Week 3 Assignment

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BUSN 5260
Current Economic Analysis
Week 3: Personal Assignment
Some students have difficulty understanding the laws of supply and demand and the difference between changes in demand (supply), which are caused by changes in the respective determinates of demand or supply, and changes in quantity demanded (supplied) which result from changes in the price of the good or the service.

Before you complete this assignment, I suggest that you again review Chapter 3 and my lecture material provided this week. There are some basic principles which must be followed when constructing supply and demand graphs, for example, price is always on the vertical axis and output (quantity) on the horizontal axis.

I also strongly suggest that you review the website Economic Basics: Demand and Supply and the videos Supply & Demand Graphing Using Excel and the Macroeconomics for MBA YouTube Channel, from the Internet which can be found through these links.

If you have questions, remember to post them to the General Questions area of the Discussion forum.


Problem 1
For each of the following draw a separate diagram to demonstrate the answer. (Hint: Remember the difference in a change in demand [supply] and a change in quantity demanded [supplied]. Don't shift both curves unless appropriate). Describe what happens to equilibrium price and sales. Explain why or why not this makes sense in the real world.

Show the effect on the U.S. new construction residential housing market in the event of a severe economic recession.


In theory, during a recession both demand for, and the supply of homes would drop. Demand would drop due to unemployment and lack of expendable cash among consumers. Supply would drop as well due to construction companies going out of business, less availability of resources, and layoffs within the construction industry. This is show in the real world today by the lack of new housing starts and the drop in home sales overall. In fact, the United States is expected to face a housing shortage in the near future.

According to the chart, the equilibrium price remains fairly constant. However, as we have seen recently this is not the case. Housing prices are at their lowest point in the past 20 years (adjusted for inflation).

Show the effect on the U.S. air travel market if American Airlines unexpectedly folds (ceases operations) overnight.


If American Airlines were to cease operations unexpectedly, consumer demand for flights would remain constant, while the number of flights available would decrease instantly thus reducing supply. This means the remaining suppliers would be able to charge a premium for their airline tickets due to the reduced supply making the equilibrium price rise. Though sales may be reduced industry wide due to the loss of such a large supplier, sales among the other individual airlines would rise not only because the prices would be higher but also because they would be more likely to sell out seats on flights that may have previously not typically sold out. I believe this would be an accurate representation of what would happen in a real world situation.

Show the effect on the U.S. domestic car market if the price of foreign cars increases due to an exchange rate shock.


If an exchange rate shock temporarily increased the cost of foreign cars to the American consumer it is highly likely that the demand for American made cars would increase. This would in theory increase the sale of domestic vehicles. The chart shows that the equilibrium price would also rise due to increased demand, though in reality, for a short term issue such as fluctuating exchange rates, it is unlikely that manufacturers would increase their pricing unless the exchange rate increase became a prolonged matter.

Show the effect on the market for large SUVs if the...
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