Topic Two: Demand, Supply and Elasticity

1.(a) Suppose the demand and supply curves for good X are as follows: QD = 200 - 5P QS = -25 + 4Pwhere P is in dollars per unit of X.

(i)Sketch the demand and supply curves.

(ii)What does "ceteris paribus" mean in relation to the demand curve above? (iii)In this example, what is the equilibrium price of X, quantity supplied and demanded, total purchasers' expenditure on X and total revenue received by sellers?

(b) At a later period it is found that the supply function for X is: QS = -7 + 4P (i)What is the new equilibrium price and what quantities are bought and sold in equilibrium?

(ii)Does the fall in the equilibrium price, which follows this shift of the supply curve, shift the demand curve and hence raise the consumption of X?

2.Suppose the demand and supply curves for good Y are as follows: QD =600 - 7.5P QS = -100 + 10Pwhere P is price per kg measured in dollars and Q is quantity measured in ‘000kgs

(a) Sketch the demand and supply curves for good Y. (b) Determine the equilibrium price and quantity. (c) If the price of a substitute good for Y were to increase, outline the effect that this would have on the demand and supply curves you have drawn. What effect would it have on the equilibrium price and quantity?

(d) Assume that at the same time as (c) the price of labour used to produce good Y increased. Outline the combined effect that these would have on the demand and supply curves you have drawn. What effect would this have on the equilibrium price and quantity?

3.Suppose the demand and supply curves for good Z are as follows: QD = 15 - 1.5P QS = 0 + 1.0Pwhere P is the price per litre measured in dollars

and Q is the quantity measured in ‘00litres

(a)Sketch the demand and supply curves.

(b)Determine the equilibrium price and quantity.

(c)Explain the meaning of a consumer surplus, and calculate the value at the equilibrium price.

(d)Explain the meaning of a producer surplus, and calculate the value at the equilibrium price.

4.Assume the number of bicycles demanded and supplied in Victoria, at various prices, is as follows:

Price of BicycleQuantity DemandedQuantity Supplied

($) per year (‘000) per year (‘000)

|120 |24 |9 | |160 |20 |16 | |200 |17 |21 | |240 |15 |24 |

(a) Sketch the demand and supply curves. From your sketch determine the equilibrium price and quantity.

(b) Calculate the arc elasticity of demand between the prices of $160 and $200, and interpret your answer. Is the demand for bicycles elastic or inelastic over this price range?

(c) Calculate the arc elasticity of supply between these same two prices and interpret your answer.

5.Explain precisely why it is not possible to estimate the magnitude of an own price elasticity of demand, simply by looking at the slope of the demand curve.

6.The local movie rental store had been hiring out DVDs at $4 each. On average, 1800 DVDs were hired per week. In response to an increase in running costs, the store increased their DVD hire to $5, resulting in the typical number of DVDs hired per week falling to 1250.

(a)Calculate and interpret the arc own price elasticity of demand for this store’s DVD hire.

(b)Explain why the store’s revenue from DVD rentals has fallen despite increasing their price.

7.“Demand curves are always negatively sloped.” Discuss.

8.State whether you would...