Questions for Week 2
(To be discussed in Friday (2nd August) Lecture)
There are no small workshops in week 2
Part I: Short answer questions
1. The following passage refers to the operation of a free-market economy. Delete the words
(in italics) which are incorrect.
In a totally free-market economy, the quantities of each type of good that are bought and
sold, and the amounts of factors of production (labour, land and capital) that are used, are
determined by the decisions of individual households and firms through the interaction of
demand and supply.
In goods markets, households are suppliers / demanders and firms are suppliers /
demanders. In labour markets, households are suppliers / demanders and firms are
suppliers / demanders.
Demand and supply are brought into balance by the effects of changes in price. If supply
exceeds demand in any market (a surplus), the price will rise / fall / stay the same. This
will lead to a rise in the quantity both demanded and supplied / a fall in the quantity
both demanded and supplied / a rise in the quantity demanded but a fall in the quantity
supplied / a rise in the quantity supplied but a fall in the quantity demanded. If,
however, demand exceeds supply in any market (a shortage), the price will fall / rise /
stay the same. This will lead to a fall / rise in the quantity demanded and a fall / rise in
the quantity supplied. In either case the adjustment of price will ensure that demand and
supply are brought into equilibrium, with any shortage or surplus being eliminated.
2. How will the market demand curve for a 'normal' good shift (i.e. left, right or no shift) in
each of the following cases?
(a) The price of a substitute good falls ................................................ left / right / no shift
(b) Population rises .............................................................................. left / right / no shift
(c) Tastes shift away from the good ..................................................... left / right / no shift
(d) The price of a complementary good falls ...................................... left / right / no shift
(e) The good becomes more expensive ................................................ left / right / no shift
3. How will the market supply curve of a good shift (i.e. left, right or no shift) in each of
the following cases?
(a) Costs of producing the good fall. .................................................... left / right / no shift
(b) Alternative products (in supply) become more profitable. ............. left / right / no shift
(c) The price of the good rises. ............................................................. left / right / no shift
(d) Firms anticipate that the price of the good is about to fall. ............ left / right / no shift
4. How will the following changes affect the market price of wheat flour (assuming that the
market is initially in equilibrium)? In each case, sketch what happens to the demand
and/or supply curves and, as result, what happens to the equilibrium price.
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5. The diagram below shows the demand for and supply of petrol. The market is initially in
equilibrium at point x.
There is then a shift in the demand and/or supply curves, with a resulting change in
equilibrium price and quantity.
To which equilibrium point (a, b, c, d, e, f, g or h) will the market move from point x after
each of the following changes?
(a) A rise in the cost of refining petrol.
(b) A fall in bus and train fares.
(c) A fall in the price of crude oil and an increase in the price of cars.
(d) A rise in tax on petrol and a reduction in tax on cars.
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6. The demand and supply schedules in Britain for wheat in a free market are as follows:
(a) What is the equilibrium price?
(b) Suppose the government fixes a maximum price of £200 per tonne. What will be the
effect?
(c) Suppose that supply now increases by 150 tonnes at all prices. Enter the new figures.
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(d) How much will price change from the original equilibrium (assuming that the
government no longer fixes a maximum price)? How much more will be sold?
7. What will happen to the equilibrium price and quantity of butter in each of the following
cases? You should state whether demand or supply or both have shifted and in which
direction: (a) a rise in the price of margarine; (b) a rise in the demand for yoghurt; (c) a rise in
the price of bread; (d) a rise in the demand for bread; (e) an expected increase in the price of
butter in the near future; (f) a tax on butter production; (g) the invention of a new, but
expensive, process of removing all cholesterol from butter, plus the passing of a law which
states that butter producers must use this process. In each case assume that other things
remain the same.
8. The price of cod (a type of fish) is much higher today than it was 30 years ago. Using demand and
supply diagrams, explain why this should be so.
