Shifting Demand: What You Need to Know

1. (Shifting Demand) Using demand and supply curves, show the effect of each of the following on the market for cigarettes: 

a. A cure for lung cancer is found. 

Solution 

Other things considered constant, after finding a lung cancer cure, then the fear of catching non-curable cancer does not come in the smoker’s mind. Now such smokers can no longer fear and smoking will rise. Hence, a demand shift to the right is seen as supply is constant as follows:  

b. The price of cigars increases. 

Solution 

Other things being constant, the cigarette prices do not change and thus there will be a reduced demand or constant in cigars while the cigarettes’ demand will increase. Let b represent cigarettes while c stands for cigars in the following curve: 

c. Wages increase substantially in states that grow tobacco. 

Solution 

Other things being constant, as the tobacco wages increase, the implication is that the production cost has also increased. A wage increase will obviously increase the consumers’ spending habits and raise demand and thus shift from D0 to D1 as shown below: 

d. A fertilizer that increases the yield per acre of tobacco is discovered. 

Solution 

Other things constant, as the fertilizer yield increases, the implication is that the supply increases, and thus the cigarette supply also increases. As a result, demand and prices as well reduce as shown: 

e. There is a sharp increase in the price of matches, lighters, and lighter fluid. 

Solution 

Other things constant, the increase of such commodities named- lighter fluid, lighters, and matches price will translate to the cigarette demand reducing since such are considered complementary goods have increased prices. As a result, the shift will be a leftward demand curve as shown:  

f. More states pass laws restricting smoking in restaurants and public places. 

Solution 

Other things constant, when state laws are passed, then smoking in public places and restaurants is reduced. As a result, less smoking leads to reduced cigarette demand. The illustration is as below: 

2. (Substitutes and Complements). For each of the following pair of goods, determine whether the goods are substitutes, complements, or unrelated: 

a. Peanut butter and jelly 

Solution 

The two products jelly and peanut butter are complements. 

b. Private and public transportation 

Solution 

Both forms of transportation are substitutes. People may have a perception that public transport less expensive rather than private transportation due to the vehicle maintenance and purchase as well. Others who resort to private transportation. 

c. Coke and Pepsi 

Solution 

Both Pepsi and Coke are considered substitute- based on price differences. One may prefer one to the other due to such differences and even taste. 

d. Alarm clocks and automobiles 

Solution 

Not each of these two items are related- in short, they are unrelated. 

e. Golf clubs and golf balls 

Solution 

Both complement one another. Golf games comprise both golf balls and golf clubs. Golf clubs need golf balls. 

3. (Demand Shifters) List five things that are held constant along a market demand curve and identify the change in each that would shift that demand curve to the right— that is, that would increase demand. 

Solution 

The first item is the consumers’ income. An income increase will lead to increased demand at a similar price. Consumers would be willing to spend good amounts on given products making the market demand to rise. An income increase will lead to the demand curve making a rightward shift. Secondly, there is taste and preferences. Taste and preferences are more inclined to products. Hence, demand increased and the curve moves to the right. Third, population growth means increased consumption. Hence, the increased consumption levels lead to the rightward shift of the demand curve. The fourth item is related to goods and their prices. If such related goods’ prices increase, then the consumers would opt for such goods. Hence, demand increases compared to similar prices. As a result, the demand curve makes a rightward shift. The fifth item is sales propaganda and advertisement. More expenses on sales propaganda and advertisement allow for the demand increment. Hence, the demand curve makes a rightward curve. 

4. (Supply). Why is a firm willing and able to increase the quantity supplied as the product price increases? 

Solution 

Producers often have an incentive of profit to offer an increased price as compared to the lower price. As increases in prices are realized given all things constant, there is the willingness by the producer to have more supplies- the prices behave as signals to both the potential and existing suppliers regarding such rewards. A product considered highly-priced attracts low-valued used and thus suppliers supply more. It is also indeed true that when prices are higher, more tends to be supplied by the commodity producer regarding increasing opportunity costs. Since the commodity producer incurs increased marginal cost for extra output, such producers need to have higher prices to raise their quantity supplied. Thus, higher prices translate to increased production, hence, increased quantity supplied. Production is then considered to be more attractive in the long run. Higher marginal costs are effectively covered due to the increased output. 

11. (Equilibrium) “If a price is not an equilibrium price, there is a tendency for it to move to its equilibrium level. Regardless of whether the price is too high or too low to begin with, the adjustment process will increase the quantity of the good purchased.” Explain, using a demand and supply diagram. 

Solution 

The original E p is at b. In such a case, not enough was supplied to reach the demand which at D0, the illustration is an increase as the demand makes a rightward shift. Since not much was supplied as compared to the increased demand, the price moves up. The case gives suppliers an incentive to make more supplies at an increased price making c become the next equilibrium point. 

12. (Equilibrium) Assume that the market for corn is depicted as in the table that appears below. 

a. Complete the table below. 

Solution 

Price per Bushel	Q D (millions)	Q S (millions)	Surplus/Shortage	Fall/Rise in Prices
$ 1.80	320	200	200 less 320= -120  Shortage	Price rises
$2.00	300	230	230 less 300 = -70  Shortage	Price rises
$2.20	270	270	270 less 270 = 0  Equilibrium	Neither falls nor rises
$2.40	230	300	300 less 230 = 70  Surplus	Price falls
$2.60	200	330	330 less 200 = 130  Surplus	Price falls
$2.80	180	350	350 less 180 = 170  Surplus	Price falls

b. What market pressure occurs when quantity demanded exceeds quantity supplied? Explain. 

Solution 

A market shortage occurs. When there is an excess of quantity demanded than supplied, then the result is consumer competition for product purchases. The supply becomes shortened causing increases in prices. 

c. What market pressure occurs when quantity supplied exceeds quantity demanded? Explain. 

Solution 

A market surplus is experienced. If there is an excess of quantity supplied than demanded, the result is that the producers reduce their prices as producers compete. As prices reduce, producers decrease their quantity supplied. On the other hand, consumers raise their quantity demanded and the reduction in price will continue. 

d. What is the equilibrium price? 

Solution 

The equilibrium price is the point of the market price where quantity demanded and supplied are both same. It is also the intersection point of the market supply and market demand curves. 

e. What could change the equilibrium price? 

Solution 

Equilibrium price could be changed by the demand shifts. Also, consumers’ incomes, reduced complementary good price, substitute good price increases, changes in preferences and consumer tastes, and changes in demographics have an impact on the equilibrium price. Also, supply determinants that comprise of technological innovation, resources’ prices decline, and changes in expectations and producers increased number can alter equilibrium price. 

f. At each price in the first column of the table above, how much is sold? 

Solution 

The first two items with unit prices of $ 1.80 and $ 2.00 will sell out since demand is increased yet supply is low. Since demand is increased and supply is considerably low, increased competition will be experienced between consumers to have corn. Such corn acquisition competition would lead to price increases until the surplus is reached. For the unit price at $ 2.20, the corn sold will be the same as quantity supplied since both supply and demand are the same- equilibrium reached. For the last three units priced at $ 2.40, $ 2.60 and $ 2.80, the corn amount will probably be less or equal than the demanded amount since all have experienced surplus. Hence, the price will reduce up to the point equilibrium is experienced and remain unchanged until a determinant shift is realized. 

13. (Market Equilibrium) Determine whether each of the following statements is true, false, or uncertain. Then briefly explain each answer. 

a. In equilibrium, all sellers can find buyers. 

Solution 

True. Explanation- surplus is experienced and therefore in equilibrium, buyers are easily found. 

b. In equilibrium, there is no pressure on the market to produce or consume more than is being sold. 

Solution 

True. Explanation- supply and demand are often equal. Therefore, production of similar equilibrium quantity is ensured and sold at the same time. 

c. At prices above equilibrium, the quantity exchanged exceeds the quantity demanded. 

Solution 

True. Explanation- Increased prices mean reduced quantity supplied. Such a case will result to increased demand due to reduced amounts supplied. 

d. At prices below equilibrium, the quantity exchanged is equal to the quantity supplied 

Solution 

False. Explanation- Reduced prices mean that demand is also reduced. Quantity supplied will rise. 

14. (Changes in Equilibrium). What are the effects on the equilibrium price and quantity of steel if the wages of steelworkers rise and, simultaneously, the price of aluminum rises? 

Solution 

As wages increase, the supply curve moves leftwards, and thus the equilibrium price will also increase while the equilibrium quantity reduces. Since, aluminum is a substitute for steel, then the demand for steel increases. The rightward demand shift will raise both equilibrium price and equilibrium quantity. The result is a raised price yet the equilibrium quantity will change based on supply and demand shifts. 

References 

https://delong.typepad.com/20120130-econ-1-lecture-notes.pdf