Topic One: Introduction, Demand, Supply and the Equilibrium

Solutions to Tutorial Questions

Question 1
(a) Market Structure - the competitive environment in the market
Concentration - the number and size distribution of sellers in the market (consider
market shares or concentration ratios).
Product Differentiation - physical and subjective differences between rival firms
products. (eg, colour or quality, brand name)
Barriers to Entry - the extent to which it is difficult for new firms to enter the
market and compete with existing firms. (eg, economies of scale, patent rights,
cost,..)
Question 2
Go back to the definition of concentration it is not just the number of firms, but
also the size distribution.
For example, assume two markets in which there are 100 firms in market A all firms
are of equal size in market B there are two firms each of whom have 40% of the
market shares and the remaining 98 firms equally share the remaining 20% of the
market.
Question 3
To sketch the demand and supply curves
choose any two prices, substitute into the
demand (supply) equation to find two
points on the demand (supply) curve, then
join these two points with a straight line.
For example:
For QD = 200 - 5P,
if P = 0 then QD = 200, ie, 200 5(0) and
if P = 20 then QD = 100, ie, 200 5(20).
These are two points on the demand curve.
For QS = -25 + 4P,
if P = 0 then QS = -25, ie, -25 + 4(0) and
if P = 20 then QS = 55, ie, -25 + 4(20).
These are two points on the supply curve.

(a) (i)
P
S

40

25
20
Prices and Markets: demolec Solutions Topic1 vm081
D
1
-25

55 75 100

200

(a) (ii) Focus on the price-quantity relationship. Assume other influencing factors,
such as income and price of other goods, remain constant.
(a) (iii) At equilibrium

QD = QS
200 - 5P = -25 + 4P
225 = 9P
25 = P
and QD = 200 - 5(25) = 200 125 = 75, or QS = -25 + 4(25) = -25 + 100 = 75
That is,

price = $25
quantity demanded = quantity supplied = 75 units
total exp = total rev = PxQ = $1,875

(b) (i)

Calculate the equilibrium as in (a) (iii), replacing QS = -25 + 4P with the new
supply curve QS = -7 + 4P
Solution: price = $23
quantity demanded = quantity supplied = 85 units

(b) (ii) No. Differentiate between shifts (other factors changing) leading to a price
change and movements along the curves that occur as a result of the price
changing.
Question 4
(a)

P
80

40
10
-100

(b)
(c)

600

300

Equilibrium : This can be found as before by solving QD = QS.

Solution: PE = $40 and QE = 300,000 kg
P
80

40

Prices and Markets:

demolec Solutions Topic1 vm081 D
10
2
600
0
300
-100

An increase in the price of a substitute good would shift the demand curve out to
the right (D to D ). That is, your good becomes relatively less expensive in
comparison to the substitute good and so more attractive to consumers. This
creates excess demand (AB) at the original equilibrium price of $40. As a result,
market forces will cause the equilibrium price to rise and the equilibrium amount
exchanged will increase. It will have no impact on the position of the supply
curve.
(d) An increase in the price of labour used to produce good Y will increase the cost
of producing the good and hence shift the supply curve up to the left (inwards).
Depending on how far the
supply curve shifts, relative
to the shift in the demand
curve, the new equilibrium
quantity could be more
than, less than or equal to
300. However, the new
equilibrium price will be
greater than $40.

P
S2
S1

80

40

10

D
0

300

600

Question 5
(i) You should disagree. If there is a shortage, firms will raise the prices they
charge. The quantity supplied will increase, the quantity demanded will
decrease, and equilibrium will be reached at a higher price.
(ii) The statements reasoning is incorrect. It should have been: Increased
production leads to a lower price, which increases the quantity demanded.
There is a movement along the demand curve, but the demand curve does not
shift.

Prices and Markets: demolec Solutions Topic1 vm081

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