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Topic 2: Demand and Supply Part 1

Important Terms
Demand curve
Supply curve
Substitution Effect
Income Effect
Market

Theory of Perfect
Competition
Competitive Equilibrium
Study tip: Practice labelling your demand & supply graphs to avoid losing easy marks


Key Concepts


MARKET





DEMAND



FACTORS AFFECTING DEMAND (SHIFTING THE CURVE):








DEMAND CURVE:










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SUBSTITUTION EFFECT:



INCOME EFFECT:






SUPPLY






FACTORS AFFECTING SUPPLY (SHIFTING THE CURVE):










SUPPLY CURVE













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Multiple Choice Questions


1) Which of these factors does not shift the demand curve for bananas:
a. The price of apples
b. The income of consumers
c. The purported health benefits of bananas
d. The Price of Bananas
e. None of the above

The following table relates to the Marginal Benefit of high-class manicures for James and Maddy.
Consider this table in answering the next 2 questions:

James Maddy
Manicures/month MB MB
1 50 45
2 35 30
3 15 20
4 10 10

2) If the price of a manicure is $20, how many manicures will each person buy per month?
a. James 3, Maddy 2
b. James 2, Maddy 3
c. James 1, Maddy 1
d. James 3, Maddy 3




3) What is the value of James and Maddys combined surplus at this price and quantity?
a. $80
b. $95
c. $90
d. $35




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4) Which of the following best describes an economists understanding of demand?
a. A consumer desire.
b. A relationship.
c. The quantity consumers buy.
d. A rude request.
e. The effects of changes in the prices of inputs.

5) Which of the following does not impact upon the supply curve for bananas:
a. The price of farming equipment
b. Suppliers expectations of future banana prices
c. An improvement in the production method of bananas
d. The number of banana sellers in the market
e. None of the above

6) The market supply curve for xylophones is given by Q
S
= 100 + 2P. If the price of a xylophone is
$5, then how many xylophones are supplied, and what is the cost of producing the last
xylophone sold?
a. Supply = 110, cost of producing = $10
b. Supply = 110, cost of producing = $5
c. Supply = 90, cost of producing = $10
d. Supply = 90, cost of producing = $5


7) Assume Joe is willing to produce another hamburger that costs $1 to make. Mary is hungry
and is willing to pay $3 for a hamburger. Mary and Joe should:
a. Marry.
b. Trade.
c. Never trade because only Joe will make a profit.
d. Never trade because each will look for a better deal.
e. Never trade because the deal makes no-one better off.













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Short Answer Questions


1) In order to save up for the latest model of mad Nike kicks, Mikhara has decided to start tutoring
high school students. The amount of hours she tutors per week is determined by the price she can
charge per hour, as described in the equation below:
Q
S
= -10 + P

a) At what price (and below) will Mikhara not tutor at all?






b) At a price of $30 per hour, how many hours will Mikhara tutor?






c) Graph Mikharas supply curve for tutoring.



















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2) Matty P (for push-up) has been chewing through his choc-banana protein shake like theres no
tomorrow. However, his addiction to the shake has caused his living costs to skyrocket, and so his
demand for them is constrained by their price, as shown in the table below:

Price Demand
$10 100
$30 80
$50 60
$70 30
$90 0

a) Graph Matts demand curve for protein shakes.














b) Now add a second curve, to illustrate what the situation would be if the price of protein tablets
decreased.