METU

Department of Economics
Econ 210: Principles of Economics
Section All
Fall 2022-2023

Review from previous lessons:

Marginal Costs and Marginal Benefits
Marginal Cost is the cost added by producing one additional unit of a product or
service.
Marginal Benefit is the incremental increase in the benefit to a consumer caused
by the consumption of one additional unit of a good or service.
The Economic Decision Rule
A rule in economics asserting that if the marginal benefit of an action is higher
than the marginal cost, then one should undertake the action; however, if the
marginal cost is higher than the marginal benefit of the action, one should not
undertake it.
Opportunity Cost
When an option is chosen from alternatives, the opportunity cost is the "cost"
incurred by not enjoying the benefit associated with the best alternative choice.

Multiple Choice Questions from Review Part

Q1: Economists view normative statements as

a) pessimistic, putting the worst possible interpretation on things.
b) statements about the normal condition of the world.
c) descriptive, making a claim about how the world is.
d) prescriptive, making a claim about how the world ought to be.

Q2: The term ''laissez faire'' suggests that

a) land and other natural resources should be privately owned, but capital should
be publicly owned
b) land and other natural resources should be publicly owned, but capital
equipment should be privately owned
c) government should not interfere with the operation of the economy
d) government action is necessary if the economy is to achieve full employment
and full production

Q3: Which of the following best describes the invisible-hand concept?

a) A market economy, through the price mechanism, will allocate resources
efficiently.
b) The non-substitutability of resources creates a conflict between private and
public interests and calls for government intervention.
c) The market system is the best system for overcoming the scarce resources-
unlimited wants problem.
d) Central direction by the government will improve resource allocation in a
capitalistic economy.

Q4: Which of the following areas of study typifies microeconomics as opposed to

macroeconomics?
a) the effect of changes in household saving rates on the growth rate of national
income
b) the impact of faster money growth on the rate of inflation
c) the impact of minimum-wage laws on employment in the fast-food industry
d) a comparison of alternative tax policies and their respective impacts on the
rate of the nation’s economic growth

Q5: Which one of the following represents the concept of ''opportunity costs”?
a) a decision by your parents to put more of their savings to fund college
expenses and less to life insurance.
b) public policy in the state of Washington to reduce timber production so that
more wildlife species will be preserved.
c) a decision by a company to increase advertising expense for a new board game
by decreasing its budget for telephone expenses.
d) all of the above do represent the concept of “opportunity costs''.

Q6: "If I didn't have class tonight, I would save the $4 campus parking fee and
spend four hours at work where I earn $10 per hour." The opportunity cost of
attending class this evening is:
a) $0 c) $40

b) $4 d) $44
Q7: The Latin phrase “ceteris paribus” means:
a) The production-possibilities curve never shifts.
b) Laissez faire.
c) Other things remaining unchanged
d) The invisible hand.

Q8: The regulatory mechanism of the market system is:

a) self-interest.
b) private property.
c) competition.
d) specialization.

Problem Set 2

Demand
Demand refers to a schedule of quantities of a good that will be bought per
unit of time at various prices, other things constant.
Quantity demanded refers to a specific amount that will be demanded per
unit of time at a specific price, other things constant.
Law of Demand: The negative relationship between price and quantity
demanded: As price rises, quantity demanded decreases; as price falls,
quantity demanded increases
Substitutes vs. Complements
Substitutes: Goods that can serve as replacements for one another; when
the price of one increase, demand for the other increases.
Complements: Goods that “go together”; a decrease in the price of one
result in an increase in demand for the other and vice versa

Shift of Demand versus Movement Along a Demand Curve

Shift of a Demand Curve: The change that takes place in a demand curve
corresponding to a new relationship between quantity demanded of a good
and price of that good. The shift is brought about by a change in the original
conditions. (Change in income, preferences, or prices of other goods)
Movement along a Demand Curve: The change in quantity demanded
brought about by a change in price. (Change in price of a good)

Supply
Supply refers to a schedule of quantities a seller is willing to sell per unit of
time at various prices, other things constant.
Quantity supplied refers to a specific amount that will be supplied at a
specific price.
Law of Supply: The positive relationship between price and quantity of a
good supplied: An increase in market price will lead to an increase in
quantity supplied, and a decrease in market price will lead to a decrease in
quantity supplied.

Shift of Supply versus Movement Along a Supply Curve

Shift of Supply Curve: The change that takes place in a supply curve
corresponding to a new relationship between quantity supplied of a good
and the price of that good. The shift is brought about by a change in
the original conditions. (Change in costs, input prices, technology, or prices
of related goods)
Movement along a Supply Curve: The change in quantity supplied
brought about by a change in price. (Change in price of a good)
Market Equilibrium
Equilibrium: The condition that exists when quantity supplied, and quantity
demanded are equal. At equilibrium, there is no tendency for price to
change

Excess Demand vs. Excess Supply

Excess Demand or Shortage: The condition that exists when quantity
demanded exceeds quantity supplied at the current price.
Excess Supply or Surplus: The condition that exists when quantity
supplied exceeds quantity demanded at the current price

Part A: Problems

Q1: In the market for ordinary milk the demand function for is 𝑄𝐷 = 100– 30𝑃
and the supply function is 𝑄𝑆 = 50 + 20𝑃.
a) Calculate the equilibrium price and quantity in the market.

At equilibrium 𝑄𝑆 =𝑄𝐷
100 − 30𝑃 = 50 + 20𝑃 𝑃* = 1 and 𝑄* = 70
b) After a famous doctor states that lactose-free milk is better for health,
which of the following demand functions might be representing the new
demand curve for ordinary milk?
1) 𝑄𝐷 = 125 – 30𝑃
2) 𝑄𝐷 = 75 – 30𝑃

This statement decreases quantity demanded at all price levels, so that

demand will decrease. At original demand function when 𝑃 = 0 quantity
demanded is 100. Put 𝑃 = 0 in functions (1) and (2);
(1) 𝑄𝐷 = 125 – 30𝑃 => Q1d= 125 (2) 𝑄𝐷 = 75 – 30𝑃 => Q2d= 75
Since 75 < 100, the new demand function should be (2)

c) Find the new equilibrium price and quantity after the shift of the demand
curve.

𝑄𝑆 = 𝑄𝐷 => 75 − 30𝑃 = 50 + 20𝑃 => 𝑃* = 0.50 and 𝑄* = 60

d) Starting with the demand and supply functions given at the beginning of
this question in (a), if a technological advancement in ordinary milk
production occurs, which of the following might be the new supply curve?
3) 𝑄𝑆 = 25 + 20𝑃
4) 𝑄𝑆 = 75 + 20𝑃

This technological advancement increases in quantity supplied at all

price levels, so that supply will increase. At original supply function when
P=0 quantity supplied is 50. Put P=0 in functions (3) and (4);
(3) 𝑄𝑆 = 25 + 2𝑃 => Qs3 = 25 (4) 𝑄𝑆 = 75 + 2𝑃 => Qs4 = 75
Since 75>50, the new supply function should be (4).

e. Find the new equilibrium price and quantity after the shift of the supply
curve.

𝑄𝑆 = 𝑄𝐷 => 100 − 30𝑃 = 75 + 20𝑃 => 𝑃* = 0.5 and 𝑄* = 85

Q2: For each of the following, draw a diagram that illustrates the likely
effect on the market for sausages. Indicate in each case the impact on
equilibrium price and equilibrium quantity. (Show clearly what happens to
demand curve, supply curve, equilibrium price and quantities).
a) A surgeon general warns that sausages are high-cholesterol food, and
they cause heart attacks.

Demand shifts to the left. Equilibrium price decreases,

equilibriumquantity decreases

b) The price of egg, a complementary product, decreases.

Demand shifts to the right. Equilibrium price increases,

equilibriumquantity increases

c) An increase in the price of spice used in the production of sausages.

Supply shifts to the left. Equilibrium price increases, equilibrium quantity
decrease

d) Hot-dogs become trendy in cafes.

Same as (ii)
e) A technological improvement occurred in sausage production.

Supply shifts to the right. Equilibrium price decreases, equilibrium

quantity increases

Q3: How will each of the following changes in demand and/or supply affect
equilibrium price and equilibrium quantity in a competitive market; that is,
do price and quantity rise, fall, or remain unchanged, or are the
answers indeterminate because they depend on the magnitudes of the
shifts? Use supply and demand to verify your answers.

i. Supply decreases and demand is constant.

Supply decreases and demand is constant. Price up; quantity down. The
decrease in supply with a constant demand results in an increase in
equilibrium price and a decrease in equilibrium
quantity as shown in the figure.

ii. Demand decreases and supply is constant.

Demand decreases and supply is constant. Price down; quantity down.
The decrease in demand with a constant supply results in a decrease in
equilibrium price and a decrease in equilibrium quantity as shown in the
figure.
iii. Supply increases and demand is constant.

Supply increases and demand is constant. Price down; quantity up.

The increase in supply with a constant demand results in a decrease in
equilibrium price and an increase in equilibrium quantity as shown in the
figure.

iv. Demand increases and supply increases.

Demand increases and supply increases. Price indeterminate; quantity up.
The increase in supply and the increase in demand unambiguously
increases the equilibrium quantity. This is because the increase in supply
and the increase in demand both increase the equilibrium quantity.
However, the change in equilibrium price is indeterminate because the
increase in supply puts downward pressure on the equilibrium price and the
increase in demand puts upward pressure on the equilibrium price. The
figure shows these effects when the demand effect dominates.

v. Demand increases and supply is constant.

Demand increases and supply is constant. Price up; quantity up.

The increase in demand with a constant supply results in an increase in
equilibrium price and an increase in equilibrium quantity as shown in the
figure.
vi. Supply increases and demand decreases.

Supply increases and demand decreases. Price down; quantity

indeterminate. The increase in supply and the decrease in demand
unambiguously decreases the equilibrium price. This is because the
increase in supply and the decrease in demand both put downward
pressure on the equilibrium price. However, the change in equilibrium
quantity is indeterminate because the increase in supply increases the
equilibrium quantity and the decrease in demand decreases the equilibrium
quantity. The figure shows these effects when the supply effect dominates.
vii. Demand increases and supply decreases.

Demand increases and supply decreases. Price up, quantity indeterminate.

The decrease in supply and the increase in demand unambiguously
increases the equilibrium price. This is because the decrease in supply and
the increase in demand both put upward pressure on the equilibrium price.
However, the change in equilibrium quantity is indeterminate because the
decrease in supply decreases the equilibrium quantity and the increase in
demand increases the equilibrium quantity. The figure shows these effects
when the demand effect dominates.
viii. Demand decreases and supply decreases.

Demand decreases and supply decreases. Price indeterminate and

quantity down. The decrease in supply and the decrease in demand
unambiguously decreases the equilibrium quantity. This is because the
decrease in supply and the decrease in demand both decrease the
equilibrium quantity. However, the change in equilibrium price is
indeterminate because the decrease in supply puts upward pressure on the
equilibrium price and the decrease in demand puts downward pressure
on the equilibrium price. The figure shows these effects when the supply
effect dominates
Q4: What effect will each of the following have on the demand for small
automobiles such as the Mini-Cooper and Fiat 500?
i. Small automobiles become more fashionable.

Demand increases.
ii. The price of large automobiles rises (with the price of small autos
remaining the same).

Demand increases due to substitutability

iii. The price of gasoline substantially drops.

Change in demand is ambiguous. Demand could increase due to the

decrease in gas prices would stimulate demand for all cars, including
small ones. Demand could decrease due to small cars are attractive to
consumers because of fuel efficiency, and that a decrease in gas prices
effectively reduces the price of the “gas guzzling” (benzini içen) substitutes.
That would encourage consumers to switch from smaller to larger cars
(SUVs), and demand for small automobiles would fall.
Q5: a) Indicate whether each of the following situations would shift the
demand curve to the left, to the right, or not at all.
i) A decrease in a society’s income.
ii) An increase in the price of a substitution good.
iii) An increase in the price of a complementary good.
iv) A decrease in the expected future price of a good.
v) A decrease in the current price of the good.

Answers:

i) Shift to the left

ii) Shift to the right
iii) Shift to the left
iv) Shift to the left
v) No shift (There will be movement along the demand line.)

b) Indicate whether each of the following situations would shift the supply
curve to the left, to the right, or not at all.
i) An increase in the number of firms in the market
ii) An increase in the current price of the product
iii) A decrease in productivity
iv) An increase in the expected future price of a product
v) A decrease in the price of an input

Answer:
i) Shift to the right
ii) No shift (There will be movement along the supply line.)
iii) Shift to the left
iv) Shift to the left
v) Shift to the right
Part B: Multiple Choice Questions

Q1: What is the difference between an "increase in demand" and an

"increase in quantity demanded"?
a) There is no difference between the two terms; they both refer to a shift of
the demand curve.
b) An "increase in demand" is represented by a rightward shift of the
demand curve while an "increase in quantity demanded" is represented by
a movement along a given demand curve.
c) There is no difference between the two terms; they both refer to a
movement downward along a given demand curve.
d) An "increase in demand" is represented by a movement along a given
demand curve, while an "increase in quantity demanded" is represented by
a rightward shift of the demand curve.

Q2: An increase in society’s income would be represented by a movement

from
a) A to B.
b) B to A.
c) D1 to D2.
d) D2 to D1.
Q3: A decrease in taste or preference would be represented by a
movement from
a) A to B.
b) B to A.
c) D1 to D2.
d) D2 to D1

Q4: A decrease in the price of the product would be represented by a

movement from
a) A to B.
b) B to A.
c) D1 to D2.
d) D2 to D1

Q5: A decrease in the price of a substitute good would be represented by a

movement from
a) A to B.
b) B to A.
c) D1 to D2.
d) D2 to D1.

Q6: A decrease in the price of a complementary good would be

represented by a movement from
a) A to B.
b) B to A.
c) D1 to D2.
d) D2 to D1.

Q7: An increase in the expected future price of the product would be

represented by a movement from
a) A to B. c) D1 to D2.
b) B to A d) D2 to D1.
Q8: a) Suppose that the supply of parking spaces in METU is fixed at
4,500, and the annual demand for these parking spaces is given as.
QD = 6000 − 3 ∙ P
What is the equilibrium annual price for parking at METU?
a. 1,000 TL
b. 750 TL
c. 500 TL
d. 250 TL

b) Now suppose that due to inflation, annual price for parking spaces

increase to 600. What will be new quantity supplied in equilibrium?

a. 3900
b. 3500
c. 4700
d. 4200