Supply and Demand

Abstract

• 1. When income increases, the demanded quantity of an ordinary good decreases.

• 2. If the price of an inferior good increases, then the demand decreases.

• 3. Two goods are substitutes for each other if the demand for each good decreases when the price of the other good increases.

• 4. The demand for a good increases as its price increases. Hence, it is a Giffen good.

Figure 4.1 shows the relevant market for the car firm CarMaker. For the following questions, please take the demand x ₁, the supply y ₁ and the equilibrium in point a as reference point.

• 1. A rival firm, which produces a substitute for the cars by CarMaker, lowers the price of its cars. The new equilibrium is at a point such as i.

• 2. Due to a process of innovation, CarMaker can reduce the marginal costs. The new equilibrium is at a point such as h.

• 3. The government increases the motorway toll. The new equilibrium is at a point such as d.

• 4. The government reduces the mineral oil tax. The new equilibrium is at a point such as f.

Assume that the market for corn is perfectly competitive. Supply is increasing and demand is decreasing in price.

• 1. A large amount of the crop is destroyed by storms. The equilibrium price thus increases, ceteris paribus.

• 2. All harvesters’ wages decrease. The market supply function shifts, ceteris paribus, to the left.

• 3. A new technology allows the production of gasoline from corn. The equilibrium demand for corn decreases and the equilibrium quantity increases, ceteris paribus.

• 4. The income of the consumers of corn increases. The equilibrium price for corn thus increases, ceteris paribus.