Seven Practice Problems in Supply and Demand (2023)

Introduction

This video shows how to answer seven practice problems in supply and demand

Video

Hello I'd like to run through with you a few problems using supply and demand.

So first problem we have here on the screen assume that a good is normal, which of the following will cause the demand curve to decrease well, let's run through each one of them and decide what's the effect, I've drawn.

Three graphs up here.

Let's see we may need more, but let's go with a it's, a normal good and increase in income let's go to the first one.

Let me find my pen.

Well, if it's an increase of income and it's a normal good let's, draw our graph fair's price on the vertical axis quantity on the horizontal axis, upper sloping supply curve downward.

Sloping demand curve, here's our equilibrium price equilibrium.

Quantity, that's, not the straightest line in the world.

Sorry about that and I'm going to put p 0 for the original prize, Q 0 for the original quantity.

And then what happens? Well, I would expect an increase in income we'll, make it.

So people can increase their income or increase our income makes it.

So I can afford to buy more if it's a normal good.

So my price will tend to go up.

So if I draw some lines here, it's not going the straightest in the world and higher price.

So if the demand curve goes up, so demand goes up here price up there's supposed to be a P.

So they look IP.

Price goes up.

Quantity goes up Sekou, an increase in the price of a substitute good.

Well, if there's two Goods and they are substitutes, then the other goods goes up I want to buy the good whose price has not gone up.

So that should increase the demand.

So that looks like let's define my pen again.

This looks like it fits both problem, a and B.

So a and B, both cause price to go up quantity.

Go up it's us.

The problems asking us for demand to go down.

So the opposite of what we have here let's try see a decrease in the cost of producing a good.

Well, let's go cost of production are on the fellers side, doesn't affect the demand curve.

So let's, draw I'm gonna let me go to green so here's, our upward sloping supply curve downward sloping demand curve price on the vertical axis quantity on the horizontal axis equilibrium price right here.

Here's my equilibrium quantity or equilibrium price up here, the equilibrium quantity down here.

And in this case, say a decrease in cost, well, lower cost of production chef, my supply curve to the right price down quantity up.

So this one would be supply curve up price down and quantity up.

If you have it so there's lower cost of production and they produce more it's less scarce.

So the price falls on the other side.

So this looks like prop see if this would be the answer for C or or this is what C is describing the increase in supply, but that doesn't fit our deep decrease in demand.

So hey, doesn't work, B doesn't work, C, doesn't work, hopefully D works.

And let me switch to green supply.

Demand, quantity, price we're.

Assuming we started equilibrium we're going to call that zero zero over here, new color and a decrease of tastes and preferences, definitely decreases demand, lowers price and decreases quantity.

So demand down price down.

Quantity would have gone down now let's all out.

But so our right answer is D, let's, try another one.

So now on this one Houston, Chronicle, ran a headline that says winter were worries and oil prices whistling toward $55.

And there was a concern about heating oil being stored for winter.

And some buyers are trying to increase the amount being stored what's, the effect of the action on supply.

And demand we go to green here's price.

Here is quantity supply curve demand curve equilibrium quantity equilibrium price.

And question is and I'm going to use a new color I'm going to make it violet.

And the article says there's concerned about, ok.

So buyers are trying to increase the amount being stored the buyers want to increase amount being stored outside.

They want to buy more so demand increases.

So it looks like it's going to be that.

So we draw the demand curve out here.

And we expect the price to go up quantity to go up sounds good.

We just answer - let's.

Try 3.

Susan buys more of a certain product because the price of another product increased for her.

The original product must be if the price of another product goes up.

And so you buy less of that product or more of this one, then it sounds like they're substitutes.

So if the price of coca-cola goes up, you buy more Pepsi, sounds like and where's.

My pen, I think, they're substitutes.

Now if it's Susan buys more above certain product, because of the price of the other product decrease that would be more compliments.

We knew it had to be a or B.

It has nothing to do with income, which would be C and D.

So in this case, here's, the pie curve, demand curve price quantity, equilibrium price equilibrium quantity.

And it said buys more well that sounds to me like another increase in demand, just like we did in the previous one.

So we would expect the price to go up and the quantity to go up because they're substitutes.

So the price of the other good goes up allows this company to raise their prices to or this products price to go up to so let's go to our next one, consider the supply and demand for CDs assume that CDs are a normal good it'll, be the effect of college students getting their music for internet sites, rather than buying CDs.

Well, sounds like college students.

Instead of buying the CDs they're going to get more from internet sites.

So let's start out on early original equilibrium.

And then so college students say, I'm, not gonna buy CDs I'm going to download, which means I would expect.

Cd prices should go down, which I think I have seen lower prices.

But also we see fewer CDs being sold.

So demand went down price.

One down.

Quantity, went down let's, try this one suppose it because of the financial meltdown in 2008, government agencies dramatically increased regulations that are very costly to business.

So what do we expect to happen find my pen here price and absurd there's, my quantity supply curve upward sloping, meaning sellers and higher prices are willing to sell more demand curve downward.

Sloping buyers at higher prices, don't want to buy as much here's our equilibrium price equilibrium quantity.

And now there's, a meltdown it's, very costly to business.

Well, something's, very costly to business doesn't seem to be seeing the buyers as much in this question.

So cost of production go up.

Let's, try a new color.

Let's, try see what color this is so supply curve decreases.

And since there's costly to produce the product I want to test on some of those cost of customers, which means customers are going to have higher prices at higher prices started at point.

A now we're up here at point, B firms are going to be able to sell as much.

So supply went down price went up quantity, went down and not a good thing to happen during recessions.

Most y6 recently, recently automobile prices fell and people bought fewer cars.

So let's start let's.

Do a new color here, let's, trying this color price quantity, upward sloping supply curve, downward sloping demand curve the equilibrium price and quantity.

Now what happened automobile prices fell.

So we know prices had to go down, and we know people bought fewer cars that people bought more cars would be over here.

So the price went down, the quantity went down so what's, the only curve that would do that.

Well, it occurs that it looks like it would do that I'm gonna put up this line right here.

Oops, no supposed to be a big dot, right? There.

It's, a lower price.

Lower quantity, here's, our lower quantity here and I'm just right over again.

So in this case, if you're gonna have price go down and quantity could go down, I.

Think your demand curve would have to go down.

So price down quantity down if it had sent something like price up and quantity up, well that would have bit of demand curve up.

So there was a decrease in demand is right and there's only really four possibilities.

You know, if it said price down and quantity up, which would been up here somewhere I'm, sorry, down here.

Somewhere price down quantity up.

Well, that sounds pretty much like an increase in supply.

And if it had said price up, the quantity went down, well, the only thing that would have done that would be a decrease in supply.

So the only one, but it said price down quantity down so it's, a decrease in demand.

Let's, try this one our last one for this fun.

Video, a recent headline in the Wall Street Journal read latest risk from for Alaska Pipeline more gas, sounds painful.

The article says, huge new gas fields have been discovered in Pennsylvania, Texas, Louisiana, it's, amazing that we're talking about.

When is it asking right now? No we're constantly finding new gas.

Amazing isn't.

It things often don't happen like you think who will see here's price here's quantity, let's do it with supply and demand.

You know, at higher prices, I think they're gonna fight look for more gas and probably find more gas or even go back to old fields.

Here's demand curve at higher prices.

People want to use less gas, here's our price and quantity before we discover the new gas in Pennsylvania in Texas and Louisiana.

Now we have huge new discoveries of gas.

Well, that's, not buyers that sellers.

Now have a lot more gas available.

Well, if sellers have more gas available that sounds that an increase in the supply is a guest doesn't it, which increase supplies of gas and be somewhere over here.

Well, if there's an increase in supply, as we just talked about price is going to go down quantity is going to go up.

So supply up means price is going to go up and quantity up s-- I wrote that wrong.

I, add price wrong direction.

I'm sure you jumped on me on that line, saying, hey, didn't, you just say price went down and you're, absolutely right.

Let's.

Make price go down supply goes up, there's more gas available.

So quantity goes up.

And price goes down, make sure you get those right? Okay, sounds good.

Hope you had a fun time with this I did.

Thanks.