Principles of Macroeconomics

Chapter 3: Supply and Demand—Theory

Practice Problems (answers given below):

1. What is the difference between a change in demand and a change in quantity demanded?

2. With respect to each of the following changes, identify whether the demand curve will shift rightward or
leftward:
a) An increase in income (the good under consideration is a normal good)
b) A rise in the price of a substitute good
c) A fall in the price of a complementary good
d) A fall in the number of buyers

3. Describe how each of the following will affect the supply of personal computers: (a) A rise in wage rates; (b) An
increase in the number of sellers of computers; (c) A tax placed on production of computers; (d) A subsidy placed
on the production of computers.

4. State what will happen to price when there is a surplus.

5. Does an increase in income always shift demand curves (for goods) to the right? Why or why not?

6. True or false? As the price of oranges rises, the demand for oranges falls, ceteris paribus. Explain your answer.

7. For each of the following, show the effect of the change graphically and state what happens to equilibrium price
and quantity.
a) There is a decrease in government restrictions for corn producers.
b) Suppose frozen pizza is an inferior good and consumer income increases.
c) There is an increase in the number of buyers of cars, and at the same time, subsidies to car producers are
reduced. Assume demand and supply shift by equal amounts.
d) There is an increase in the price of peanut butter (a complement to jelly), and at the same time, there is an
increase in the price of strawberries (an input in production of jelly). Assume demand shifts by a larger
amount than supply shifts. (Graph the market for jelly.)

Answers:

1. A change in demand is caused by a change in factors other than price. A change is quantity demanded is caused
by a change in price.
2. (a) Rightward; (b) Rightward; (c) Rightward; (d) Leftward

3 . (a) The supply of computers decreases when resource prices rise.

4. When there is a surplus, the price will fall until equilibrium is achieved.

5. No. An increase in income shifts the demand curve to the right only in the case of normal goods. The demand
curve shifts to the left in the case of inferior goods. The demand curve does not shift in the case of neutral goods.

6. False. If the price of oranges rises, the quantity demanded of oranges falls, ceteris paribus. There is a big
difference between the terms demand and quantity demanded. Quantity demanded refers to the amount of a good
consumers are willing and able to buy at a particular price. Demand refers to the demand curve, depicting the
various quantities demanded at all possible prices. While a number of factors may shift the demand curve, a good’s
own price is not one of them. The only thing that a good’s own price can change is quantity demanded.

7.
a) The equilibrium price will fall and the equilibrium quantity will rise .
b) The equilibrium price will fall and the equilibrium quantity will fall .

c) The equilibrium price will rise and the equilibrium quantity traded will stay the same .

d) The equilibrium price will fall and the equilibrium quantity traded will fall .