Question

Questions

Complete the following three problems. In each of the following scenarios, identify how the change described in that scenario affects:

1. the demand curve 2. the supply curve 3. the equilibrium price (P) 4. the equilibrium quantity (Q)

The answer in each cell should be increase, decrease, no change, or unknown for the effect on demand, supply, price.

Problem 1

Consider the market for gasoline. Each scenario described below will have an effect on the gasoline market.

● Scenario A – The average household income rises.

● Scenario B – The government implements a tax on the production of gasoline.

● Scenario C – Both changes (Scenarios A and B) occur simultaneously

Write answers to Problem 1 in the following table.

Effect on Demand ●Effect on Supply ●Effect on Price ●Effect on Quantity

Scenario A

Scenario B

Scenario C

Problem 2

Consider the market for electric cars (e.g., Nissan Leaf, Tesla vehicles). Each scenario described will have an effect on the electric car market.

● Scenario D – Improved technology substantially lowers the price of the batteries used as an essential input for the production of electric cars.

● Scenario E – Electric cars and traditional, gasoline-powered cars are (consumer) substitutes. The price of gasoline-powered cars rises (perhaps due to a tax).

● Scenario F – Both changes (Scenarios D and E) occur simultaneously

Write answers to Problem 2 in the following table.

Effect on Demand ●Effect on Supply ●Effect on Price ●Effect on Quantity

Scenario D

Scenario E

Scenario F

Problem 3

Consider the market for lumber (e.g., wooden boards). Each scenario described will have an effect on the lumber market.

● Scenario G – Lumber is used extensively by residential construction firms, which also require a substantial labor force. Thus, lumber and construction labor are complements. The wages (price) paid to construction labor rises.

● Scenario H – Logging and processing of trees produces both lumber and pulpwood (woody material used for paper, bioenergy, etc.). Thus lumber and pulpwood can be considered joint products.* The price of pulpwood rises.

● Scenario I – Both changes (Scenarios G and H) occur simultaneously

*Note: Under some circumstances, lumber and pulpwood could be considered production substitutes, rather than joint products. Ignore that possibility for the purposes of this exercise.

Write answers to Problem 3 in the following table.

Effect on Demand ●Effect on Supply ●Effect on Price ●Effect on Quantity

Scenario G

Scenario H

Scenario I

Answer 1

Problem 1: Consider the market for gasoline -

Scenario/ Effect	Effect on Demand	Effect on Supply	Effect on quantity	effect on price
Scenario A	increase	no change	increase	increase
Scenario B	no change	decrease	decrease	increase
Scenario C	increase	decrease	unknown	increase

In scenario A when there will be increase in average income of the household increases then there will be rightward shift in demand curve and supply curve will not change and as a result equilibrium quantity will rise and also equilibrium price. In scenario B when government implemented unit tax on production of gasoline then the supply curve will shift leftward and demand curve will not change. As a result equilibrium price will rise and equilibrium quantity will decrease. In scenario C when both occurs simultaneously then demand rises and supply falls. As a result we can not say anything about equilibrium quantity because it depends on the impact of decrease in quantity due to tax increase in quantity due to rise in income. Equilibrium price will rise.

Problem 2: Market for electric Cars-

Scenario/ Effect	effect on demand	effect on supply	effect on quantity	effect on price
Scenario D	no change	increase	increase	decrease
Scenario E	increase	no change	increase	increase
Scenario F	increase	increase	increase	unknown

In scenario D when price of input of electric car like price of battery decrease then supply will increase and which resulted shift in supply curve towards right and demand curve will not change. As a result of this equilibrium quantity will rise and equilibrium price will fall. In scenario D if price of substitute of electric cars rises then the demand of electric car will rise. As a result of this equilibrium quantity will rise and we can not say about price because it depends on how much price rises due to increase in demand and how much price falls due to increase in supply.

Problem 3: Consider the market for lumber -

Scenario/ Effect	effect on demand	effect on supply	effect on quantity	effect on price
Scenario G	no change	decrease	decrease	increase
Scenario H	no change	increase	increase	decrease
Scenario I	no change	unknown	unknown	decrease

In Scenario G, if price of labour i.e wage increases and it is a complementary to lumber production and as a result of this supply curve will shift due to increase in cost of production. As supply curve shift leftward and as a result equilibrium quantity will fall and equilibrium price will rise. In Scenario H, if the price of pulpwood rises and it is a joint product of lumber then the supply of lumber will increase and it resulted shift in supply curve towards right. As a result of this equilibrium price will fall and equilibrium quantity will rise. In Scenario I, when both occurs simultaneously we can not say about supply because one force is shifting the supply leftward and another force is shifting the supply rightward. In simultaneous effect we can not say what will happen. As demand also no changes we can not say about equilibrium price and quantity. Because it depends on the how much supply increase and decrease.