Name: Period: Date: 5. As the price of a DVD increases, does the quantity of DVDs demanded increase or decrease?

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1 Name: Period: Date: Classwork Demand and Supply Practice Activity (30 points) Exercise 1: Graphing the Demand Curve. Use the data presented in the Demand Schedule for DVDs to graph the demand curve in the chart below. Demand Schedule For DVDs Price per DVD (in dollars) Quantity Demanded (in millions) Price per DVD (in dollars) Exercise 2: Movement Along The Demand Curve. Answer the following questions based on the demand curve you have graphed: DEMAND CURVE* Quantity Demanded (in millions) 1. When the price of a DVD is $20, what is the quantity demanded by consumers? 2. When the price of a DVD is $15, what is the quantity demanded by consumers? 3. When the price of a DVD is $11, what is the quantity demanded by consumers? 4. As the price of a DVD decreases, does the quantity of DVDs demanded increase or decrease? 5. As the price of a DVD increases, does the quantity of DVDs demanded increase or decrease? Exercise 3: Characterizing the relationship between the change in price and the change in quantity demanded: Lines A and B are depicted in the table below. Line A depicts an inverse relationship between two variables that is characteristic of a demand curve; line B depicts a direct relationship between two variables. Line A Line B y y x Negative slope: Inverse relationship between x and y variables; when y decreases, x increases. x Positive slope: Direct relationship between x and y variables; when y increases, x increases. For each pair of variables below, indicate whether the relationship between them is direct or indirect: Variable 1 (Y) Variable 2 (X) Relationship: Direct or indirect? Years of education Lifetime income Hours spent studying for math exam Score on math exam Frequency of hand washing using Incidence of cold and flu symptoms anti-bacterial soap Price of a product Quantity demanded of product

2 Exercise 4: Shifts in the Demand Curve. In recent years, sales of DVDs have decreased as many consumers have elected to stream directly into their playing devices. Of course, the cost to stream is less than the cost of a DVD. The demand for DVDs is shown in the demand schedule as D1. Imagine that as a result of pressure from the movie industry, streaming is outlawed, and the only way to purchase video is to buy a DVD. Demand for DVDs increases and is now shown in the demand schedule as D2. Price per DVD Demand Schedule for DVDs Quantity Demanded (D1) Quantity Demanded (D2) Using the data presented in the Demand Schedule for DVDs, graph the demand curves D1 and D2 in the chart below. Price per DVD Quantity Demanded Refer to the chart you have drawn and answer the following questions: 1. When DVDs sell for $18, compare the quantity demanded for DVDs at demand levels D1 and D2. 2. Explain why more customers are now willing to purchase DVDs for the same price. 3. When demand increases at all price levels, the demand curve shifts in which direction: right or left? 4. Explain the difference between an increase in demand and increase in the quantity demanded. a. Which is depicted as a movement along the demand curve? b. Which is depicted as a shift in the demand curve? Exercise 5: Identifying the determinants of demand. In exercise 2, you have seen have how an increase in demand is depicted on a graph by a shift in the demand curve. When the demand curve shifts upward and to the right, this is indicative of an increase in demand. When the demand curve shifts to the left, this is indicative of a decrease in demand. Factors that result in a change in demand are the determinants of demand. Working individually or as pair, complete the table below. For each determinant of demand: indicate whether demand will increase or decrease; provide an explanation as to why. 2

3 Determinant of demand Population increases Demand increases or decreases? Explanation Population decreases Increase in most peoples income Decrease in most peoples income Price of substitute increases Price of substitute decreases Price of complementary good increases Price of complimentary good decreases Product becomes a popular fad (change in taste of buyers) Product now out of fashion (change in taste of buyers) There is an expectation that the price of the product will soon fall There is a fear that the economy will go into a recession where many firms will fail and unemployment will increase Movement along the curve or a shift in the demand curve? Complete the table below by indicating whether each scenario results in a change in the quantity demanded (movement along the demand curve), or a change in demand (shift in the demand curve). If there is a shift in the demand curve, indicate whether the curve shifts up or down. Scenario 1. There is an outbreak of the flu and sales of latex gloves skyrocket. Movement or shift up or shift down? 2. A nail salon cuts the price it charges for manicures and more clients come. 3. A chain of department stores extends the hours that stores will remain open and total sales for the chain has increased. 4. The US Census Bureau has announced that there is baby boom in the United States and sales of baby carriages have increased. 5. John s Bicycle shop increases the prices of bicycles and sales decrease. 6. The City of Los Angeles has cut the number of city employees by 10% and sales of big screen televisions falls. 3

4 Exercise 6: Create a Supply Curve The survey to assess students willingness to work at the library was distributed to all seniors in the school; the total hours that students are willing to work at the different hourly rates are presented in the supply schedule for part time workers below: Supply Schedule for Part Time Workers Hourly rate # hours seniors are willing to work $ $ $ $ $ $7 480 $5 240 $3 0 $2 0 $1 0 Using the data in the supply schedule for part time workers, draw the supply curve. Supply of Part Time Workers $30 $25 $20 Hourly rate $15 $10 $7 $5 $3 $ Quantity of Part Time Workers Supplied In your own words, summarize the information displayed in the graph. 4

5 Exercise 7: Changes in Supply A Shift in the Demand Curve The supply schedule below presents the results of a survey of seniors only, and seniors and juniors, indicating the number of hours these students would be willing to work in the school library at different hourly rates of pay. Hourly rate Supply Schedule of Student Workers Hours # hours seniors are willing to work (S2) # hours juniors are willing to work (S1) # hours juniors and seniors are willing to work (S3) $ $ $ $ $ $ $ $ $ $ Using the data from the supply schedule for part time workers, draw supply curves S2 and S3 on the graph below. 35 Supply of Part Time Workers Hourly Rates Quantity of Part Time Hours 5

6 Refer to the chart you have drawn and answer the following questions: 1. When the hourly rate is $20, compare the quantity of hours students are willing to work at supply levels S2 and S3. 2. When supply increases at all price levels, the supply curve shifts in which direction: right or left? 3. Explain the difference between an increase in supply and increase in the quantity supplied. 4. Which is depicted as a movement along the supply curve? 5. Which is depicted as a shift in the supply curve? Exercise 8: In the table below, complete the following: 1. Record the affect on supply of each of the four determinants. 2. In each instance, state if the supply curve shifts right or left. 3. In your own words provide an explanation of the suppliers reactions. Determinant of supply Affect on supply Explanation A decrease in the price of inputs. A change in the price of inputs (raw materials, wages, etc.) An increase in the price of inputs. Increase in the number of firms in the industry A change in the number of firms in the industry. Decrease in the number of firms Increase in taxes A change in taxes Decrease in taxes Technology development 6

7 Equilibrium Imagine that you have opened a small business in your school selling Italian ices. You make the ices from fresh fruit lemons, oranges, blueberries and cherries - using a family recipe that your grandfather has passed along. You are concerned about the price you pay for the fruit, as the price you pay for the ingredients is reflected in the price you charge your customers, and you are aware that there is a limit to what your customers are willing to pay. Although you would like to offer variety to your customers, if the price of any of the fruits becomes too high, you will cut back on your purchases, and offer less of that flavor to your customers. The quantity of lemons you are willing to purchase at various prices per bushel is presented in the table below. The lemon supplier obtains lemons directly from growers in Florida and has a variety of customers that include restaurants, supermarkets and fruit vendors. The quantity of lemons you are willing to purchase and the quantity of lemons the supplier is willing to offer at various prices per bushel are presented in the table below: Price per bushel Quantity demanded (D) Quantity supplied (S) $ $ $ $ $ Exercise 9: For each price per bushel in the table: Indicate whether there is a shortage (quantity demanded > quantity supplied) or a surplus (quantity supplied > quantity demanded) Indicate the amount of the shortage or surplus. Price per Quantity Quantity Surplus or Amount bushel demanded (D) supplied (S) shortage $ $ $ $ $ When a surplus exists: a. Suppliers respond; the lemon supplier has unsold lemons that will soon go bad. i. If the supplier is willing to offer lemons at a lower price, what happens to the quantity of lemons demanded? ii. What happens to the size of the surplus as suppliers lower the price of lemons? 7

8 2. When a shortage exists: a. Suppliers respond; since the lemon supplier is able to sell all the lemons at the current price, this is a good opportunity to raise prices to increase profits. As long as the quantity demanded is greater than quantity supplied, suppliers can continue to raise prices. i. What happens to the quantity of lemons demanded as suppliers raise the price? ii. What happens to the size of the shortage when suppliers raise the price? b. Consumers respond; since at these prices the supply of lemons is less than demand, those who value the lemons the most are willing to pay more if they have to obtain lemons. Everyone does not value lemons equally. Consumers who value lemons the most will be willing to pay more. i. What happens to the quantity of lemons demanded as the price increases? ii. What happens to the size of the shortage as the price of lemons increases? iii. 3. At equilibrium (when there is neither a shortage nor a surplus): a. Supply and demand is in balance, there is no pressure to change. i. Can you explain why there is no pressure for the equilibrium price to change? ii. Can you think of events that would disturb this equilibrium? Exercise 10: Points A, B and C in the chart below depict either a shortage, a surplus or an equilibrium. Indicate what each letter represents in the chart by circling the correct term: A. Shortage, surplus, equilibrium point B. Shortage, surplus, equilibrium point C. Shortage, surplus, equilibrium point 8