Activity No.

1 Demand and Supply

Name: DAISY-AN C. SACCUAN Course & Section: BSMA 1-1

1. Suppose during 2003/04 the number of cars sold in Bahrain increases despite an
increase in cars prices. How can this be explained? D↑ while S remained constant.

It is possible that consumer’s incomes increased in 2003/04. Since cars are

considered as a normal good, higher consumer income must have shifted the
demand curve to the right, allowing more consumers to purchase cars.

2. Because of health awareness many people reduces their consumption of animal oil and
increase their consumption of vegetable oil to reduce cholesterol problems. What will
happen to DC of both products?

The demand curve for animal oil shifts to the left while the demand curve for vegetable
oil shifts to the right.

3. Suppose you have the following data about the price, quantity demanded and, quantity
supplied of a specific good
P Qd Qs
5 70 0
10 55 20
15 40 40
20 25 60
25 10 80
a. What is the equilibrium price and quantity?
The market is at equilibrium at P*=15 and Q*=40 units.

b. Is there a surplus or shortage when P = 10? Why?

There is a shortage when P=10 because P is less than P* and Qd is greater
than Qs. There is a shortage of 35 units.

c. Is there a surplus or shortage when P = 20? Why?

There is a surplus when P=20 because P is greater then P* and less than Qs.
There is a surplus of 35 units.

d. What is the highest price at which buyers are willing and able to buy 55 units?
Buyers are willing to pay P=10 for 55 units.

e. What is the minimum price at which sellers are willing and able to sell 60 units?
Sellers are willing to sell P=20 for 60 units.

f. What will happen in the market if price ceiling of 10 was in effect?

If there is a price ceiling of 10, it will result to excess demand or shortage of 35
units.

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 g. What will happen to demand curve, supply curve and P* and Q* if

i. An increase in the price of a substitute good

Demand increase, Supply is unchanged, Price increase and Quantity also increase.

ii. A decrease in consumers' income

Assuming that the good is a normal good: The demand decrease, Supply is unchanged,
Price decrease and Quantity also decrease.

iii. An increase in the cost of factors of production

Demand is unchanged, Supply decrease, Price increase, and Quantity decrease.

h. Suppose a new technology has been discovered to reduce the cost of the good, but the
demand for this good has decreased because of a new substitute. What is the impact on
P*, Q*, other things remain the same?
There will be an increase in supply and decrease in demand, which means it will lower
equilibrium price while having an uncertain effect on equilibrium quantity.

i. Suppose some unfavorable conditions severely affected the supply of this good while
its demand increased because of the decrease in the price of a complement, what will
happen to P* and Q*?
There will be a decrease in supply and increase in demand which means equilibrium
price will increase while having an uncertain effect on equilibrium quantity.

Activity No. 2 Demand and Supply

Name: DAISY-AN C. SACCUAN Course & Section: BSMA 1-1

Critical Thinking Questions

1) Suppose the price of gasoline is $1.60 per gallon. Is the quantity demanded higher or
lower than at the equilibrium price of $1.40 per gallon? And what about the quantity
supplied? Is there a shortage or a surplus in the market? If so, of how much?

Since $1.60 per gallon is above the equilibrium price, the quantity demanded would
be lower at 550 gallons and the quantity supplied would be higher at 640 gallons.
(These results are due to the laws of demand and supply, respectively.) The outcome
of lower Qd and higher Qs would be a surplus in the gasoline market of 640 - 550 =
90 gallons.

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2) Why do economists use the ceteris paribus assumption?

To make it easier to analyze complex problems. Ceteris paribus allows you to look
at the effect of one factor at a time on what it is you are trying to analyze. When you
have analyzed all the factors individually, you add the results together to get the
final answer.

3) Many changes are affecting the market for oil. Predict how each of the following
events will affect the equilibrium price and quantity in the market for oil. In each case,
state how the event will affect the supply and demand diagram. Create a sketch of the
diagram if necessary.

A) Cars are becoming more fuel efficient, and therefore get more miles to the gallon.

More fuel-efficient cars means there is less need for gasoline. This causes a leftward
shift in the demand for gasoline and thus oil. Since the demand curve is shifting
down the supply curve, the equilibrium price and quantity both fall.

B) The winter is exceptionally cold.

Cold weather increases the need for heating oil. This causes a rightward shift in the
demand for heating oil and thus oil. Since the demand curve is shifting up the
supply curve, the equilibrium price and quantity both rise.

C) A major discovery of new oil is made off the coast of Norway.

A discovery of new oil will make oil more abundant. This can be shown as a
rightward shift in the supply curve, which will cause a decrease in the equilibrium
price along with an increase in the equilibrium quantity. (The supply curve shifts
down the demand curve so price and quantity follow the law of demand. If price
goes down, then the quantity goes up.)

D) The economies of some major oil-using nations, like Japan, slow down.

 When an economy slows down, it produces less output and demands less input,
including energy, which is used in the production of virtually everything. A
decrease in demand for energy will be reflected as a decrease in the demand for oil,
or a leftward shift in demand for oil. Since the demand curve is shifting down the
supply curve, both the equilibrium price and quantity of oil will fall.

E) A war in the Middle East disrupts oil-pumping schedules.

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Disruption of oil pumping will reduce the supply of oil. This leftward shift in the
supply curve will show a movement up the demand curve, resulting in an increase
in the equilibrium price of oil and a decrease in the equilibrium quantity.

F) Landlords install additional insulation in buildings.

 Increased insulation will decrease the demand for heating. This leftward shift in
the demand for oil causes a movement down the supply curve, resulting in a
decrease in the equilibrium price and quantity of oil.

G) The price of solar energy falls dramatically.

Solar energy is a substitute for oil-based energy. So if solar energy becomes

cheaper, the demand for oil will decrease as consumers switch from oil to solar. The
decrease in demand for oil will be shown as a leftward shift in the demand curve. As
the demand curve shifts down the supply curve, both equilibrium price and
quantity for oil will fall.

H) Chemical companies invent a new, popular kind of plastic made from oil.

A new, popular kind of plastic will increase the demand for oil. The increase in
demand will be shown as a rightward shift in demand, raising the equilibrium price
and quantity of oil.

4) Consider the demand for hamburgers. If the price of a substitute good (for example,
hot dogs) increases and the price of a complement good (for example, hamburger buns)
increases, can you tell for sure what will happen to the demand for hamburgers? Why or
why not? Illustrate your answer with a graph.

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 P1

P2

D1

Q2 Q Q1 D2 D

The increase of the price of the substitute will increase the demand for hamburgers. The
increase in the price of the complement will decrease the price of hamburgers. Therefore,
we do not know for sure what will happened to the demand. It depends on which of these
factors have the bigger impact.

5) Suppose there is soda tax to curb obesity. What should a reduction in the soda tax do
to the supply of sodas and to the equilibrium price and quantity? Can you show this
graphically? Hint: assume that the soda tax is collected from the sellers

Price Supply

S2

Quantity of soda

A reduction is soda tax will decrease the cost of production. This will cause a
rightward shift of supply curve. Equilibrium quantity will increase and equilibrium
price will decrease. The soda tax is collected from the sellers, so a reduction in the
tax will reduce sellers' costs. Lower costs will increase supply, resulting in a lower
equilibrium market price and a higher equilibrium market quantity.

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 Activity No. 3 Demand and Supply

Name: DAISY-AN C. SACCUAN Course & Section: BSMA 1-1

Directions: Each of the questions or incomplete statements below is followed by five

suggested answers or completions. Select the one that is best in each case and write the
correct letter of your anwer in the space provided for.

B 1) During a recession, economies experience increased unemployment and a reduced

level of activity. How would a recession be likely to affect the market demand for new
cars?
A) Demand will shift to the right.
B) Demand will shift to the left.
C) Demand will not shift, but the quantity of cars sold per month will decrease.
D) Demand will not shift, but the quantity of cars sold per month will increase.
E) All of the above
B 2. Unionized workers may be able to negotiate with management for higher wages
during periods of economic prosperity. Suppose that workers at automobile assembly
plants successfully negotiate a significant increase in their wage package. How would the
new wage contract be likely to affect the market supply of new cars?
A) Supply will shift to the right.
B) Supply will shift to the left.
C) Supply will not shift, but the quantity of cars produced per month will decrease.
D) Supply will not shift, but the quantity of cars produced per month will increase.
E) All of the above
A 3. An increase in the demand for a good will cause
A) an increase in equilibrium price and quantity.
B) a decrease in equilibrium price and quantity.
C) an increase in equilibrium price and a decrease in equilibrium quantity.
D) a decrease in equilibrium price and an increase in equilibrium quantity.
E) None of the above
D 4. An increase in the supply of a good will cause
A) an increase in equilibrium price and quantity.
B) a decrease in equilibrium price and quantity.
C) an increase in equilibrium price and a decrease in equilibrium quantity.
D) a decrease in equilibrium price and an increase in equilibrium quantity.
E) None of the above
A 5. The law of demand states that the quantity of a good demanded varies
A) inversely with its price. B) directly with population.C) directly with income.
D) inversely with the price of substitute goods E) None of the above
B 6. Which of the following is consistent with the law of demand?
A) A decrease in the price of a gallon of milk causes a decrease in the quantity of milk
demanded.

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B) An increase in the price of a soda causes a decrease in the quantity of soda demanded.
C) An increase in the price of a tape causes an increase in the quantity of tapes
demanded.
D) A decrease in the price of juice causes no change in the quantity of juice demanded.
E) None of the above
B 7. A drop in the price of a compact disc shifts the demand curve for prerecorded tapes
leftward. Fromthat you know compact discs and prerecorded tapes are
A) normal goods. B) substitutes.C) inferior goods.D) complements. E) luxury
C 8. A substitute is a good
A) of higher quality than another good. B) that is not used in place of another good.
B) that can be used in place of another good . D) of lower quality than another good. E)
None of the above
C 9. People buy more of good 1 when the price of good 2 rises. These goods are
A) normal goods.B) complements.C) substitutes.D) inferior goods. E) luxury

C 10. Which of the following pairs of goods are most likely substitutes?
A) compact discs and compact disc players B) lettuce and salad dressing
B) cola and lemon lime soda D) peanut butter and gasoline E) None of tha above
A 11. A complement is a good
A) used in conjunction with another good.
B) used instead of another good.
C) of lower quality than another good.
D) of higher quality than another good.
E) None of the above
D 12. Suppose people buy more of good 1 when the price of good 2 falls. These goods
are A) substitutes.B) inferior.C) normal.D) complements. E. luxury
B 13. A change in which of the following alters buying plans for cars but does NOT
shift the demandcurve for cars?
A) a 10 percent decrease in the price of car insurance
B) a 20 percent increase in the price of a car
C) a 5 percent increase in people's income
D) an increased preference for walking rather than driving
E) All of the above
D 14. Which of the following would NOT shift the demand curve for turkey?
A) a change in tastes for turkey
B) B) a decrease in the price of ham
C) an increase in income
D) a change in the price of a turkey
E) All of the above
A 15. Which of the following does NOT shift the supply curve?
A) an increase in the price of the good
B) a fall in the price of a substitute in production
C) a decrease in the wages of labor used in production of the good
D) a technological advance
E) All of the above

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 Activity No. 4 Demand and Supply

Name: DAISY-AN C. SACCUAN Course & Section: BSMA 1-1

CRITICAL THINKING QUESTIONS

1. Illustration
1.1 Demand: For each of the fallowing cases, state how demand for the vehicle,
“HONDA SIR”, behaves, i.e., whether there is an increase or decrease in demand or in
quantity demanded.
i) The price of gasoline rises because of a shortage in the world petroleum market.
Decrease in demand

ii) A lower priced “TOYOTA REVO” enters the car market.

Decrease in demand

iii) The country is hit by another recession, causing a fall in real incomes.
Decrease in demand

iv) The government imposes a 10 per cent import levy on all imported car parts.
Decrease in demand

v) A lower rate of fatalities in accidents involving Honda Sir is observed.

Increase in demand

1.2 Supply: Indicate whether a movement upward or downward along the supply curve,
or a shift leftward or rightward of the supply curve of MANGOES occurs for the
following cases:

i) The surge in export demand raises price.

Movement upward along the supply curve

ii) The government imposes a price ceiling on mangoes to appease consumers who
have not had enough of the fruit last year.
Shift leftward of the supply curve

iii) A new variety is developed which doubles the out per tree.
Shift rightward of the supply curve

iv) The current crop of mangoes is infested by fruit files.

Shift leftward of the supply curve

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v) The price of pesticides against fruit files increases due to the 10 percent import levy.
Shift leftward to the supply curve

1.3 Describe what will happen to equilibrium price and quantity of each of the
commodities given the corresponding hypothetical situations.
i) Coffee: The Philippine Medical Association announces that caffeine in coffee
causes heart attack.
Decrease in demand resulting decrease in equilibrium price and quantity
ii) National Bookstore’s Books: Management engages in a one month cut-price book
sale.
Increase in demand resulting increase in equilibrium price and quantity
iii) Rice: Government imports rice from Thailand.
Supply increase resulting decrease in equilibrium price and increase in equilibrium
quantity
iv) Pork: Foot and mouth disease (FMD) hits thousands of pigs resulting in very high
mortality rate.
Supply decrease resulting increase in equilibrium price and decrease in equilibrium
quantity
v) Cigarettes: Taxes on cigarettes are increased from P2.00 to P3.00 per pack.
Supply increase in equilibrium price and decrease in equilibrium quantity.

Activity No. 5 Demand and Supply

Name: DAISY-AN C. SACCUAN Course & Section: BSMA 1-1

Critical Thinking Skills

1) Suppose the demand for gasoline is given by Qᴰ = 100 – 2P and the supply by Qˢ 20 +
6P
1. What will be the equilibrium price and quantity for gasoline?

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 Qd = 100 – 2P and the supply by Qs = 20 + 6P
To get the equilibrium, we equate the demand and he supply functions as follows:
100-2P = 20+6P
100-20 = 6P+2P
80 = 8P
10 = P(Equilibrium price)
Equate the value of P into any equation of the quantity as below:
Qd = 100-2P
but P = 10
Qd = 100-2(10)
Qd = 100-20
Qd = 80 units (Equilibrium quantity)

Qs = 20+6P
Qs = 20+6(10)
Qs = 20+60
Qs = 80 units (Equilibrium Quantity)

Comment on the Following Statements:

2) The current price of beef are 20% higher than last year’s price, but the Aggregate
consumption of the commodity was observed to have risen by 10% . The law of demand
does not apply in the case of beef.
An increase in prices of beef may not necessarily translate to a reduced demand as
other factors such as tastes and preferences and a relatively higher increase of
prices on substitute products of beef may still work in favor of beef to increase its
demand.
3) After reaching its peak in December 1996, the monthly sales of Toyota Corolla had
shown a downward trend as the prices of the car were gradually raise. This reduction in
demand may be traced to changes in consumers taste and preferences in favor of the
Mitsubishi GLXi as evident in the sudden proliferation of this car almost everywhere.

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An increase in prices of Toyota Corolla would shift the preference to other cheaper
brands(Mitsubishi) bringing the level of quantity demanded for Toyota in that year.

4) Years ago ( and up to now ), PCC City has been known for its rapidy increasingn rate
of theft, armed robbery and mugging by persons addicted to drugs Since those who
craved for drugs did not earn enough money to buy sufficient quantities, they resorted to
crimes of varying degrees. Mayor HIRAP NA has been aware of the problem and he
vowed strongly that he would reduce, if not totally eliminate, these drug – related crimes.
His age – old solution: crack down on the drug traffic, arrest drug dealers and drastically
decrease the amount of drugs onthe street. Having done this, the mayor is still confused
why the drug-related crime rates are still rapidly increasing in his beloved PACC City.
Demand for addiction goods is not subject to the laws of demand and supply. For
the above scenario, an increase in the crackdown on drug trafficking will curtail the
supply. However, this doesn’t eliminate the demand for the same as addicted
persons will still find their names to satisfy those addictions. A reduction in the
want for drugs such as by starting rehabilitation process and education on the same
may help reduce the rates of drug abuse and effectively crime.

5) Some people claim that without government price support programs, farmers could
farmers could not afford to grow some crops like rice: therefore, the country will not
have rice without the support programs. Is this claim correct or not? Analyze the case
with and without the support.
The above claim is not entirely true. So long as there demand for rice, there will be
production of the same to some given level. Government support will only come to
boost this production level by reducing the production costs involved resulting to an
increase in the supply of rice to that point where it meets the quantity demanded.

Tools of Analysis: Demand and Supply

The concepts of demand and supply are among the most important in all economics.
They are of course not the only tools of analysis in the economist’s armoury, but they
allow us to identify and understand the relevant factors in analyzing many economic
situations. It is assumed at this point that students already have some familiarity with
these concepts, but a brief review is in order here, so that we can then see their
application to a situation that has caused considerable controversy in recent years, the
subject of equal prize money in tennis.

a. Demand

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 In the economic sense demand refers to the quantities that people are or would be
willing to buy at different prices during a given time period, assuming that other factors
affecting these quantities remain the same. For reasons explained in Chapter 3 on
demand theory, there is generally an inverse relationship between the quantity demanded
and the price charged, and this is customarily shown in the downward-sloping demand
curve, although the relationship can equally be expressed in terms of a function or
equation. The demand relationship is determined by many factors, but consumer tastes
are fundamental. This applies both to products and to the services of people in the labour
market.

b. Supply

In the economic sense supply refers to the quantities that people are or would be
willing to sell at different prices during a given time period, assuming that other factors
affecting these quantities remain the same. When talking about the supply of products it
is often the costs of production that are most important in determining the supply
relationship, and generally there is a direct relationship between the quantity supplied
and the price offered, with more being supplied the higher the price. However, in factor
markets, in particular the labour market, supply is more complex. The availability of
people with the relevant skills, the pleasantness of the work and the opportunity cost
involved are all important factors.

In order to get a further flavour of what analysis in managerial economics is all

about, it is useful to consider the next case study, where there have been a lot of views
expressed which show a lack of understanding of economic fundamentals.

Activity No. 6 Demand and Supply

Name: DAISY-AN C. SACCUAN Course & Section: BSMA 1-1

Case Study Analysis

Case Study : Equal Prize Money in Tennis

A British cabinet minister has now stepped into the debate regarding equal prize money
at Wimbledon, the British Open tennis championships. Patricia Hewitt (no relation to the

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men’s winner), the Trade and Industry Secretary, announced that it is ‘simply wrong’
that the winner of the men’s singles should collect £525,000, while the women’s winner
should receive only £486,000, when they had both worked equally hard. The debate
regarding prize money is not new, and has aroused some strong feelings in the last ten
years. The 1996 men’s champion, Richard Krajicek, commented in 1992 that most
women players were ‘fat, lazy pigs’ who deserved to win less. This attracted a storm of
protest from many supporters of women’s tennis, and these supporters and lobbyists have
been successful in gradually reducing the differentials in prize money. Tim Henman, the
British number one player, attracted criticism in 1999 for accusing female players of
being ‘greedy’ in demanding more prize money in ‘Grand Slam’ tournaments. The
situation in 2002 was that in the four ‘Grand Slam’ tournaments the prize money was
equal for men and women at both the US and Australian Opens, but interestingly the
women’s prize money was only half that of the men’s at the French Open.
Let us consider some of the main arguments that have been put forward both for and
against equal prize money:
FOR
1 Women have to train just as long and hard as men.
2 The ball is in play longer in women’s matches, because the game involves more rallies
and less ‘serve and volley’ tactics, according to research by the Women’s Tennis
Association.
3 Female stars are just as popular with the crowds as male players.
4 Unequal pay is an example of unfair discrimination, which in many countries is illegal.
AGAINST
1 Men have to play the best of five sets, while womenonly play the best of three.
Therefore men play longer. Research from Stirling University shows that, on this basis,
men earn less. The 1998 men’s singles champion, Pete Sampras, earned £26,270 per
hour, compared with £42,011 per hour received by the women’s champion, Jana
Novotna.
2 Competition at the top of women’s tennis is less stiff, allowing female stars to compete
in the doubles more easily, and win two prizes. The combination of singles and doubles
prizes for women would exceed the singles prize for men.
3 Male players attract bigger crowds.
4 Women are not as good as men.
The last point has also raised argument, since it is difficult to make any objective
evaluation. On a purely objective measure, the top female stars serve nearly as fast as the
top male players, but obviously there are many other factors which make a top tennis
player apart from a fast serve. In a recent television interview John McEnroe, never one

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to shy away from controversy, opined that the top female seed at Wimbledon in 2002,
Venus Williams, would only rank about number 400 in the world among male players.
Adding another dimension to the debate is sponsorship income. Anna Kournikova has
never won a major tournament; she is currently ranked number 55 in the world. Her
career total prize winnings amounted to just under £3 million at the end of 2001.
However, it is estimated that she has accumulated around £50 million in sponsorship
income, mainly from Adidas, the sportswear supplier. Although sponsorship income
tends to be directly related to the talent of the player, as reflected in computer rankings,
there are obviously other factors that are relevant.
However, one factor that is important here is that sponsorship income is determined
much more by the market forces of demand and supply than is the amount of prize
money in a tournament. The amount of tournament prize money at Wimbledon is
determined by the management committee of the All England Club. What do the public
make of all this? In a recent television poll by the BBC the viewers calling in were nearly
equally divided: 51 per cent thought the men should receive more, 49 per cent thought
prize money should be equal.
Questions
1. Do the observations by Patricia Hewitt make any sense in economic terms?
Yes, the observations made by Patricia Hewitt make sense in economic terms.
Because there is more about the sponsorship in the game by management
committee as they show the money initiated by which company and how much they
are paying. The observations point towards equitable distribution of resources.

2. How relevant is hard training to determining prize money?

Hard training is assumed to be one of the factors deciding the value of prize money.
One of the arguments in favor of equal prizes states that men and women both
undergo equally hard training exercises and thus should be rewarded in the same
manner. On the other hand, the argument against this states that women have to
compete in an easier environment among themselves that entails not as hard a
training as men. Thus they should be rewarded lesser than men.

3. How relevant is length of playing time to determining prize money?

The parameter of length of playing time is taken as one of the determinants in
deciding the prize value of tournaments for men and women. And for a player to
win a match they have to do hard training and hard labor over it. The argument
made in favor of equal prizes states that women play longer matches because their
game involves less rallies. The argument against this states that men play longer

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because they deal with five sets whereas women play best of three sets. Thus, length
of playing time involved by the two genders is taken as a parameter of judgement .

4. Why is sponsorship relevant to the prize money debate? Is it a good idea to relate prize
money to sponsorship?
Sponsorship is being related to the prize money debate to determine whether men
and women players both raise sponsorships equally or there is a disparity between
the two. And sponsorship it helps the management committee to get some money
initiated to them for the match and by this match will get more promotion as which
company is doing the sponsorship. The belief is that sponsorship earned depends on
the talent of the player rather than anything else. I think no, it’s not good to relate
the prize money to sponsors as in between the miss the charm of the game and the
energy in the crowed and the player for the winning of the match.

5. Can you suggest any way of using economic forces to determine prize money? What
about having an ‘open’ championship where men play women, with no distinction
between men’s singles and women’s singles
The prize money should be initiated by the government of the nation or can be done
in the way of charity in which the name of the sponsors will not be added to the
match. As the game played by the players do represent their nation in competition
with the other countries then the government must process the prize or for those
players too who plays in the national state level to motivate them to represent their
nation in the international matches. Or in the lower level, the amount can be charity
by the companies or by any interested person in which they are not allowed to get
their names involved in the prize amount. And nowadays, girls and boys are
different as genders but as per their capability and ability to perform they are
equal. So initiating a match between a single men and women will be best initiative
for the women empowerment and motivating women and helping the players to
enjoy not format of their match and having new competitor for them.

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