Activity 10

What is understood by market?

Group of buyers and sellers of a particular good or service. The buyers are the group that determines
the demand for the product.
Sellers are the group that determines the supply of that product.

Mechanism by which goods or services are exchanged between two groups of people. Those who buy that
For the purposes of economic study, those who demand are referred to as demand or demanders. Those who sell are called supply or suppliers.
offerers.

2. What are the assumptions of the perfect competition model?

Many buyers and sellers

Identical product or service

Demanders and suppliers price - acceptors

There are no restrictions to enter the industry.

Sellers and buyers are well informed about prices.

3. How is equilibrium established in the perfect competition model?

Situation in which opposing forces compensate each other. In markets, equilibrium occurs when the price makes
that the plans of buyers and sellers align with each other.

It occurs at the intersection of the demand and supply curve, in response to the dynamics of the laws of supply and demand.

4. What does the monopoly consist of?

Monopoly: it is when a single seller offers or provides that good, without competition, which gives it power over it.
market and can influence the price and conditions of the exchange.

5. The following are the supply and demand curves of the market for good A. Explain what happens if:

A) A price lower than the equilibrium price is given.

The D> O(S) indicates excess demand that occurs

translate in the scarcity of the good.

Qo Qd
A price higher than the equilibrium price is given.

The O (S) > D, there is excess supply that

translate in excess of the good.

Qd Qo

C) A technological improvement is introduced.

1. Which curve is affected: technology is a

determinant of the supply curve
2. Movement or displacement, external factor
P0
to the graphed (price and quantity)
Displacement
P1 3. Direction: improvement, increase, right
Rightward shift of the supply curve.
Result at the breakeven point:
Q0 Q1
So the price goes down and the quantity increases.
claimed (qd)

A sales tax is imposed.

1. Which curve does it affect: The sales tax

affects the seller. - Offer
2. Movement or displacement, external factor
to the graphed (price and quantity)
P1
Displacement
P0 3. Direction: decrease, left
Higher taxes on the seller, less supply, to the
left
Break-even result:
Q1 Q0 increase in price and decrease in quantity demanded (qd)

E) Salaries and interest rates are increased.

1. Which curve is affected: Wages and rates of

interest is the payment for the inputs (labor and
P1 capital, respectively).
So the production or costs rise
P0 supplies. - Offer
2. Movement or displacement, external factor
to the graphed (price and quantity)
Q1 Q0 Displacement
3. Direction: decrease, left
Higher production costs lead to a contraction in supply.
the left
Result at the break-even point:
Increase in price and decrease in quantity demanded (qd)
 F) People's preferences for good A improve.

1. Which curve does it affect: Preferences is a

determinant of the demand curve
2. Movement or displacement, external factor
P1
to the graphed (price and quantity)
P0
Displacement
3. Direction: improve, increase, right
Preferences improve, people want more
the good, right
Q0 Q1 Result at the break-even point:
Increase in price (pe) and the quantity demanded (qd)

G) Increase consumer income.

1. Which curve is affected: Income of the

consumers is a determinant of the curve of
P1
demand
2. Movement or displacement, external factor
P0 to the graphed (price and quantity)
Displacement
3. Direction: improve, increase, right
Income improves, people can buy
Q0 Q1 more, there is more demand.
Result at the break-even point:
Increase in price and the quantity demanded (qd)

6. The following are supply and demand data for good X, per unit of time:

Price 1 2 3 4 5 6 7 8

Qs 20 30 40 50 60 70 80 90

Qd 80 70 60 50 40 30 20 10

Graphically show the market equilibrium situation in each case: (Note: Each situation of the following is
independent from each other

A) Graph both curves and indicate the equilibrium point (Equilibrium price and quantity).
 10

6
Offer
4 Demand
2

0
0 50 100

Pe=4 Qe=50

B) What happens if a price of ¢3 is set?

10 The price of 3 is
less than the price
8 of balance.

6 The D> O(S) is given

Offer
excess demand
4 Demand what is translated in the
2 scarcity of the good, the
What is 40 and the Qd is
0 60
0 50 100

C) What happens if a price of ¢5 is set?

10
The price of 5 is
8 greater than the price
of equilibrium.
6
Offer When Qo > Qd, it occurs
4 Demand excess supply, the
2 what causes
surplus of the good,
0 What is 60 and the Qd is
0 50 100 40

D) Suppose the government imposes a maximum price of ¢2. How can the situation that arises be resolved?
presents?
 10
The maximum price of 2 is lower
8 that the pe, for what the
producers are not going to want
6 produce at that price and there is
Offer scarcity of the good, what it has
4 Demand What the government should do is help
to the affected sector with subsidies
2
or with advantages in
0 imports, just like
0 50 100 technology improvement plans.

E) Suppose that a disaster damaged the production plants of good X and now each quantity offered is ¢1
more expensive.
As the offered quantity is modified, the offer becomes 1 dollar more expensive, a new table must be created.
offer, but the quantity demanded is the same it has not changed

Price Oferta inicial Oferta actual Demand

1 20 80
2 30 20 70
3 40 30 60
4 50 40 50
5 60 50 40
6 70 60 30
7 80 70 20
8 90 80 10
9 90

10
9
8
7
6
5 Offer
4 Initial offer
3 Demand
2
1
0
0 20 40 60 80 100
Q

There is a new equilibrium point, the supply shifted to the left due to higher production costs. The new
punto de equilibrio es pe=4,5 y qe=45

F) Suppose that for some reason the quantity demanded increases by 10 units at each price.

In this case, by increasing the demand by 10 units at each price, it is necessary to develop a
new demand table. It is necessary to remember that it always starts from the initial equilibrium.
 Demand Demand
Price Offer
initial actual
1 20 80 90
2 30 70 80
3 40 60 70
4 50 50 60
5 60 40 50
6 70 30 40
7 80 20 30
8 90 10 20

9
8
7
6
5 Offer
4 Initial demand

3 Current demand

2
1
0
0 20 40 60 80 100

The demand curve shifts to the right due to an increase in the quantity demanded,
obtaining a new equilibrium point of pe=4.5 and qe=55.

G) Suppose that a new technology allows production at the following prices:

Price 1 2 3 4 5 6 7 8

Qs 30 40 50 60 70 80 90 100

5 Initial offer

4 Literal offer g
Initial demand
3

0
0 20 40 60 80 100 120
 There is a new supply curve, reaching a new equilibrium point of pe=3.5 and qe=55.

7. Given the demand curve for new cars, graphically show what happens to the demand for this good if:

A) The price of new cars increases

1. Which curve is affected: Only the ...

demand curve
2. Movement or displacement, factor is one
of the graphed (price) for what there is
movement not displacement.
3. Address: The price increases, only the graph is shown
effect.
Resultado :
Price increase, quantity demanded (qd) decreases

B) The price of fuels decreases

1. Which curve it affects: Only the

demand curve
2. Movement or displacement,
Fuels are decreasing, it is an external factor to
the plotted (price and quantity) for what there is
displacement.
3. Address: As it is a complementary good if
lower the price increases the quantity demanded of
gasoline and the quantity demanded of new cars.
Movement to the right
Result:
New demand curve

C) The price of used cars decreases

1. Which curve is affected: Only the

demand curve
2. Movement or displacement,
Used car market, another different from the one discussed,
it is an external factor to the graphed (price and
quantity) so there is displacement.
3. Direction: As it is a substitute good, if it decreases the
price increases the quantity demanded of used cars
and the quantity of new car demand decreases.
Left shift
Resultado :
New demand curve
 D) Taxes on used cars increase

Which curve is affected: Only the

demand curve
2. Movement or displacement,
Used car market, another one different from what was discussed,
it is an external factor to the graphed (price and
amount) so there is displacement.
3. Direction: As it is a substitute good, if they increase
taxes decrease the quantity demanded
of used cars and increases the demand quantity
of new cars.
Shift to the right
Resultado :
New demand curve

8. The following are data regarding the demand for good X:

Price Quantity

A 25 0

B 20 20

C 15 40

D 10 60

E 5 80

F 0 100

A) Plot the demand curve.

30
25
20
15
Quantity
10
5
0
0 50 100 150
 B) What is known as elasticity?

It is the measure that reflects the degree of sensitivity that the quantity supplied by producers has in response to variation.
of the market price.

C) What sign does the elasticity coefficient have?

The sign of the calculation is negative; however, for interpretation, it is used in absolute terms.

D) Calculate the price elasticity at each point.

(Q2-Q1) (P2-P1)
Quantity (Q2-Q1) Q2+Q1 Q2+Q1 Price (P2-P1) P2+P1 P2+P1 Elasticity
A 0 25

B 20 20 20 1.00 20 -5 45 -0.11 -9.00

C 40 20 60 0.33 15 -5 35 -0.14 -2.33
D 60 20 100 0.20 10 -5 25 -0.20 -1.00
E 80 20 140 0.14 5 -5 15 -0.33 -0.43
F 100 20 180 0.11 0 -5 5 -1.00 -0.11

We use the midpoint formula.

((Q2-Q1)/(Q2+Q1))/((P2-P1)/(P2+P1)) = E

9. Cite and describe how each of the determinants of demand for a good affect it.

Developed at the link: [Link]

10. Explain why the demand curve has a negative slope. Explain if there is a relationship between the
price elasticity of demand and the slope of the demand curve.

The demand curve has a negative slope because it relates the quantity demanded to the prices. When the price decreases,
Price increases the quantity demanded and conversely, when the price increases, the quantities demanded decrease.
it is a negative relationship.

There is a relationship between the slope and elasticity, since:

Slope Formula: Derivative of Quantity / Derivative of Price (dC/dP). Percentage changes in quantity.
provoked by a percentage change in price

Elasticity = (dC/dP) * P/C. Percentage change in quantity divided by a percentage change in price, multiplied by the price.
divided by the quantity.

Therefore, Elasticity = Slope * P/C.

11. The following are market demand data for margarine (in thousands of kilograms) for a certain
period in a certain economy.

Point Price $ Quantity

A 0 180

B 500 135

C 1000 100

D 1500 70
 E 2000 45

F 2500 25

G 3000 0

[Link] the demand curve.

Margarine Market

3500
3000
2500
2000
1500
1000
500
0
0 25 50 75 100 125 150 175 200
Demanded quantities

[Link] the price elasticity of demand at points A, C, D.

(Q2-Q1) (P2-P1)
Quantity (Q2-Q1) Q2+Q1 Q2+Q1 Price (P2-P1) P2+P1 P2+P1 Elasticity
A 180 0
B 135 -45 315 -0.14 500 500 500 1.00 -0.14
C 100 -35 235 -0.15 1000 500 1500 0.33 -0.45
D 70 -30 170 -0.18 1500 500 2500 0,20 -0.88
E 45 -25 115 -0,22 2000 500 3500 0.14 -1.52
F 25 -20 70 -0.29 2500 500 4500 0.11 -2.57
G 0 -25 25 -1.00 3000 500 5500 0.09 -11.00

[Link] what would happen if:

At no point is it said that one good is inferior to the other, so it is assumed that both are substitutes.
It doesn't matter to use margarine and butter.

We are analyzing the margarine market, so the answers should be in accordance with this.
market, like this:

The price of margarine decreases.

If the price of margarine decreases, the demand for margarine increases.

The price of butter decreases.

If the price of butter falls relative to the price of margarine, people prefer the price of
butter, and therefore the demand for margarine decreases.

Improve consumer income.

If incomes improve, the demand for margarine increases.

12. The fish market is in equilibrium, based on this situation analyze and determine graphically what
effect produced by the following events, (each event is independent).

P0

Q0

The government sets a minimum price on fish.

A technological improvement is introduced.

1. Which curve is affected: Minimum price is higher

all of equilibrium.
2. Movement or displacement, there is none
shift or movement because it is a failure
of the market
3. Address:
There is no movement or displacement
Result at the break-even point:
QD QS There is an excess of supply, an excess of the good, therefore
that prices must go down to sell.

b. The Ministry of Health initiates a campaign against the consumption of red meats (Analyze the incidence of this event)
about the red meat market and, subsequently, about fish.

The red meat market is affected

1. Which curve is affected: Change in preferences of

meat consumption, fewer people will desire red meat.
Preferences change demand.
2. Movement or displacement, external factor
to the graphed (price and quantity)
P0 Displacement
3. Direction: decrease, left
P1 Shift of the demand curve to the
left.
Result at the break-even point:
Q1 Q0 So the decrease in price also affects the quantity.
demand (qd)
 Fish market, being a protein substitute for meat, increases its demand.

Which curve is affected: low demand for goods

substitute to the demand
2. Movement or displacement, external factor
to the graphed (price and quantity)
P1
Displacement
P0
Direction: improvement, increase, right
Shift of the demand curve to the
right.
Result at the break-even point:
Q0 Q1 Raise the price and increase the quantity demanded
(qd)

13. Draw the supply and demand curves for good W. Explain what happens if (Explain graphically. Each situation)
is independent):

a. Increases consumer income.

1. Which curve is affected: Income is a determinant

of the demand
2. Movement or displacement, external factor
P1
to the graphs (price and quantity)
Displacement
P0
3. Direction: improvement, increase, right
Displacement of the curve intended for the
right.
Q0 Q1 Result at the break-even point:
Increase the price and increase the quantity demanded
(qd)

b. A technological improvement is introduced.

1. Which curve is affected: technology is a

determinant of the supply curve
2. Movement or displacement, external factor
P0
to the graphed (price and quantity)
Displacement
P1 3. Direction: improve, increase, right
Rightward shift of the supply curve.
Result at the breakeven point:
Q0 Q1
So the price drops and the quantity increases.
demanded (qd)
 A situation of scarcity of supply of the good occurs.

In the D> O(S) scenario, there is excess demand that

translate in the scarcity of the good.

Qo Qd

14. Suppose that the market for good X is perfectly competitive. Also assume that initially the price of
equilibrium is Po.

a. Cite at least four reasons why that price Po could rise or fall.
b. Take two of the causes you mentioned, and explain why they can alter the price Po.

c. If the prices of other goods different from X change, will the equilibrium price Po be altered or not?
Explain.

Developed in the link, we must look at the determinants of supply and demand.

15. According to theory, it is expected that if the price of gasoline rises, ceteris paribus, gasoline consumption
But if you observe a real situation and notice that despite the price having gone up, the quantity of gasoline sold
has increased. Will this empirical observation mean that theory is one thing and practice is another? Explain
clearly.

Ceteris Paribus means that all other variables remain constant, that is to say, a situation is created for
In reality, there are other factors that influence the markets.

16. Don Tomás López decreed a specific tax on certain products such as gasoline and sound equipment.
Jorge Monte stated that "producers will necessarily pass the total amount of the tax on to consumers."
Analyze and explain, with the relevant graphs, whether this statement is true or not.

It was not evaluated due to tax issues, a subject for a higher level.

17. Suppose you work for a consulting firm and there is interest from a group of companies.
natural fruit juice producers. Based on this information, answer what happens to the quantity and price of
equilibrium in each of the following items, explain and graph: (3p each, each item is independent of the others)
demás).

In the link, exercise 8 is [Link]://[Link]/[Link]

18. The following table shows the quantities demanded and supplied of coffee, per week in thousands of kilos, at each
precio:

Price offered quantity quantity demanded

200 30 70

300 40 60
 400 50 50

500 60 40

600 70 30

a. Determine the equilibrium price and quantity, and graph this situation.
800

600

400

200

0
0 20 40 60 80
Quantity

Offer Demand

PE: Precio 400, Cantidad= 50

b. Suppose that a new technology allows coffee to be produced cheaper. The quantity supplied increases by
20 units at each price. Determine the new price and equilibrium quantity. Graph this situation.
There are new supply tables and curves.
Offer
Offer Price new Demand
technology
200 30 50 70
300 40 60 60
400 50 70 50
500 60 80 40
600 70 90 30

700
600
500
400
300
200
100
0
0 20 40 60 80 100
Quantity

Offer Demand New technology offer

Nuevo PE, precio=300, cantidad=60

 A study reveals that coffee can be a harmful substance for health, which affects the quantity demanded.
decrease by 40 units at each price. Determine the new price and equilibrium quantity. Graph it.
situation.
Demand
Price Decreased Demand Offer
in 40
200 30 70 30
300 40 60 20
400 50 50 10
500 60 40 0
600 70 30

700
600
500
400
300
200
100
0
0 20 40 60 80
Quantity

Offer Demand Demand decreased by 40

Nuevo PE, precio=200, cantidad=30

d. Indicate what happens if a maximum price of 300 colones per kilo is established.
700
600
500
400
300
200
100
0
0 20 40 60 80
Quantity

Offer Demand

The quantity demanded is 60 and the quantity supplied is 40, resulting in an excess of demand and a shortage of the good.

e. Suppose a sales tax is imposed on coffee, and then each quantity offered is 200 colones more.
face.
This activity was not graded, it is a very advanced level for the course.

19. Through the appropriate use of the respective figures, illustrate and explain the effect of a per-unit tax on the
good x (incidence) for each of the following costs.

This activity was not graded; it is too advanced for the course.

20. If the price elasticity of demand is 2 and currently 100 units are sold at a price of $20, how many units
Will it be sold at the price of $21? Support your answer with the respective calculations.

Solved in the link and explained in the video conference

21. Suppose you manage an Internet Café. You charge a price of ¢300 per hour. Daily sales are made of
120 hours (total time that computers are used by customers). You have managed to estimate that the
The price elasticity of demand coefficient is 1.5

Explained in videoconference

22. Suppose you are the manager of a newsstand. Over the past few months, you have observed that when
the price of magazines is between ¢1800 and ¢2000, the demand is elastic. Additionally, at any of these prices always
There are some magazines left unsold.

a. Which of these two mentioned prices should be charged? Explain.

If the demand is elastic, people will buy much less if I raise the price of the good, so if I want
to sell more quantity, the price to sell more quantity should be 1800.

b. It is also known that if the average elasticity of demand is equal to 1.2 when the price is between ¢1400 and ¢1700,
And at the price of ¢1400, 40 magazines are demanded per day, how many magazines will be demanded at the price of ¢1700?

It is calculated like exercise 20, explained in the video conference and in the link.