ECON 100 Tutorial: Week 2 office LUMS C85

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Question 1 Normal Good: – A good for which, other things equal, an increase in income leads to an increase in demand (and vice versa) – Examples: Inferior Good: – A good for which, other things equal, an increase in income leads to a decrease in demand (and vice versa) – Examples:

Question 1 ctd. Complementary Good: – Two goods for which an increase in the price of one leads to a decrease in the demand for the other (and vice versa) – Examples: Substitute Goods: – Two goods for which an increase in the price of one leads to an increase in the demand for the other – Examples:

Question 2 Suppose we have the following market supply and demand schedules for bicycles: Price (£) Quantity Demanded Quantity Supplied a. Plot the supply curve and the demand curve for bicycles. b. What is the equilibrium price of bicycles? c. What is the equilibrium quantity of bicycles?

Question 2 Suppose we have the following market supply and demand schedules for bicycles: d. If the price of bicycles were £100, is there a surplus or a shortage? How many units of surplus or shortage are there? Will this cause the price to rise or fall? e. If the price of bicycles were £400, is there a surplus or a shortage? How many units of surplus or shortage are there? Will this cause the price to rise or fall?

Question 2 Ctd. f. Suppose that the bicycle maker's labour union bargains for an increase in its wages. Further, suppose this event raises the cost of production, makes bicycle manufacturing less profitable, and reduces the quantity supplied of bicycles by 20 units at each price of bicycles. Plot the new supply curve and the original supply and demand curves. What is the new equilibrium price and quantity in the market for bicycles? originalnew Price (£) Quantity Demanded Quantity Supplied Price (£) Quantity Demanded Quantity Supplied

Question 2 Ctd. Price (£) Quantity Demanded Quantity Supplied Price (£) Quantity Demanded Quantity Supplied

Question 3 For each event, which curve is affected (supply or demand for bicycles), what direction is it shifted, and what is the resulting impact on equilibrium price and quantity of bicycles? a. The price of cars increases. demand, shifts right, equilibrium price and quantity rise. b. Consumer’s income decreases and bicycles are a normal good. demand, shifts left, equilibrium price and quantity fall

Question 3 ctd. c. Price of steel used to make bicycle frames increases. supply, shifts left, equilibrium price rises, equilibrium quantity falls d. An environmental movement shifts tastes towards bicycling. demand, shifts right, equilibrium price and quantity rise e. Consumers expect the price of bicycles to fall in the future. demand, shifts left, equilibrium price and quantity fall.

Question 3 ctd. f. A technological advance in the manufacturing of bicycles occurs. supply, shifts right, equilibrium price falls, equilibrium quantity rises. g. The price of bicycle helmets and shoes is reduced. demand, shifts right, equilibrium price and quantity rise. h. Consumers’ incomes decrease, if bicycles are an inferior good. demand, shifts right, equilibrium price and quantity rise.

Question 4 Market research has revealed the following information about the market for chocolate bars: the demand schedule can be represented by the equation D = 1,600 – 300P, where D is the quantity demanded and P is the price. The supply schedule can be represented by the equation S = 1, P, where S is the quantity supplied.

Question 4 a. Develop a Demand and Supply Schedule table. P(£)DS

Question 4 b. Identify the equilibrium price and quantity in the market for chocolate. Equilibrium price is 0.2 (or 20 pence) and the equilibrium quantity is 1540.

Question 4 d. Draw a diagram to confirm that you identified the correct equilibrium price and quantity.

Question 5 Suppose an econometrician uses a long dataset of pork sales, prices and income and estimates that the demand function for pork is given by: D p = 165 – 20P p + 20P b + 3P c + 2Y Where: D p is the demand (in millions of kg), P p is the price of pork, P b is the price of beef, P c is the price of chicken, and Y is the average income level of households (in C$,000).

Question 5 ctd. D p = 165 – 20P p + 20P b + 3P c + 2Y Is beef a substitute of complement to pork? substitute The coefficient on P b is positive; this indicates that if P b ↑, then D p ↑. (if the price of a good goes up, then demand for it’s substitutes will go up. ) And chicken? substitute Is pork a normal good? yes, pork is a normal good. The coefficient on income (Y) is positive. So if Y↑, then D also ↑.

D p = 165 – 20P p + 20P b + 3P c + 2Y Suppose P b =4, P c =3.33 and Y=12.5 then write down the demand curve as a function of P p alone. The demand curve is the relationship between Price and Quantity. To find the demand curve, we plug in P b, P c, and Y into our demand function. D p = 165 – 20P p + 20(4) + 3(3.33) + 2(12.5) D p = 165 – 20P p D p = 280 – 20P p

Question 5 ctd. Using Excel draw a diagram of what the inverse demand curve looks like (i.e. with P p on the vertical axis and D p on the horizontal). HINT: Enter a column headed Pp (in the top left cell – labelled A1) and then enter 0, 1,2,3,4 ….. up to 14 in the cells below the heading. Head the next (B) column Dp and in the cell below this heading enter the “formula” for the demand curve. Draw the inverse demand curve using Excel’s chart facility. HINT highlight the two columns and then click on CHARTS and then the SCATTER icon and chose Straight Marked Scatter. It should produce dots connected by a line. If you have an older EXCEL it may be different - but probably easier! And there are many ways of doing this in the EXCEL – so do whatever works for you. What is the slope and intercept? If all else fails draw it with pencil and ruler!

Question 5 ctd: Find the slope and intercept. We can solve for the slope and intercept algebraically. We start with the equation for our demand curve: D p = 280 – 20P p And put it into Y=mX+b form, (slope-intercept form), where P p is our Y variable and D p is our X variable. D p = 280 – 20P p D p + 20P p - D p = 280 – 20P p + 20P p - D p 20P p = 280 – D p 20P p ÷ 20 = (280 – D p ) ÷ 20 Now we have an equation that is in slope-intercept form, that we can easily graph by hand: P p = 14 – (1/20)D p Our slope is -1/20 and our intercept is 14.

Using Excel draw a diagram of the inverse demand curve. Find the slope and intercept. First, we start with the equation for our demand curve: D p = 280 – 20P p Ian wants us to plot what he calls the “inverse demand curve”, with P p on the vertical axis and D p on the horizontal. We just solved it algebraically. To graph in Excel, we actually use our original Demand Curve: D p = 280 – 20P p And set up a Demand schedule by plugging in values for P and solving for D.

Question 5 ctd. Suppose P b rises by $1.00 what happens to this demand curve – show this in Excel. What are the new values of the slope and intercept? Answer: -1/20 and 15.

Question 5 ctd. Suppose incomes rise to 22.5? What happens to the slope and intercept? Answer: Nothing, also rises by 1.

Question 5 ctd. (part b) Now, suppose the supply of pork were given by S p = P p – 60P h where P h is the price of hogs (pork products are made from dead hogs). If P h =$1.50 per kg then write the supply curve as a function of P p alone. Draw the inverse supply curve in Excel (i.e. with P p on the vertical axis and S p on the horizontal). First, plug in P h : S p = P p – 60P h S p = P p – 60(1.50) S p = P p – 90 This is our supply curve, that we can graph in Excel: S p = P p This is the supply curve, re-written in slope-intercept form: P p = 2 + (1/40)S p

Question 5 ctd. (part b) Now Suppose P h rises by $1 what happens to the slope and intercept of the supply curve. Show this using Excel. S p = P p – 60P h Answer: slope remains the same at 1/40 and the intercept rises from -2 to -½

Question 5 ctd. (part c) (c) Suppose D p = 280 – 20P p and S p = P p what is the equilibrium price and demand level? Show this using Excel. Answer: P p *=3.33 and D p *=213

Question 5 ctd. (part c, ctd.) What would happen to the equilibrium if the price of hogs rose by $1. Answer: the equilibrium price rises to $4.50 and demand is 190.

Question 5 ctd.

For Next Week Attend lectures Read relevant pages in book. Work through and complete the tutorial worksheet prior to coming to tutorial. (Working together is fine, as long as you understand the material.) Bring your questions to the tutorial or them to me. Be prepared to participate in tutorial.