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Presentation (Group 1)
Tutorial Questions Analysis (1.1, 2.1 & 2.2)
Presented by: Hung Ka Chun, Tony (18000433D)
Li Yat Kai, Ken (18093684D)
Wu Kwan Yu, Kent (18023675D)
Chan Renmao, Cano (18084461D)
Question
1.1
Q1.1(a)
3
In Country A, the most popular crab-fishing months occur
between October and January. During these months, the
demand for crab is relatively high and the crab fishermen are
able to sell their crab catches for about $3 per kg. However,
during February to September, when the demand for crab is
relatively low, the crab fishermen are able to sell their crab
catches for about $4 per kg. Does this violate the law of
demand? Use a demand and supply diagram to explain your
answer.
Q1.1(a) (Simplify)
4 • In Oct to Jan • In Feb to Sep
• Demand of crab is • Demand of crab is
relatively high relatively low
• Fishermen are able to • Fishermen are able to
sell their crab for $3/kg sell their crab for $4/kg
Crab-Fishing Months
Question 1.1(a) Analysis
5
Think about it
6
• In the most popular crab-fishing months
• Demand of crab is high
• Suppose the price will rise
• Why the price does not rise but fall?
•• Think about it
•
7
Most popular crab-fishing months
• Price fall
Concept related: A Change in Both Demand and Supply (Self-study note U2 p.6)
Q1.1(a) Analysis
8
• Oct to Jan (Most popular crab-fishing months)
𝑃1
shift right
𝑃2
• 𝑃2 < 𝑃1 = $3/kg
𝐷2
𝑫𝟏 • 𝑄2 > 𝑄1
𝑄1 𝑄2
Q1.1(a) Analysis Cont’d
10
• Feb to Sep (Not the most popular crab-fishing months)
𝐷2 𝑫𝟏 • 𝑄2 < 𝑄1
𝑄2 𝑄1
Q1.1(a) Analysis Cont’d
12
Oct to Jan
• The drop in price ($3/kg)
• Caused by the larger increase in supply than increase in
demand
• Price will drop
Feb to Sep
• The rise of price ($4/kg)
• Caused by the larger drop in supply than the drop in
demand
• Price will rise
Think about it
13
14
“
The Law of Demand
15
Law of demand
Q1.1(a) Answer A change ( or ) in price
16
will cause a change ( or
• Not violate ) in quantity demanded.
𝑺𝟏 𝑺𝟐
18
“
Reservation Price
19
Q1.1(b) Answer
20
Reservation price Number of producers Market price Quantity supplied (per day)
◈ $80 50 $80 330
$10 50 $10 50
Q1.1(b) Answer Cont’d
21
• Consistent
$10 $20
Q1.1(b) Answer Cont’d
22
• Upward-sloping graph
• Consistent with the law of supply
Concept related: The Law of Supply (T1 p.44 & Self-study note U1 p.20)
Question
2.1
Q2.1
◈
Explain with a demand-supply diagram in each
of the following cases how the equilibrium
price and quantity of the good or service
specified (underlined) will change. [Hint: If there
is no equilibrium, explain what else will happen
in the market.]
“
Equilibrium price (𝑃0 ) is the price
at which the quantity demanded
equals the quantity supplied
25
Q2.1(a)
26
If the price of PS3 and Wii fall, what will happen to the price
and quantity of Xbox games if they are determined by
market demand and supply?
“
Substitute
X and Y are related goods and both
of them can replace each other, if
the price of X increase (due to a
decrease in the supply of Y) will
increase the demand of Y.
Concept related: Prices of related goods (T1 p.37 & Self-study note U1 p.17)
Q2.1(a) Answer Cont’d
31
• Equilibrium price
• 𝑃1 𝑃2 Demand and supply of Xbox Games 𝑺𝟏
• Equilibrium quantity
• 𝑄1 𝑄2
𝑃1
𝑃2
𝑫𝟏
𝐷2
𝑄2 𝑄1
• Advance Technology
• Supply
• Supply shifts right
Demand and supply of PCs • Demand for PCs increase
• Demand
𝑺𝟏 𝑺𝟐 • Demand shifts right
• Equilibrium price decrease (𝑃1 to 𝑃2 )
• Increase in supply > increase in demand
• Equilibrium quantity increase (𝑄1 to 𝑄2 )
𝑃1
𝑃2
𝐷2
𝑫𝟏
𝑄1 𝑄2 Concept related: Changes in Equilibrium ( Self-study note U2 p.4 – 7)
Q2.1(c)
34
35
Q2.1(c) Answer
36 𝑺
• Effective price floor Excess Supply
• Quantity demand
• 𝑄𝑠 > 𝑄𝑑 𝐷
• Excess Supply 𝑄𝑑 𝑄𝑠
𝑄1
Concept related: Price floor (T2 p.21-23 & Self-study note U2 p.14-15)
Q2.1(d)
37
The price of potatoes rises and at the same time people
become concerned that French fries can cause heart
attacks.
Q2.1(d) Answer
38
• Potatoes price rise
• Raw material of French fries
• Cost of French fries will increase (Operation cost &
resources price)
• Supply will decrease (Shift left)
• Heart attack
• Demand of French fries will decrease (Shift left)
decrease
𝑄1 𝑄2 𝐷2 𝑫𝟏
𝑄2 𝑄1
Q2.1(d) Answer
40
• Change in supply Demand and supply of French fries
larger than change 𝑺𝟐
in demand 𝑺𝟏
• Equilibrium price
increase
𝑃1 𝑃2 𝑃2
𝑃1
• Quantity demand
decrease
𝑄1 𝑄2 𝐷2 𝑫𝟏
𝑄2 𝑄1
Q2.1(d) Answer
41
• Change in supply Demand and supply of French fries
smaller than 𝑺𝟐
change in demand 𝑺𝟏
• Equilibrium price
decrease
𝑃1 𝑃2 𝑃1
• Quantity demand 𝑃2
decrease
𝑄1 𝑄2 𝐷2 𝑫𝟏
𝑄2 𝑄1
Question
2.2
43 Consider a competitive market
with the following equations of
demand (D) and supply (S).
𝑫𝟎 : P = 60 – ½ 𝑸𝒅
𝑺𝟎 : P = 20 + ½ 𝑸𝒔
2.2
44
Given:
Market Demand (𝐷0 ) : P = 60 – ½ 𝑄𝑑
Market Supply (𝑆0 ) : P = 20 + ½ 𝑄𝑠
Given:
𝐷0 :P = 60 – ½ 𝑄𝑑
𝑆0 :P = 20 + ½ 𝑄𝑠
Q2.2(a) Answer
46
Quantity
demanded by
𝒒𝒅
each consumers
Quantity demanded 𝑸𝒅
“
Market demand is formed by the
horizontal summation of
individual demand by each
consumers
47
Q2.2(a) Answer Cont’d
48
• Market Demand (𝑫𝟎 ) : P = 60 – ½ 𝑄𝑑
Concept related: Individual Demand to Market Demand (T1 p.33 & Self-study note U1 p.16)
D/S curve review:
49 Algebra of the demand curve
P = a - b 𝑄𝑑
a is the intercept along the Y-axis (the highest price
anyone would pay)
b is the slope of the equation
Y-intercept point increases = Demand curve shift right,
ceteris paribus
Opposite for Supply curve
Q2.2(b)
50
Derive the equilibrium price (𝑃0 ) and quantity (𝑄0 ) in this
market.
Given:
𝐷0 :P = 60 – ½ 𝑄𝑑
𝑆0 :P = 20 + ½ 𝑄𝑠
51
Q2.2(b) Answer
52
Market Demand (𝐷0 ) :P = 60 – ½ 𝑄𝑑
Market Supply (𝑆0 ) :P = 20 + ½ 𝑄𝑠
• At equilibrium
• 𝑄0 = 𝑄𝑑 = 𝑄𝑠
• P = 𝑃0
60 – ½𝑄0 = 20 + ½𝑄0
𝑄0 = 40
Hence, 𝑃0 = 60 – ½*40 or 𝑃0 = 20 + ½*40
𝑃0 = $40
Q2.2(b) Answer Cont’d
53
𝑆0
𝑃0 = $40
𝑄0 = 40
𝑃0
𝑄0 𝐷0
Q2.2(c)
54
If the demand equation becomes
𝐷1 : P = 80 – ½ 𝑄𝑑
Given:
𝐷1 :P = 80 – ½ 𝑄𝑑
𝑆0 :P = 20 + ½ 𝑄𝑠
Q2.2(c) Answer
55
Market Demand (𝐷1 ) :P = 80 – ½ 𝑄𝑑
Market Supply (𝑆0 ) :P = 20 + ½ 𝑄𝑠
• At equilibrium
• 𝑄1 = 𝑄𝑑 = 𝑄𝑠
• P = 𝑃1
80 – ½𝑄1 = 20 + ½𝑄1
𝑄1 = 60 (increase)
Hence, 𝑃1 = 80 – ½*60 or 𝑃1 = 20 + ½*60
𝑃1 = $50 (increase)
Q2.2(c) Answer Cont’d
56
𝑆0
𝑃1 = $50
𝑄1 = 60
𝑃1
𝑄1 𝐷1
◈
Q2.2(c) Answer Cont’d
57
𝑃1 = $50 𝑆0
𝑄1 = 60
𝑃1
Increase
𝑃0
𝐷1
Increase
𝑄0 𝑄1 𝐷0
Q2.2(d)
58
If the supply equation becomes
𝑆2 : P = 40 + ½ 𝑄𝑠
Given:
𝐷0 :P = 60 – ½ 𝑄𝑑
𝑆2 :P = 40 + ½ 𝑄𝑠
Q2.2(d) Answer
59
Market Demand (𝐷0 ) :P = 60 – ½ 𝑄𝑑
Market Supply (𝑆2 ) :P = 40 + ½ 𝑄𝑠
• At equilibrium
• 𝑄2 = 𝑄𝑑 = 𝑄𝑠
• P = 𝑃2
60 – ½𝑄2 = 40 + ½𝑄2
𝑄2 = 20 (decrease)
Hence, 𝑃2 = 60 – ½*20 or 𝑃2 = 40 + ½*20
𝑃2 = $50 (increase)
Q2.2(d) Answer Cont’d
60
𝑆2
𝑃2 = $50
𝑄2 = 20
𝑃2
𝑄2 𝐷0
◈
Q2.2(d) Answer Cont’d
61
𝑆2
𝑆0
𝑃2 = $50
𝑄2 = 20
𝑃2
Increase
𝑃0
𝐷0
𝑄2 𝑄0
◈Decrease
Q2.2(e)
62
Based on your answers in (b), (c) and (d), explain whether
the changes in equilibrium are consistent with what you
learn in class.
Q2.2(e) Answer 𝑄1 = 60
𝑃1
64
•
Increase
𝐷1
• 𝑃0 increases to 𝑃1
𝑄1
Increase
Decrease
𝑃2
65
•
Increase
For 2.2 (d) Supply decreases 𝑃0
• 𝑃0 increases to 𝑃1
𝑄2 𝑄0
decrease
Increase
Decrease
From Q2.2(b)
𝑄0 = 40
𝑃0 = $40
“
Price Ceiling: The government requires
that the market price must not rise above
certain level.
67
Q2.2(f) Answer
68
• The government sets a price ceiling at $60
• $60 > 𝑃𝑒𝑞 = $40
• Higher than equilibrium 𝑆0
• Not effective
𝐷0
Concept related: Price ceiling (T2 p.18-20 & Self-study note U2 p.12-14)
Q2.2(f) Answer Cont’d
69
• The government sets a price ceiling at $30
• $30 < 𝑃𝑒𝑞 = $40 𝑆0
• Lower than equilibrium
• Effective
𝐷0
Concept related: Price ceiling (T2 p.18-20 & Self-study note U2 p.12-14)
“
Excess demand occurs when
𝑸𝒅 > 𝑄𝑠
Excess supply occurs when
𝑄𝑠 > 𝑸𝒅
70
Q2.2(f) Answer Cont’d
71
𝑸𝟏 𝑸𝟐
Excess demand = 𝑸𝟐 − 𝑸𝟏 = 60 – 20 = 40
Concept related: Excess demand (T2 p.18-19 & Self-study note U2 p.3-4)
Q2.2(f) Answer Cont’d
72
Given:
𝐷0 :P = 60 – ½ 𝑄𝑑
𝑆0 :P = 20 + ½ 𝑄𝑠
𝑸𝟏 𝑸𝟐
By calculation: (Price ceiling at $30)
P = 30
Demand: 30 = 60 – ½ 𝑄2
𝑄2 = 60
Supply: 30 = 20 + ½ 𝑄1
𝑄1 = 20
Excess Demand = 60 – 20 = 40
Thanks!
Any questions?
73