the quantity demanded. The changes
to the price which affected the quantity demanded are due the change in the supply of the
good. When supply increases due to, for example, a fall in the price of inputs or
improvement in the technology causing the price of the good to fall and quantity demanded
to increase.
 When the price of the good changes and everything else remains the same, there is a
movement along the supply curve and a change in the quantity supplied. The changes to
the price which affected the quantity supplied are due the change in the demand for the
good. When demand increases due to, for example, a fall in the price of complements or an
increase in the price of substitutes causing the price of the good to increase and quantity
supplied to increase.
 Equilibrium in a market occurs when the price balances the plans of buyers and sellers. The
equilibrium price is the price at which the quantity demanded equals the quantity supplied.
The equilibrium quantity is the quantity bought and sold at the equilibrium price.

Question 2 Given the following demand and supply functions of product X (units/day).

Demand : Qd = 20 – 2P

Supply : Qs = 2 + 4P

a) Currently, price = 2, is the market in equilibrium? if not, is there a shortage and surplus
and how many units?

b) a) Currently, price =
2, is the market in
equilibrium? if not, is
there a shortage and
c) surplus and how many
units?
d) P=2, Qs = 2+4(2) =
10
e)
Qd = 20-2(2) = 16
f)
g) Qd> Qs, so
the market is not in
equilibrium.
h) Shortage = 6
units.
P=2, Qs = 2+4.(2) = 10 Qd = 20-2.(2) = 16

=> Qd> Qs, so the market is not in equilibrium.

=> Shortage = 6 units.

b) Graph the demand and supply. Label the equilibrium price and equilibrium quantity.

Equilibrium is where Qd = Qs, solving 20-2P = 2+4P  6P = 18  P = 3

 Qd = 20 – 2.(3) = 14

Question 3
Suppose that the demand and supply for standard microwaves is described by the following
equations: QD = 20,000 – 100P and QS = –1,000 + 50P where P is the price in dollars; QD is
the quantity demanded in units per month; QS is the quantity supplied in units per month.

a) Solve for the equilibrium price and quantity.

 At equilibrium: QD = QS  20,000 – 100P = –1,000 + 50P
 21,000 = 150P
 P = 140
 The equilibrium price is $140 per unit.
 QD = 20,000 – 100(140) = 6,000 or QS = –1,000 + 50(120) = 6,000
 The equilibrium quantity is 6,000 units per month.

b) Determine the price the buyers pay and the price the sellers receive if a $30 unit tax is
imposed on the sellers.

c) QD = 20,000 – 100P
d) QS1 = –1,000
+ 50(P – 30) = -1000 +
50P -1500 = -2500 +
50P
e) New
equilibrium
f) QD = QS1
g) 20000 – 100P
= -2500 + 50P
h) 150P =
22500
i) Pe1 =
22500/150 = $150 per
unit = Pb1
j) Ps1 = Pb1
– Tax = $150 - $30 =
$120 per unit.
k) QS = –1,000 + 50(P –
30) new supply
l) 20,000 – 100P = –
1,000 + 50(P – 30)
m) 20,000 – 100P = –
1000 + 50P – 1500
n) 22,500 = 150P
o) P=$150
p) The consumer will pay
$150 per unit.
q) QD = 20,000 –
100(150) = 5,000 or
QS = –1,000 + 50(150 –
30) = 5,000
r) The equilibrium
quantity is 5,000 units
per month.
s) 5000 = –1,000 +
50(P)
t) 6000 = 50P
u) P =$120
v) The producer will
receive $120 per unit.
 QD = 20,000 – 100P
 QS1 = –1,000 + 50(P – 30) = -1000 + 50P -1500 = -2500 + 50P
 New equilibrium: QD = QS1  20000 – 100P = -2500 + 50P
 150P = 22500
 P1 = 22500/150 = $150 per unit = Pb1
=> Ps1 = Pb1 – Tax = $150 - $30 = $120 per unit.

 QS = –1,000 + 50(P – 30) (new supply)

 20,000 – 100P = –1,000 + 50(P – 30)
 20,000 – 100P = –1000 + 50P – 1500
 22,500 = 150P
 P=$150 => The consumer will pay $150 per unit.
  QD = 20,000 – 100(150) = 5,000 or QS = –1,000 + 50(150 – 30) = 5,000
 The equilibrium quantity is 5,000 units per month.
5000 = –1,000 + 50(P)
 6000 = 50P
 P =$120 => The producer will receive $120 per unit.
Question 4
Below you find a demand schedule for ice cream cones for June, July and August. A, B and C
are three different consumers.
Price A B C
$2 40 30 10
$3 30 22 8
$4 20 18 2
a) Draw a market demand schedule for ice cream cones.

b) The current market price is $3. What is market demand at this price?
 If the current market price is $3, the demand will be 60 ice-cream.
c) Show on your diagram what happens to the market demand curve when market demand
declines by 20 percent owing to cold, rainy weather.

d) The market demand

curve shifts to the left.
Textbooks always
illustrate changes in
e) demand with the help
of a parallel shift of the
demand curve. It is
noteworthy that a
f) 20-percent decline in
demand does not lead
to a parallel shift.
g) The market demand
curve shifts to the left.
Textbooks always
illustrate changes in
h) demand with the help
of a parallel shift of the
demand curve. It is
noteworthy that a
 i) 20-percent decline in
demand does not lead
to a parallel shift.
j) The market demand
curve shifts to the left.
Textbooks always
illustrate changes in
k) demand with the help
of a parallel shift of the
demand curve. It is
noteworthy that a
l) 20-percent decline in
demand does not lead
to a parallel shift.
 The market demand curve shifts to the left. Textbooks always illustrate changes in demand
with the help of a parallel shift of the demand curve. It is noteworthy that a 20-percent
decline in demand does not lead to a parallel shift.
Question 5
The following is a supply table for trading cards. Price is stated in terms of price per package
of 10. Quantity is package per week.
a. Determine the market supply for trading cards using the table.
Price Quantity supplied
s
$1 26
$2 32
$3 39
$4 51
$5 67
$6 83

b. What is the relationship between price and market quantity supplied? What two things
accounts for this relationship?
As price rises, market quantity supplied also rises. The ability of the existing producers to
substitute the production of one product for another product and also with the entry of new sellers
into the market account for this relationship.

Section C
Question 1
Using supply and demand analysis, explain the effect on the equilibrium price and quantity
traded of houses in a country of each of the following events. (Consider each event
separately.)

(a) A rise in real incomes.

 Initial market demand and supply are represented by the demand curve Do and
supplycurve S. The market initial equilibrium point is at eo and the corresponding
equilibrium price and quantity are Op* and Oq* respectively.

 A rise in real incomes is likely to

lead to an increase in the demand for
houses since housing is generally
regarded as a normal good. This will
cause the demand curve to shift
outwards from D0 to D1 in the
diagram above. The new market
equilibrium is now at e1, where D1
intersects S. This causes the
equilibrium price and quantity
traded of the good to rise.

 The effect of an increase in the

demand for houses is that both the variables moves thesame direction, that is, both
the price of houses and quantity demanded for houses increases. The new
equilibrium price and quantity for houses are Op** and Oq** respectively.
 (b) A fall in the rate of interest on loans for house purchases for an extended period of time.
 Initial market demand and supply are represented by the demand curve Do and supply curve S.
The market initial equilibrium point is at eo and the corresponding equilibrium price and
quantity are Op* and Oq* respectively.
 A fall in the rate of interest on loans would
most likely increase the demand for houses.
This will cause the demand curve to shift
outwards from D0 to D1 in the diagram above.
This causes the equilibrium price and quantity
traded of the good to rise. The new market
equilibrium is now at e1, where D1 intersects
S. This causes the equilibrium price and
quantity traded of the good to rise.

 The effect of an increase in the demand for

houses is that both the variables moves the
same direction, that is, both the price of houses
and quantity demanded for houses increases. The new equilibrium price and quantity for houses
are Op** and Oq** respectively.

(c) A rise in the level of taxes to be paid on the sale of a house.

 Initial market demand and supply are represented by the demand curve D and supply curve
So. The market initial equilibrium point is at eo and the corresponding equilibrium price and
quantity are Op* and Oq* respectively.
 A rise in the level of taxes paid on the
sale of a house would reduce supply
since the net price received by sellers
would fall and thus less people would
want to sell their house at any given
price. This will cause the supply curve
to shift backwards from S0 to S1 in
the diagram above. This causes the
equilibrium price to rise and quantity
traded of the good to fall.
 The new market equilibrium is now at
e1, where D intersects S1. This causes
the equilibrium price to increase and
quantity traded of the good to decline.
 The effect of a decline in the supply of houses is that the variables move the opposite
direction, that is, the price of houses increases and quantity of houses decreases. The new
equilibrium price and quantity for houses are Op** and Oq** respectively.
(d) The relaxation of planning controls allowing more land to be used for building new
houses.

Initial market demand and

supply are represented by
the demand curve D and
supply
curve So. The market
initial equilibrium point is
at eo and the
corresponding
equilibrium price and
* *
quantity are Op and Oq
respectively.
A relaxation of planning
controls allowing more
land to be used for
building would
decrease the costs that
house builders face
causing supply to
increase. This will cause
the supply curve to shift
outwards from S0 to S1 in
the diagram above. This
causes the
equilibrium price to fall
and quantity traded of the
good to rise.
The new market
equilibrium is now at e1,
where D intersects S1.
This causes the
equilibrium price to
decline and quantity
traded of the good to rise.
The effect of a decline in
the supply of houses is
that the variables move
the opposite
direction, that is, the price
of houses decreases and
quantity of houses
increases. The
new equilibrium price and
quantity for houses are
** **
Op and Oq respectively.
  Initial market demand and supply are represented by the demand curve D and supply curve
So. The market initial equilibrium point is at eo and the corresponding equilibrium price and
quantity are Op* and Oq* respectively.
 A relaxation of planning controls
allowing more land to be used for
building would decrease the costs that
house builders face causing supply to
increase. This will cause the supply
curve to shift outwards from S0 to S1 in
the diagram above. This causes the
equilibrium price to fall and quantity
traded of the good to rise.

 The new market equilibrium is now at

e1, where D intersects S1. This causes
the equilibrium price to decline and
quantity traded of the good to rise.

 The effect of a decline in the supply of houses is that the variables move the opposite
direction, that is, the price of houses decreases and quantity of houses increases. The new
equilibrium price and quantity for houses are Op** and Oq** respectively.

Question 2
Using supply and demand analysis, consider the effect on the market price and quantity
traded of beef traded in a country following:
a. An outbreak of a disease which affects the beef stock in the country.
 Given a market for beef with demand
curve (D) and supply curve (S) and
initial equilibrium (price, quantity)
combination (p, q), an outbreak of
disease affecting the beef stock will
result in a backward shift in the supply
curve for beef, to S’, yielding anew
equilibrium (p’, q’): price increases and
the quantity traded decreases.

b. The introduction of new regulation for

beef production which raises the cost of supplying beef.
m) Given a market for
beef with demand curve
(D) and supply curve (S)
and initial
n) equilibrium (price,
quantity) combination
(p, q), an increase in
the costs of producing
o) beef will result in a
backward shift in the
supply curve for beef to
S’, yielding a new
p) equilibrium (p’, q’):
price increases and the
quantity traded
decreases.
 Given a market for beef with demand
curve (D) and supply curve (S) and
initial equilibrium (price, quantity)
combination (p, q), an increase in the
costs of producing beef will result in a
backward shift in the supply curve for
beef to S’, yielding a new equilibrium
(p’, q’): price increases and the quantity
traded decreases.

c. An effective advertising campaign

promoting the consumption of beef.
 Given a market for beef with demand
curve (D) and supply curve (S) and
initial equilibrium (price, quantity)
combination (p, q), a successful
advertising campaign for beef will result
in an outward shift in the demand curve
for beef to D’, yielding a new
equilibrium (p’, q’): price and quantity
traded increase.