Seminar 3 with Answers PDF

Chapter 2: Markets, Demand and Supply *1. For a particular week in June, three families - Smith, Jones and Brown - have the demand schedule for strawberries shown below. Assuming these three families comprise the whole market, calculate the market demand for strawberries and plot it on a graph. On...

Chapter 2: Markets, Demand and Supply *1. For a particular week in June, three families - Smith, Jones and Brown - have the demand schedule for strawberries shown below. Assuming these three families comprise the whole market, calculate the market demand for strawberries and plot it on a graph. On the same graph plot the supply function using the data in column A. What are the equilibrium price and equilibrium quantity?* Price per carton Quantity demanded Market demand Supply (normal weather) Supply (bumper crop) ------------------ ------------------- --------------- ------------------------- ---------------------- ---------- ---------- Smith Jones Brown Column A Column B 35 3 5 5 ? 8 11 40 3 5 4 ? 9 12 45 2 4 4 ? 10 13 50 1 4 3 ? 15 18 55 0 3 2 ? 20 23 *Now suppose that favourable weather conditions produce a bumper crop. Growers will now be willing to sell more at each of the old prices. This causes a shift of the whole supply function. Plot this new supply function from the data in column B. What are the new equilibrium price and quantity?* *2. House prices in Ealing as elsewhere are determined by market forces (or 'demand and supply'). Each of the factors below will affect either the demand for houses or the supply. What will be the probable effect on house prices of the following? (Assume ceteris paribus throughout and explain your answer).* *a) Banks and Building Societies adopt a less generous attitude to borrowers when granting loans for house purchase. Demand shifts left* *b) There are improvements in the A40, which links Ealing with Central London. Demand shifts right* *c) The local authority relaxes planning restrictions on new housing development. Supply shifts right* *d) House prices in Wembley (near Ealing) rise. Demand shifts right* *e) The cost of building new houses increases. Supply shifts left* *f) the Monetary Policy Committee raises interest rates by ¼ percent Demand shifts left* *g) there is renewed rioting and looting in Ealing town centre Demand shifts left* *3. The diagrams below illustrate the world market for wheat:* price supply increased demand demand quantity *Consider the diagram above. Here the demand curve has shifted to the right leading to an increase in prices and an increase in the amount traded. Which of following could lead to the effect shown in the diagram?* *a) renewed economic growth in Asia leading to rising income levels.* *b) increasing popularity of the Atkins "lo-carb" diet* *c) severe drought in the American mid-west (a major wheat producing area)* *Now consider the diagram below.* *This time the supply curve has shifted to the left indicating a reduced supply at each price. As a result equilibrium price rises and the equilibrium quantity falls. Which of the following could lead to the effect shown in the diagram?* *\ * *a) Supermarkets in the UK decide to offer bread as a "loss leader".* *b) global warming results in worsening climatic conditions in the growing areas.* *c) the EU gives bigger subsidies to farmers* reduced prices supply supply quantity *Now finally consider the diagram below.* *Which of following could lead to the effect shown in the diagram?* *a) a rise in the world price of other cereals* *b) the WTO prevents countries from giving subsidies to farmers* *c) the development of drought resistant strains of wheat.* prices supply increased supply demand quantity 4\. Why do the prices of fresh vegetables fall when they are in season? Could an individual farmer prevent the price falling? 5\. This question is concerned with the supply of oil for central heating. In each case consider whether there is a movement along the supply curve (and in which direction) or a shift in it (and whether left or right). *(a) New oil fields start up in production.* *(b) The demand for central heating rises.* *(c) The price of gas falls.* *(d) Oil companies anticipate an upsurge in demand for central heating oil.* *(e) The demand for petrol rises.* *(f) New technology decreases the costs of oil refining.* *(g) All oil products become more expensive.* \(a) Shift right. \(b) Movement up along (as a result of a rise in price). \(c) Movement down along (as a result of a fall in price resulting from a fall in demand as people switch to gas-fire central heating). \(d) Shift left (if companies want to conserve their stocks in anticipation of a price rise). \(e) Shift right (more of a good in joint supply is produced). \(f) Shift right. \(g) Movement up along. *6. The weekly demand and supply schedules for t-shirts (in millions) in a free market are as follows:* ***Price (£)*** **8** **7** **6** **5** **4** **3** **2** **1** --------------------- ------- ------- ------- ------- ------- ------- ------- ------- *Quantity demanded* 6 8 10 12 14 16 18 20 *Quantity supplied* 18 16 14 12 10 8 6 4 \(a) Equilibrium is where quantity demanded equals quantity supplied: *P* = £5; *Q* = 12 million. ***Price (£)*** **8** **7** **6** **5** **4** **3** **2** **1** --------------------- ------- ------- ------- ------- ------- ------- ------- ------- *Quantity demanded* 10 12 14 16 18 20 22 24 *Quantity supplied* 18 16 14 12 10 8 6 4 7\. On separate demand and supply diagrams for bread, sketch the effects of the following: (a) a rise in the price of wheat; (b) a rise in the price of butter and margarine; (c) a rise in the price of rice, pasta and potatoes. In each case, state your assumptions. *8. For what reasons might the price of foreign holidays rise? In each case identify whether these are reasons affecting demand or supply (or both).* - - - - - - *9. What will happen to the equilibrium price and quantity of butter in each of the following cases? You should state whether demand or supply (or both) have shifted and in which direction. (In each case assume ceteris paribus.)*