Demand and Supply
Market Equilibrium
Practice Questions
ECON2113 Microeconomics (L1/L7)
Tutorial Two
Jeremy TO
Department of Economics, HKUST
Jeremy TO ECON2113 Microeconomics (L1/L7)
Demand and Supply
Market Equilibrium
Practice Questions
Perfectly Competitive market
Important Assumptions:
It is a market with numerous buyers and sellers.
There is no barriers to entry or exit.
Buyers and sellers have perfect information.
All sellers are selling homogeneous good and have no market
power (Price Takers).
Jeremy TO ECON2113 Microeconomics (L1/L7)
Demand and Supply
Market Equilibrium
Practice Questions
Demand
Quantity Demanded: It is the amount of good and service
that consumers plan to buy during a given time period at a
particular price.
The Law of Demand: It states that other things remaining
the same, the higher the price of a good, the smaller is the
quantity demanded, and vice versa.
Demand Curve: It shows the relationship between the
quantity demanded of a good and its price when all other
influences on consumers’ planned purchases remain the same.
Deriving market demand: Horizontal summation
Jeremy TO ECON2113 Microeconomics (L1/L7)
Demand
A Change in Demand
When any factor that influences buying plans other than the
price of the good changes, there is a change in demand and
the demand curve shifts. An increase in demand shifts the
demand curve rightward and a decrease in demand shifts the
demand curve leftward.
Factors that change the demand:
Prices of Related Goods
Expected Future Prices
Income
Expected Future Income and Credit
Population and Preferences.
A Change in the Quantity Demanded Versus a Change in
Demand
A change in price results in a movement along the demand
curve, which is change in the quantity demanded. A change
in other factors shifts the demand curve, which is a change in
demand.
Demand and Supply
Market Equilibrium
Practice Questions
Supply
Quantity Supplied: It is the amount of a good or service that
firms plan to sell during a given time period at a particular
price.
The Law of Supply: It states that other things remaining the
same, the higher the price of a good, the greater is the
quantity supplied, and vice versa.
The law of supply occurs because an increase in the quantity
of a good produced results in an increase in its marginal cost.
So the price must rise in order to induce firms to increase the
quantity they produce.
Supply curve: It shows the relationship between the quantity
supplied of a good and its price when all other influences on
producers’ planned sales remain the same.
Deriving market supply: Horizontal summation
Jeremy TO ECON2113 Microeconomics (L1/L7)
Supply
A Change in Supply
When any factor that influences selling plans other than the
price of the good changes, there is a change in supply and the
supply curve shifts. An increase in supply shifts the supply
curve rightward and a decrease in supply shifts the supply
curve leftward.
Factors that change the supply:
Prices of Productive Resources
Expected Future Prices
Number of Suppliers
Technology and The State of Nature
A Change in the Quantity Supplied Versus a Change in
Supply
A change in price results in a movement along the supply
curve, which is change in the quantity supplied. A change in
other factors shifts the supply curve, which is a change in
supply.
Demand and Supply
Market Equilibrium
Practice Questions
Determination of Market Equilibrium
An equilibrium: It is a state in which there is no tendency to
change.
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.
Jeremy TO ECON2113 Microeconomics (L1/L7)
Demand and Supply
Market Equilibrium
Practice Questions
Price Mechanism
The price of a good regulates the quantities demanded and
supplied.
Shortage: If the price is below the equilibrium price,
consumers plan to buy more than firms plan to sell. A
shortage results, which forces the price higher, toward the
equilibrium price.
Surplus: If price is above the equilibrium, firms plan to sell
more than consumers plan to buy. A surplus results, which
forces the price lower, toward the equilibrium price.
The price continues to adjust until the quantity supplied equals
quantity demanded.
Under the price mechanism, whenever there is a shortage or a
surplus in the market, the market price will adjust
automatically to eliminate the shortage or the surplus.
Jeremy TO ECON2113 Microeconomics (L1/L7)
Demand and Supply
Market Equilibrium
Practice Questions
Predicting Changes in Equilibrium Price and Quantity
Change in Demand Only ⇑ ⇑ ⇓ ⇓
Effect on equilibrium price ↑ ↑ ↓ ↓
Effect on equilibrium quantity ↑ ↑ ↓ ↓
Change in Supply Only ⇑ ⇓ ⇑ ⇓
Effect on equilibrium price ↓ ↑ ↓ ↑
Effect on equilibrium quantity ↑ ↓ ↑ ↓
Change in Demand and Supply
Effect on price Uncertain ↑ ↓ Uncertain
Effect on quantity ↑ Uncertain Uncertain ↓
Jeremy TO ECON2113 Microeconomics (L1/L7)
Demand and Supply
Market Equilibrium
Practice Questions
Problem 1
The demand and supply schedules for gum are in the table.
Price(Cents) Quantity Demanded Quantity Supplied
(Millions Of Packs A Week) (Millions Of Packs A Week)
20 180 60
40 140 100
60 100 140
80 60 180
(1) Suppose that the price of gum is 70 cents a pack.
Describe the situation in the gum market and explain how the
price adjusts.
(2) Suppose that the price of gum is 30 cents a pack.
Describe the situation in the gum market and explain how the
price adjusts.
Jeremy TO ECON2113 Microeconomics (L1/L7)
Problem 1
A fire destroys some factories that produce gum and the quantity of
gum supplied decreases by 40 million packs a week at each price.
(3) Explain what happens in the market for gum and draw a
graph to illustrate the changes.
(4) If, at the time as the fire the teenage population increases
and the quantity of gum demanded increases 40 million packs
a week at each price. What is the new market equilibrium?
Show the changes on your graph.
Demand and Supply
Market Equilibrium
Practice Questions
Problem 2
Think about the demand for the three game consoles: Xbox One,
PlayStation 4, and Nintendo Switch. Explain the effect of the
following events on the demand for Xbox One games and the
quantity of Xbox One games demanded, other things remaining the
same. The events are:
(1) The price of an Xbox One falls.
(2) The prices of a PlayStation 4 and a Nintendo Switch fall.
(3) The number of people writing and producing Xbox One
games increases.
(4) Consumers’ incomes increase.
(5) Programmers who write code for Xbox One games become
more costly to hire.
(6) The expected future price of an Xbox One game falls.
(7) A new game console that is a close substitute for Xbox
One comes onto the market.
Jeremy TO ECON2113 Microeconomics (L1/L7)
Demand and Supply
Market Equilibrium
Practice Questions
Problem 3 (Optional)
Suppose that the market demand for oil is
P = 800 − 2Q d
There are three identical suppliers in the oil market, each of which
has the following individual supply of oil:
P = 200 + 3Q s
The price of oil is expressed in dollars, and the quantities are
expressed in barrel of oil per day.
(1) Draw a graph of the oil market, label the axes and the
curves, and mark in the equilibrium price and quantity.
Calculate the market equilibrium price and quantity.
(2) Calculate the consumer surplus, the producer surplus, and
the total surplus. Determine whether the market equilibrium is
efficient or inefficient. Explain.
Jeremy TO ECON2113 Microeconomics (L1/L7)