Asfa

CHAPTER 3

1 Supply and demand data for toasters are shown below. Plot the supply curve and demand curve and find the equilibrium price and quantity.

|Quantity |Price |

| |10 |12 |14 |16 |18 |20 |

|Demanded |10 | 9 | 8 | 7 | 6 | 5 |

|Supplied | 3 | 4 | 5 | 6 | 7 | 8 |

1. Equilibrium price £17, quantity 6.5.

2. What is the excess supply or demand when the price is (a) 12, (b) 20? Describe the price movements induced by positions (a) and (b).

2 (a) At 12 there is an excess demand of 5 per period. If market forces operated this would lead to a rise in price.

(b) At 20 there is excess supply of 3 per period. If market forces operated this would lead to a fall in price.

3. What happens to the demand curve for toasters if the price of bread rises? Show in a supply-demand diagram how the equilibrium price and quantity of toasters change.

3 A rise in the price of bread, other things being equal, will lead to a contraction in demand from Q1 to Q2. Since bread and toasters are complements, if consumers buy less bread they will need fewer toasters to toast it. Demand for toaster, other things being equal, will decrease, from D1 to D2. Both price and quantity will fall.

4 How is the demand curve for toasters affected by the invention of the toaster oven if people prefer this new way of toasting? What happens to the equilibrium quantity and price of toasters?

4 Since there is now and alternative method (substitute) for toasting bread, demand for toasters will decrease and price and quantity will fall.

5 You are a sheep farmer. Give three examples of a change that would reduce your supply of wool. Did you use a fall in the price of...