Exercises: Supply, demand and market equilibrium

Explain what the demand for a good is and state the law of demand. Illustrate it with an example: what happens to concert tickets if their price falls by half?

Explain what supply is and state the law of supply. Why does a farmer bring more strawberries to the market when their price is high?

The figure shows the supply and demand curves for the sandwich market in a city, with the price in monetary units and the quantity in thousands of sandwiches.

1. a) Read the equilibrium price and quantity from the graph.
2. b) Explain what the intersection point of the curves represents.

Explain what a market is in economics (it does not have to be a physical place) and classify these markets according to whether they are physical or digital and local or global: your town's flea market, a second-hand app, the stock market and the weekly fruit market.

Explain in your own words what the equilibrium price is. If a churro seller sets his churros at such a high price that he has some left over every morning, what imbalance is he suffering and what does that tell him about where the equilibrium lies?

List three factors that shift the demand curve of a good (buyers' income, tastes and fashions, the price of related goods) and give a specific example of each applied to the city bike market.

List three factors that shift the supply curve of a good (the cost of inputs, technology, the weather) and give a specific example of each applied to the tomato market.

Distinguish between a movement along the demand curve and a shift of the whole curve: explain what happens to coffee sales when its price rises, as opposed to what happens when coffee becomes fashionable without any change in its price.

At a price of $\text{€}\ 4$, students in a city demand $100$ smoothies a day; at $\text{€}\ 6$, only $60$.

1. a) Plot these two points on price and quantity axes (you may draw them) and explain whether they conform to the law of demand.
2. b) State two factors, other than price, that could shift this demand and state in which direction they would do so.

Family income in a neighbourhood rises. Explain, using the supply and demand model, what will happen to the equilibrium in the market for restaurant dinners (a normal good): which curve moves, in which direction, and what happens to the equilibrium price and quantity.

The local council sets the entrance fee for the municipal swimming pool at $\text{€}\ 2$ when the equilibrium price would be $\text{€}\ 5$.

1. a) Explain, using the model, what imbalance occurs (shortage or surplus) and why.
2. b) What rationing mechanisms might emerge in response to this imbalance? Name two and comment on them.

In a neighbourhood's fresh juice market: at $\text{€}\ 1$, $100$ glasses are demanded and $40$ are supplied; at $\text{€}\ 2$, $70$ are demanded and $70$ supplied; at $\text{€}\ 3$, $40$ are demanded and $100$ supplied.

1. a) What are the equilibrium price and quantity?
2. b) What imbalance is there at $\text{€}\ 1$ and at $\text{€}\ 3$? Name them (shortage or surplus) and explain how the market pushes towards equilibrium in each case.

The council opens a free, high-quality sports centre in the neighbourhood. Analyse, using the supply and demand model, what happens in the market for private gyms in the area: what relationship the two goods have, which curve moves and what happens to the equilibrium price and quantity.

In the private tutoring market, the quantity demanded is $Q_d = 100 - 10P$ and the quantity supplied is $Q_o = 10P - 20$, where $P$ is the price per hour.

1. a) Calculate the equilibrium price and quantity by setting supply and demand equal.
2. b) If a maximum price of $\text{€}\ 5$ per hour were set, calculate the quantities demanded and supplied and describe the imbalance.

The price of games consoles falls sharply. Explain, using the supply and demand model, what happens in the market for games for that console: what relationship there is between the two goods, which curve shifts and what happens to its equilibrium price and quantity.

"Record olive harvest: the price of oil falls by $30\ \%$ at source, but it is barely noticeable in the supermarket."

1. a) Analyse the first effect using the supply and demand model.
2. b) Formulate two hypotheses that explain why the final consumer price does not fall by the same amount (packaging and distribution costs, intermediaries' margins, the elasticity of demand).

A festival sells out its $20,000$ tickets at $\text{€}\ 60$ in a few hours and the next day they are resold for $\text{€}\ 150$ on the internet.

1. a) Analyse using supply and demand why reselling occurs.
2. b) Assess two solutions (a higher initial price, named tickets) and their effects on fans and on the organisers.

Every September, thousands of students look for a flat at the same time in the same university town and rents skyrocket; in June, many flats are left empty.

1. a) Explain the two seasonal equilibria using shifts in supply or demand.
2. b) Propose two measures (one public and one market-based) to ease the problem and analyse their effects.

A frost destroys half of the strawberry crop just before the peak season.

1. a) Analyse using the model which curve shifts, in which direction, and what happens to the new equilibrium.
2. b) Who gains and who loses from the frost? Consider separately the farmers who saved their crop, those who lost it, and consumers.

A cinema ticket costs $\text{€}\ 10$ at equilibrium and the council imposes a $\text{€}\ 1$ tax per ticket that the cinemas must pay.

1. a) Analyse using the supply and demand model what happens to the price audiences pay and to the number of tickets sold.
2. b) Reason who really bears the tax (audiences, cinemas, both?) and what that sharing depends on (think about how much demand reacts to the price).

To protect farmers, a government sets a minimum price for strawberries above the equilibrium price.

1. a) What imbalance appears in the market? Explain it using the model.
2. b) What options does the government have with the surplus (buy it, store it, destroy it, export it) and what does each one cost?
3. c) Assess the policy in terms of efficiency and equity, and propose an alternative.

In the city bike market, two things happen at once: household income rises (the bike is a normal good) and a new technology makes manufacturing cheaper.

1. a) Analyse separately the effect of each change on the equilibrium price and quantity.
2. b) Explain why, with both at once, you can safely predict what will happen to the quantity but not to the price. What data would you need to know the final effect on the price?

A football club has a stadium with a fixed capacity of $30,000$ seats. After a run of victories, the number of people wanting tickets shoots up: they sell out in hours, prices for single matches rise and the season-ticket waiting list grows.

1. a) Analyse the market using the model: what is special about the supply, and how is the imbalance adjusted if the club does not want to raise prices any further?
2. b) Propose two allocation criteria that a "socially responsible" club could use (affordable prices, lotteries, seniority) and analyse the winners and losers of each one.

The factory that employed $400$ people in a town of $8,000$ inhabitants closes down.

1. a) Analyse, market by market, what happens to demand in the town's bars, to the housing market and to the taxi service: which curves move and why.
2. b) Explain why the effects chain together (less income, less consumption, more closures) and what that interdependence is called.